Unlawful deductions from wages

Sections 13 to 15 of the Employment Rights Act 1996, under the heading "Protection of Wages", provide the right not to suffer unauthorised deductions and the right not to have to make payments to the employer. Deductions and payments from wages are only lawful if

• they are required or authorised under a statutory provision, or
  
  
• they are required or authorised under a relevant provisions of the worker's contract, or
  
  
• the worker has previously agreed in writing to the making of the deduction.

Having defined the requirements for a deduction to be lawful, the Act then provides six exceptions from the rules, among which are

• the recovery of overpaid wages and business expenses, and
  
  
• a deduction that is made because a worker has taken part in a strike or other industrial action.

If an employee believes that a deduction from wages is unlawful, the Act allows for the matter to be considered by an Employment Tribunal. However, if the deduction is one of the excepted deductions, an Employment Tribunal does not have jurisdiction to consider the matter. Instead, an aggrieved worker would have to sue the employer in a civil court.

The Employment Appeal Tribunal (EAT), giving its decision on 26 April 2004 in the case Scott -v- Strathclyde Fire Board, confirmed that an Employment Tribunal does not have the jurisdiction to hear a case involving one of the exceptions even if, were it to have considered the matter, it would have found the deduction to have been unlawful.

Mr. Scott, a fireman, had been involved in a strike and his employer had made a deduction from his wages. He claimed before an Employment Tribunal that the amount of the deduction was unlawful, not that the deduction itself was unlawful. Nevertheless, the Tribunal decided that it did not have jurisdiction to consider the matter.

The EAT upheld the Employment Tribunal's decision. It took the position that the wording of the Act is clear and the purpose of the provision, whether or not the deduction is lawful, is to remove consideration of the matter from an Employment Tribunal and to pass it instead to the civil courts.

Employers should not assume that, because a strike deduction or recovery of an overpayment cannot be considered by an Employment Tribunal, there is no risk attached to the making of such deductions. Even though an employee may find it harder to sue the employer in the civil courts, there is still an effective remedy if the employer has not acted reasonably in handling the deduction or in calculating its value.

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...back to 4 June 2004

Source: www.employmentappeals.gov.uk/uploads/EATS0050032642004/index.htm

Recovery of overpayments and change of position

The decision of the Court of Appeal in the case Commerzbank AG -v- Gareth Price-Jones on 21 November 2003 provides guidance on the issues of "unjust enrichment" and "change of position" in the context of recovering overpayments.

Mr. Price-Jones worked as an investment banker and was due a bonus payment of £;250,000 for the 2000 bonus year in December 2000 and a further payment of £;250,000 for the 2001 bonus year in December 2001. Entitlement to these payments was set out by letter in February 2000. As a consequence of a possible merger, Mr. Price-Jones received a further letter in June 2000 stating that he would receive a bonus payment for the 2000 bonus year of £;265,000 in March 2001. He took this mean that he was to receive the £;265,000 in addition to the £;250,000 for the 2000 bonus year.

Mr. Price-Jones was paid the £;250,000 in December 2000 and the £;265,000 in March 2001. The bank subsequently claimed that the December payment had been made in error and that the £;265,000 was an increase to the original £;250,000, not an addition payment. Mr. Price-Jones refused to repay the £;250,000 on the basis that he was contractually entitled to both payments. Because of his refusal, the bank declined to pay the bonus due in December 2001 and offset the payment against the overpayment. Mr. Price-Jones sued the Bank to recover the 2001 bonus.

The High Court, in December 2002, found in favour of Mr. Price-Jones and ordered the Bank to pay the bonus, plus interest and costs. The Bank appealed.

The Court of Appeal overturned completely the High Court decision. The written judgement is lengthy and, without going into detail, the judges decided that the Bank's decision to give a bonus of £;265,000 replaced its earlier commitment to pay £;250,000. Of particular interest, however, are the comments in the ruling about whether the Bank was entitled to recover the overpayment on the basis that Mr. Price-Jones had been "unjustly enriched" or whether Mr. Price-Jones was entitled to keep the money on the basis that he had "changed his position".

In general, the courts will hold that recovery of an overpayment, or "restitution", is appropriate where "unjust enrichment" occurs, but not appropriate if there has been a "change of position", for example because "a person receives payment in good faith and then spends it, gives it away, or loses it". In the latter situation, it would be inequitable to require restitution.

In allowing the appeal, the Court of Appeal made the following points, among others:

• If a "change of position" occurs, it is likely to occur after receipt of the overpayment. The change of position claimed by Mr. Price-Jones had occurred before he received the overpayment. He claimed that, if he had taken the second letter to have replaced the first letter, he would have assumed that the Bank no longer viewed him as a valued employee and would have sought alternative employment.
• However, the decision made clear that the "change of position" defence is still available where a change of position occurs in advance of the payment. To quote the judgement: "The question whether it would be inequitable to require restitution can arise in cases of 'anticipatory reliance' where a recipient of an overpayment has already changed his position in good faith in the expectation of receiving a future benefit".
• The "change of position" defence requires the recipient of the overpayment to establish that, in all the circumstances, it would be inequitable to require restitution. This would normally occur where the recipient can demonstrate a reduction in assets, i.e. there are no, or insufficient, funds available to make the repayment. However, examples of other situations in the context of employment where there could be a "change of position" even though the money was still available are
  • giving up an existing job to lead a life of leisure in circumstances where it would be difficult to find another job, or
  • turning down a firm offer of a better paid job.

(Source: www.courtservice.gov.uk/judgmentsfiles/j2092/commerzbank-v-jones.htm )
...back to 28 November 2003

Two recent Employment Appeal Tribunal decisions have clarified important issues on making deductions from the earnings of employees.

In the case International Packing Corporation v. Joseph Balfour and 57 others, heard before the Scottish EAT on 23 October, the employer had introduced short term working and, as a result, the employees' earnings were reduced. It was claimed by the employees that this amounted to an unlawful deduction from wages under the protection of wages provisions of the Employment Rights Act 2002.

As the contractual provisions that allowed the introduction of short term working required the prior approval of the employee's trade union, and such prior approval had not been obtained, the employer was found, by reducing the employee's wages, to have made an unlawful deduction from wages.

In the case Beresford Swift Communications Ltd v. Mr. C.E. Cole, heard before the London EAT on 29 October, the deduction from Mr. Cole's wages was made under a contractual provision that allowed repair costs incurred by the employer to be recovered from the employee where an accident had occurred due to the employee's negligence.

The original employment tribunal had decided that the employer had acted unlawfully because, in its opinion, Mr. Cole had not been negligent and the issue as to whether or not he was negligent was part of the contractual term. The EAT upheld that decision and confirmed that it is within an employment tribunal's jurisdiction to consider whether the employer's decision about negligence had been reasonable.

The lesson from both decisions is that, when relying on contractual terms to justify a deduction from wages, employers must ensure that they always fulfil any conditions included in those contractual terms.
Payroll Briefing 12 - 12 December 2002