How to protect against unlawful wage (and bonus) deductions
In this column, Beth Hale, partner and general counsel, and Holly Buick, trainee, at CM Murray, lay down the law on unlawful deductions in wages, including bonuses.
There may be a route to recover an unpaid bonus to which an employee believes they are entitled, under the provisions on unlawful deductions from wages, found in the Employment Rights Act 1996.
A recent incident at a Wahaca restaurant involving the chain reportedly deducting the unpaid bill of a “walk-out” customer from an employee’s pay generated public outcry and discussion around the circumstances in which businesses can reduce their staff’s pay.
While accountants are unlikely to be subject to these types of one-off deduction, it is worth understanding the protection against unlawful deductions from wages, in particular in relation to bonuses. As LLP members will normally qualify as “workers” for the purposes of the legislation, the protection may be equally relevant to partners in accountancy firms as employees.
Senior professionals frequently have some element of performance-related pay; at higher levels total remuneration is likely to have a significant bonus element. This is highlighted, for example, by analysis of the figures released by accounting firms under the new gender pay reporting obligations.
Employers may not make any deduction from a worker’s wages unless required or authorised by law (for example, tax deducted through PAYE), through a provision of the employment contract, or where the worker has consented in writing. Otherwise, the deduction will be unlawful and the worker may bring a claim in the Employment Tribunal to recover the sum. Wages means any sum payable to the worker in connection with their employment and includes both contractual and non-contractual bonuses.
In order to bring a claim under the unlawful deductions provisions, the employee will need to show that they have a legal (but not necessarily contractual) entitlement to a specific sum.
This will be more straight-forward in the case of a contractual bonus, for example where the terms of employment include a clear entitlement and formula for calculating the amount. Even where a bonus is described as “discretionary”, the courts will look at all the circumstances, and may find for example that a contractual obligation has arisen through a statement made to employees or can be implied through custom and practice.
Most bonuses will have a discretionary element: the employee has a right to participate in a bonus scheme, with the employer deciding whether to award a bonus, and the amount, timing and conditions.
There are limits on the exercise of this discretion – employers must act in good faith and not capriciously, arbitrarily, irrationally or in breach of the implied term of trust and confidence. Where the dispute is over the amount awarded under a discretionary scheme, an unlawful deductions claim is unlikely to be suitable, because of the difficulty in showing a legal entitlement to a precise amount.
However, once the employer has decided to award a bonus, it will be treated as being owed to the employee, giving rise to a potential unlawful deductions claim if not paid. In the case of Farrell Matthews v Hansen, Ms Hansen was awarded a one-off bonus to be paid in instalments, and successfully challenged the firm’s decision to stop the payments after she resigned.
The unlawful deduction from wages provisions are designed for straightforward claims where the employee can point to a specific amount and are traditionally used in relation to relatively small claims. Where calculating the amount is more complex, a worker may have a claim for breach of contract, which can be heard by the Employment Tribunal if the employment has ended (with a maximum award of £25,000), or brought as a civil claim in the county court or high court.
However, there is nothing to prevent a larger claim also being brought under the unlawful deductions legislation and this may be possible even where the level of bonus is said to be at the employer’s sole discretion. In Tradition Securities and Futures SA v Mouradian, the Court of Appeal found that in practice the employee broker determined the level of his bonus himself using a formula. As it was possible for a court to quantify the amount, an unlawful deductions claim was possible.
Claims for unlawful deductions from wages are more straightforward (and less costly) to bring than high court proceedings for breach of contract. Firms should be aware that these provisions can sometimes be used to recover a disputed bonus.
Authors: Beth Hale, partner and general counsel at CM Murray, and Holly Buick, trainee.