Deduction from wages allowed

Where an employee has breached their contract, for example by not working their notice period, then it may seem fair to reduce their final salary payment.

But deductions from wages can only be made in very limited circumstances. It really comes down to whether or not the employment contract allows for this, and if the deductible amount is a pre-determined, genuine estimate of the employer's loss. Significantly, the deduction must not be an attempt to penalise the employee. If it is then it can't be made.

In Li v First Marine Solutions, Ms Li resigned and, because she believed she had outstanding holiday (which it turned out she had not), didn't work her one-month notice period. Her contract contained terms entitling her employer to deduct from her final pay an amount equal to the salary she would have earned if she had worked her notice (so, for example, if she had worked two of four weeks' notice, she would have had two weeks deducted – and thus not been paid anything for her notice pay).

The Employment Appeal Tribunal (EAT) upheld the tribunal's decision that the clause wasn't a penalty and so the employer was entitled to make the deduction. It provided for a genuine pre-estimate of loss and could be adjusted depending on how much of their notice period an employee worked (the more they worked, the smaller the deduction would be). It was also relevant that the sum wasn't excessive.

The EAT emphasised that the normal principle is 'no work, no pay' and said that employment tribunals should consider the reality of the employment circumstances and whether the effect of any deduction was intended. The lesson for employers is to anticipate a scenario like this. When putting together an employment contract, think about the likely cost to your business of that employee leaving without fulfilling their notice obligations. How much would it cost to engage and train up a replacement, for example? Then make sure to capture this genuine estimate of your loss in a well-drafted set of clauses. At best, it will make an employee think twice before leaving you in the lurch. At worst, it will stand you in great stead if a legal argument ensues.