Unlawful deductions from wages: issues for migrant workers

Caroline Maguire details the approach advisers should take when dealing with unlawful deductions from wages, a common problem faced by migrant workers.

A common issue which arises when advising migrant workers on their employment rights is that of unlawful deductions from wages. While the rules on this area are relatively straightforward, a number of practices which tend to arise with migrant workers can give rise to complications. In addition, an apparently straightforward query on a deduction from wages can mask other serious problems in the relationship between a migrant worker and her/his employer (for example discrimination).

The rules governing when deductions may be made from a worker’s wages are set out in the Employment Rights (Northern Ireland) Order 1996 (‘ERO’). Normally, an employer can only make deductions from a worker’s wages where such a deduction is:

• authorised by statute (eg income tax);
• authorised under the contract of employment (and notified to the worker in writing); or,
• agreed in writing by the employee before it is made and in advance of the actual reason for the deduction arising.

There are special rules governing retail workers which this article will not address.

An employer is permitted to make a deduction from wages without notice to the worker and absent a clause in the worker’s contract, where an earlier overpayment of wages is being recovered.{footnote}However, even where there has been an overpayment of wages, there may be grounds for arguing that an employer is not entitled to recover it if the worker was genuinely unaware that the payment was an overpayment and had innocently used the money for things s/he would not have otherwise bought and it would not be fair in all the circumstances to require the worker to repay the money (‘change of position’ defence) (Lipkin Gorman (a firm) v Karpnale Ltd [1992] 4ALL ER 512).{/footnote}

In respect of migrant workers, the deductions that may commonly be encountered are deductions for accommodation or other board or lodging, deductions for charges or fees from a recruitment agency for finding work, deductions to cover fuel expenses where workers are transported to a work site (usually in the construction industry) or deductions made from a final pay packet because the worker has left employment before the expiry of a specified period.

Deductions to cover the fees of recruitment agencies will usually be unlawful – these costs should be borne by the employer as the client of the recruitment agency. As well as it being an unlawful deduction, a recruitment agency may be committing a criminal offence if it asks a worker to cover the costs of recruitment.{footnote}The Department for Employment and Learning has power to prosecute such recruitment agencies.{/footnote}

Deductions to cover accommodation or board or lodgings are not unlawful, so long as they meet the statutory requirements outlined above. Likewise, deductions to cover fuel expenses may be lawful if the statutory requirements are fulfilled. However, in both cases an adviser should check if such deductions result in a worker receiving less than the National Minimum Wage. Accommodation is the only benefit in kind that can count towards assessing what a worker has been paid when calculating National Minimum Wage pay. In addition, there is a limit on the amount which an employer can count as being paid (the daily accommodation offset) which is currently £4.30 per day. Where any accommodation deduction exceeds the daily offset limit, such excess cannot be counted as wages for the purposes of the National Minimum Wage. Deductions for fuel payments cannot count towards payment for the National Minimum Wage.

Deductions for the cost of fuel may also constitute discrimination on the grounds of race, where it could be shown that such deductions would not be made from the wages of domestic workers.{footnote}Discrimination on grounds of race is illegal under the Race Relations (Northern Ireland) Order 1997.{/footnote}

Deductions from wages most frequently occur on the termination of employment. An employer may attempt to justify such deductions on a number of grounds. Where a worker has resigned and fails to work a contractual notice period,{footnote}In the absence of any contractual notice period, an employee with more than two months’ service is required to give minimum notice of one week under Article 118(2) of ERO.{/footnote} the employer sometimes feels justified in withholding some or all of the final wages due. Alternatively (or additionally) a worker’s contract might include a term which makes the worker liable to pay the employer a certain sum if s/he fails to complete a prescribed term of employment. Such a sum might typically be linked to the cost of an airfare or training. On the face of it, where the contract clearly sets out the circumstances in which a deduction will be made and the worker agrees to such term, such deductions may be lawful. However, there are a number of grounds on which such apparently lawful deductions may be challenged.

First, it may be possible to argue that the worker has not given true consent to the term if s/he has been given a contract in English and s/he is not fluent in the language.

Secondly, the position of the migrant worker should be compared with that of domestic workers, to determine whether the clause in question might be racially discriminatory. Even if there is no exact comparator, there may be scope for challenge if the employer does not seek to recoup similar or equivalent costs from domestic employees or if it could be argued that such costs would not be recouped from a hypothetical comparator.

Thirdly, such a clause may be challenged on the grounds that it is a penalty clause. A clause in a contract which specifies for an amount to be paid or deducted on breach of the contract is enforceable if it is a genuine pre-estimate of the loss the party will incur as a result of the breach and is not punitive in nature.{footnote}However the contract must specifically authorise deductions from wages (see Potter v Hunt Contracts Ltd [1992] ICR 337).{/footnote} This is a liquidated damages clause. However, where the purpose of a clause is to deter the worker from terminating her/his contract, it may be a penalty clause. If the amount to be recouped bears no relation to the loss the employer may suffer, this could indicate that the purpose of the clause is to act as a deterrent and it may therefore be a penalty clause.{footnote}See the case of Giraud UK v Smith [2000] IRLR 763.{/footnote}

The provisions in relation to ‘unauthorised deductions from wages’ in the ERO may be used to recover wages and contractual holiday pay{footnote}Where the claim is for statutory holiday pay, it cannot be made under the ERO unauthorised deductions provisions but rather must be made under Regulation 30 of the Working Time Regulations (Northern Ireland) (1998) (see the Court of Appeal’s decision in IRC v Ainsworth [2005] IRLR 465).{/footnote} withheld but not wages in lieu of notice, which may be recoverable in the industrial tribunal or civil courts in a claim for breach of contract.{footnote}Workers who sue for breach of contract should be aware that employers can counter sue. The damages an employer may recover could be substantially more than what the worker is claiming. This may be of considerable tactical importance in cases involving ‘penalty clauses’.{/footnote}

The time limit for making a claim to an Industrial Tribunal in relation to unlawful deductions from wages is three months. The time limit runs from the date of the last deduction. If the worker is an employee s/he must comply with the statutory grievance procedures and allow 28 days to elapse before submitting a claim. Where an employee has complied with the statutory grievance procedures within three months of the last deduction, the time limit is extended by a further three months. The statutory grievance procedures do not apply to workers and consequently no extension of time limits is available.{footnote}A tribunal does have discretion to extend the time limit if it is satisfied that it was not reasonably practicable for a complaint to be presented within the three month period.{/footnote} Claimants can sometimes be caught out by time limits where they have verbally raised a grievance about a deduction and have been told by the employer that it will be sorted out.{footnote}This risk arises where the worker has ceased working for the employer or the deduction was not part of an ongoing series of deductions.{/footnote} To avoid the risk of missing the deadline for submitting a claim, it is suggested that any grievance be raised in writing rather than verbally. If there is doubt about whether a worker is in fact an employee, further advice should be sought.