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Contracts of employment: changes, breach of contract and deductions from wages

URN No: 07/924

Contents

• Foreword   
• The contract of employment
  • Employed or Self-employed?
  • Written statement of employment particulars 
• Variation of contract 
• Refusal by employee to authorise variation
• Collective variation of contract
• Breach of contract claims by employees
• Breach of contract claims by employers
• Constructive unfair dismissal
• Unlawful deductions from wages       
  • Circumstances in which deductions are lawful
  • Circumstances in which the protection does not apply       
  • Special protection for individuals in retail work
  • Complaints about unlawful deductions and payments
  • Meaning of ‘wages’
  • Meaning of ‘deductions’
  • Retrospective consent to deductions from wages
• New legislation for resolving disputes in the workplace 
• Making a complaint to an employment tribunal   
  
  • Conciliation 
  • Contracting out of rights
  • Pre-hearing review
  • The employment tribunal hearing
  • The employment tribunal judgement
    

Foreword

The purpose of this document is to explain the means of redress available to an employee whose employer:

• makes unlawful deductions from his or her wages; or

• breaches the terms and conditions of employment that have been agreed between them.

It also aims to explain the means of redress available to an employer whose employee breaches the agreed terms and conditions. It is intended to give general guidance only and should not be regarded as a complete or authoritative statement of the law. Readers should be alert to the possibility of developments in case law that might affect the rights described.

Further information on these matters may be obtained from Acas.

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The contract of employment

A contract of employment is an agreement entered into by an employer and an employee under which they have certain mutual obligations.

If no contract of employment exists beforehand, one will come into existence as soon as an employee starts work and, by doing so, demonstrates that he or she accepts the job on the terms offered by the employer. The contract need not be in writing, unless it is a contract of apprenticeship (employers should note however that a contract of apprenticeship may be found by the courts to be implied even if it is not in writing). Its terms can be written, oral, implied or a mixture of all three.

Implied terms might include those that are too obvious to be expressly agreed - for example, a term that the employee must accept reasonable instructions from the employer - those that are necessary to make the contract workable and those that are established by custom and practice in the particular organisation or industry concerned.

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Employed or self-employed?

Whether someone is an employee working under a contract of employment or a self-employed person working under a contract to provide services depends upon the true nature of the agreement entered into by the parties. If the employer has a duty to provide work, controls when and how it is done, supplies the tools or other equipment needed to do it and pays tax and national insurance contributions on the worker's behalf, then it is likely that the worker is an employee. If, on the other hand, the worker can decide whether or not to accept work and how to carry it out, makes his or her own arrangements for holidays or sickness absences, pays his or her own tax and national insurance contributions and is free to do the same type of work for more than one employer at the same time, this points towards the person being self-employed.

The fact that a worker is described (either by himself or herself or by the employer) as being self-employed does not necessarily mean that this is actually so. Neither does the fact that the worker does the job on the employer's premises or from his or her own home determine the issue. The important question is whether or not the worker is genuinely in business on his or her own account. If a dispute arises in which employment status is in doubt, this can be considered as a preliminary issue by the employment tribunal or the court concerned, taking into account all factors relevant to the case.

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Written statement of employment particulars

All employees taken on for one month or more are entitled by law to be given, within two months of the date the employment starts, a written statement setting out the main particulars. This statement will not necessarily cover every aspect of the contract, but will constitute important evidence of the principal terms and conditions. Further information about the right to a written statement can be found in 

Employers should be aware that they may have to follow collective redundancy consultation procedures, even when no reduction of the workforce is planned, if they intend to impose new terms and conditions on a group of employees by terminating their existing contracts. For further information see Redundancy consultation and notification - Guidance.

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Refusal by employee to authorise variation

If the employer wishes to vary the terms and conditions of employment and the employee, having been consulted, objects to the variation, then the employer may decide to terminate the contract by dismissing the employee. As usual in the event of dismissal, the appropriate statutory or contractual notice (or pay in lieu of notice) would have to be given and any other contractual obligations relating to the termination of employment would have to be fulfilled. Further details of notice entitlement can be found in

If the dismissed employee considered the employer's actions to have been unfair, he or she would be entitled to make a complaint of unfair dismissal to an employment tribunal - provided that he or she had completed a qualifying period of at least one years' continuous service. Such complaints must normally be made within three months of the date the employment ended. However, from 1 October 2004, the time limit for claims will be extended in specified circumstances connected with statutory dismissal and disciplinary procedures. The tribunal can also consider a complaint made outside the three-month time limit if they believe it was not reasonably practicable for the employee to have made the complaint within it and that it has been made within such further period as they consider reasonable.

The tribunal would consider all the circumstances of the case in deciding whether or not the dismissal was in fact unfair. These would include the employer's reasons for wishing to vary the terms and conditions - overriding business considerations, for example, might make the dismissal fair - and the employee's reasons for opposing the variation. (Further information can be found in:

If an employer attempts simply to impose a variation of contract on an employee without the employee's agreement, this will be a breach of contract. The employee may have various means of redress available in law. These are described in the following sections of this document.

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Breach of contract claims by employees

If an employee suffers a measurable financial loss because his or her employer has breached the contract of employment, or any other contract connected with employment, then the employee may be entitled to seek damages by making a breach of contract claim.

The normal forum for pursuing such a claim is a county court or other civil court. A claim may however be made to an employment tribunal instead if it:

• arises or is outstanding on the termination of the employee's employment; and
• does not relate to one of the following special categories:
  • personal injury;
  • a term requiring the employer to provide living accommodation for the employee or imposing an obligation in connection with the provision of living accommodation;
  • a term relating to intellectual property (including copyright, rights in performances, moral rights, design rights, registered designs, patents and trademarks);
  • a term imposing an obligation of confidence; or
  • a term which is a covenant in restraint of trade.

There are a number of factors that a dismissed employee making a claim for breach of employment contract may wish to bear in mind in deciding which of the two alternatives - employment tribunal or civil court - to use. For example, the employment tribunals provide a generally speedier and more informal means of redress than the civil courts for the resolution of employment disputes, and their procedures have been designed to make it unnecessary for the parties to incur the cost of legal representation. On the other hand, employment tribunal claims for breach of contract must be made within three months of the date on which the employment ended (or, if that is not reasonably practicable, within such further period as the tribunal considers reasonably practicable), whereas civil court claims may be made up to a much longer time limit of six years from the date on which the breach of contract occurred. Another consideration might be that employment tribunal awards for an employer's breach of contract are subject to an upper limit, currently £25,000, whereas civil court awards may reflect the full amount of the damages suffered by the dismissed employee. If employees wish to claim more they cannot first seek £25,000 from an employment tribunal and then go on to seek the balance from a civil court.

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Breach of contract claims by employers

If an employer suffers a measurable financial loss because one of his or her employees breaches the contract of employment, or any other contract connected with employment, then the employer is entitled to seek damages by making a breach of contract claim.

The normal forum for pursuing such a claim is a county court or other civil court. A claim may be made in an employment tribunal instead, but only if it is in response to a breach of contract claim that an employee has already made to an employment tribunal and that has not since been settled or withdrawn. In addition, the claim:

• must arise or be outstanding on the termination of employment of the employee against whom it is made; and
• must not relate to one of the special categories listed above in respect of employees' claims.

If the dismissed employee withdraws his or her breach of contract claim after the employer has made a claim, the employer's claim can still be considered by the employment tribunal.

Employment tribunal claims by employers must normally be made within six weeks of the date on which the employer (or other respondent) receives from the tribunal a copy of the dismissed employee's originating application (or, if that is not reasonably practicable, within such further period as the tribunal considers reasonably practicable). Civil court claims may be made up to a much longer time limit of six years from the date on which the breach of contract occurred. Employment tribunal awards for a breach of contract by an employee are subject to an upper limit, currently £25,000, whereas civil court awards may reflect the full amount of the damages suffered by the employer.

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Constructive unfair dismissal

If an employer breaches an employee's contract of employment in a fundamental way, which effectively indicates that he or she no longer intends to be bound by its terms, the employee may be entitled to resign and to regard himself or herself as having been forced to take that step in response to the employer's behaviour. This is known as constructive dismissal.

If the constructively dismissed employee considers the dismissal to have been unfair, he or she will be entitled to make an unfair dismissal complaint to an employment tribunal in the same way as if the employer had expressly dismissed him or her for objecting to a variation of the agreed terms and conditions of employment. Again, the right to make an employment tribunal complaint on these grounds is subject to a one year qualifying period of continuous service. The tribunal would first consider whether or not there was a constructive dismissal and then, if there was, decide whether or not the dismissal was in fact unfair in all the circumstances.

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Unlawful deductions from wages

The employment legislation imposes no requirement on an employer to pay an employee's wages at any particular time, in any particular form or by any particular method such as cash, cheque or credit transfer. These, like other terms and conditions of employment, remain matters for negotiation and agreement between the parties concerned. If certain payment arrangements have been agreed between the parties and the employer subsequently departs from these, then the employee may be entitled to make a breach of contract claim - as described in the earlier sections of this booklet - if he or she suffers a measurable financial loss as a result.

The legislation does however provide specific protection for individuals against having unauthorised deductions made from their wages (including complete non-payment of wages). This protection extends not only to employees but also to:

• individuals who work under a contract of service or apprenticeship or under any other type of contract (written or otherwise) by virtue of which they have agreed to perform work or services personally (but not including independent contractors or freelance agents);
• Crown servants, including those employed by Government departments (but not including members of the armed forces); and
• anyone who works on board a ship registered in the United Kingdom (but not including individuals who: work wholly outside Great Britain; are not ordinarily resident in Great Britain; or are employed under a crew agreement within the meaning of the merchant shipping legislation).

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Circumstances in which deductions are lawful

One of three conditions has to be met for an employer lawfully to make deductions from a worker's wages or to receive payments from a worker. These are that the deduction or payment is:

• required or authorised by legislation (for example income tax or national insurance contributions); or
• authorised by the worker's contract - provided that the worker has been given a written copy of the relevant terms or a written explanation of them before it is made; or
• agreed to in writing by the worker before it is made.

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Circumstances in which the protection does not apply

The conditions set out above do not have to be met where a deduction is made or a payment received:

• to recover an earlier overpayment of wages or expenses by the employer to the worker; or
• as a result of disciplinary proceedings provided for in legislation (for example, police disciplinary proceedings); or
• a consequence of the worker taking part in a strike or other industrial action; or
• to satisfy a court order or a tribunal decision - provided in the case of a deduction that the worker has given his or her prior written agreement to it.

In addition, where a deduction is made under an arrangement agreed to by the worker in writing for the employer to pay to a third party amounts notified by that third party, the deduction is always lawful under the legislation on unlawful deductions if the employer deducts the amount that has been notified.

Where a deduction is made because of a statutory requirement on the employer to deduct and pay over specified amounts to a statutory authority (for example, PAYE income tax payments to the Inland Revenue), the deduction is lawful under the legislation on unlawful deductions - provided that the employer deducts the amount specified by the authority. Any questions as to whether or not the authority has correctly calculated the amount due should be followed up with the authority itself.

The rules governing payments by a worker to his or her employer do not apply where the employer is receiving the money in a different capacity (for example, on a social occasion).

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Special protection for individuals in retail work

The legislation on unlawful deductions from wages gives individuals in retail work special protection additional to that already described. An individual is in retail work for the purposes of this legislation if the work involves:

• selling or supplying goods or services directly to members of the public, to fellow workers or to other individuals in their personal capacities; or
• collecting money in connection with the sale or supply of such goods or services.

Workers covered by the additional special protection include:

• those who undertake selling activities to the public or to fellow workers not on a regular basis but on odd occasions;
• those who collect or receive money in connection with retail transactions with the public or fellow workers but are not themselves involved in the sale or supply of goods or services (for example, rent collectors and cashiers who do not serve customers).

Workers not covered by the additional special protection include:

• those who sell or supply goods or services only to companies (for example, lorry drivers or warehouse personnel who supply goods only to other depots).

The special protection relates to deductions or payments made because of cash shortages or stock deficiencies, including:

• non-payments of any bonuses to which workers become entitled if there is no loss of stock or cash, or a loss that falls short of a certain allowable level;
• deductions or payments made because of dishonesty or other conduct that results in a shortage or deficiency (regardless of whether the amount of deduction or payment equals the value of the shortage or deficiency).

It is unlawful for an employer to deduct more than 10 per cent from the gross amount of any payment of wages to a retail worker if the deduction is made because of shortages or deficiencies. Accordingly, where deductions can be made from a retail worker's wage to pay for shortages or stock deficiencies (see above), the sums owed may be recovered in instalments of no more than 10 per cent of the worker's gross wages.

The 10 per cent limit does not however apply to deductions from the final payment of wages - that is, the wages due to a retail worker for his or her final period of work or, if paid later, a payment in lieu of notice.

A deduction of any size from the wages of a retail worker is unlawful if made more than twelve months after the cash shortage or stock deficiency to which it relates was (or ought reasonably to have been) established by the employer, unless:

• the deduction is one in a series resulting from a particular shortage or deficiency; and
• the first deduction in the series was made less than twelve months after the shortage or deficiency was (or ought reasonably to have been) established.

The provisions governing payments received by an employer from a retail worker because of shortages or deficiencies are similar to the general provisions governing deductions from wages. However, payments received by an employer from a retail worker in these circumstances are unlawful unless certain additional conditions are met. These conditions are:

• that the employer must, before receiving the first payment for any particular shortage or deficiency, let the worker know in writing the full amount that he owes;
• that the employer must on one of the worker's pay days make a written demand for payment;
• that a demand for payment (or the first in a series of demands) relating to a particular shortage or deficiency must be made no earlier than the first pay day after the day on which the employer informs the worker of the full amount owed (or, if the worker is informed on a pay day, no earlier than that day);
• that any such demand must not require the worker to pay more than 10 per cent of the gross amount of wages payable on that pay day; and
• that the payment (or payments) demanded on a pay day, added to any deductions made on the pay day because of shortages or deficiencies, must amount to no more 10 per cent of the gross amount of wages payable.

A demand for payment can be given or posted to the worker, or left at his or her last known address, on a pay day. If the pay day is not a working day of the employer's business, the demand may be made on the first working day following the pay day.

If an employer goes to court to recover money that he or she has asked a retail worker to pay because of shortages or deficiencies, the court must ensure that payments do not exceed instalments of 10 per cent of gross wages. This does not apply however to any amounts paid by workers from their final payment of wages or sums paid by them once they are no longer working for the employer.

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Complaints about unlawful deductions and payments

Any worker who considers that he or she has suffered an unlawful deduction from wages or been required to make an unlawful payment may seek redress by presenting a complaint to an Employment tribunal. This applies regardless of the worker's length of service. Such complaints must normally be made within three months of the date on which the wages were due to be paid (or, if that is not reasonably practicable, within such further period as the tribunal considers reasonably practicable). In the case of a payment by the worker to the employer, the three months runs from the date on which the payment was received by the employer. In the case of a series of deductions or payments, the three months runs from the last deduction or payment in the series. However, from 1 October 2004, with the introduction of statutory dismissal, disciplinary and grievance procedures (see New legislation for resolving disputes in the workplace), the normal three month time limit will be extended by a further three months, for claims made by employees, in specified circumstances connected with those procedures.

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Meaning of 'wages'

Wages, for the purposes of this legislation, are sums payable to the worker by his or her employer in connection with his or her job. They include:

• any fees, bonuses, commission, holiday pay or other payments in connection with the worker's job;
• statutory payments such as Statutory Sick Pay and Statutory Maternity Pay; and
• luncheon vouchers, gift tokens and other vouchers of a fixed monetary value that can be exchanged for money, goods or services.

Certain other types of payment do not count as wages, and individuals have no special protection if deductions are made from them - although they may still be entitled to make a breach of contract claim, as described in the earlier sections of this booklet, if the deductions are in breach of contract. These types of payment include:

• loans or advances of wages;
• payments of expenses incurred in employment;
• pension and redundancy payments;
• lump sums on retirement or in compensation for loss of office;
• payments in kind, other than vouchers or tokens that can be exchanged and are of fixed monetary value; and
• tips and other gratuities paid directly to the worker by a third party.

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Meaning of 'deductions'

Disputes as to whether or not the employer has correctly calculated the gross amount of wages due are matters to be settled under the law of contract in the civil courts or alternatively, if the employment has ended, in the employment tribunals. However, if the employer makes a deliberate decision not to pay some part or all of the gross wages due under the worker's contract, then this counts as a deduction and the worker can complain to an employment tribunal under the legislation on unlawful deductions from wages.

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Retrospective consent to deductions from wages

An employer might ask a worker to agree to a change in the terms of his or her contract, or to give his or her consent, to allow for deductions to be made on account of certain conduct. However, if the employer makes a deduction in respect of any instances of such conduct that took place before the contract was varied or the consent obtained, this remains unlawful. The same principle applies to payments by workers to employers.

For example, an employer might obtain a worker's consent to allow for deductions to be made on account of lateness. The employer would then be entitled to make deductions on account of any future incidents of lateness, but would not be entitled to make reductions on account of any such incidents that occurred before the worker's consent was obtained.

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New legislation for resolving disputes in the workplace

From 1 October 2004, employers and employees will generally be required to follow a minimum three-stage process to ensure that disputes are discussed at work. The new minimum procedures create a framework for dealing with dismissal, disciplinary action and grievance issues, but are not intended to replace established effective procedures. The three steps consist of 1. a letter outlining the problem; 2. a meeting to discuss the matter and 3. an opportunity to appeal at a further meeting. In specified types of case (which include claims for unlawful deductions from wages, but not breach of contract claims), employees who have not been able to resolve a grievance through discussion must have completed the first step of the procedure if their case is to be admissible to an employment tribunal. If an employee raises a grievance in writing after the employer has undertaken step 1 of a disciplinary procedure, the matter can be dealt with at the step 2 or 3 meeting. Where the procedure relates to dismissal, the employee is not required to do this. However, if the grievance is raised after step 3 of the dismissal or disciplinary procedure, the full grievance procedure must be followed. Where an employer or employee is found not to have fully complied with these procedures (again, in specified types of case: these include breach of contract, unlawful deductions and unfair dismissal claims), employment tribunals will, subject to some exceptions, impose financial penalties.

Detailed guidance, including information on the circumstances in which the procedures do not apply or are treated as having been followed, is available on the DTI website. Further help and advice can be found on the Acas website and by contacting their helpline: 08457 47 47 47.

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Making a complaint to an employment tribunal

Individuals who wish to complain to an employment tribunal may obtain a copy of the explanatory booklet Making a claim to an Employment Tribunal, which contains the application form ET1 or, in Scotland, ET 1 (Scot) - and is available from Jobcentre Plus offices, Citizens Advice Bureaux, from the DTI Publications Orderline on 0845 015 0010, or from the Employment Tribunals Service website. You should raise your complaint in writing with your employer and wait 28 days before presenting your completed form to the appropriate employment tribunal office as explained in the booklet.

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Conciliation

The legislation makes provision for employment tribunal complaints (or potential complaints) to be resolved, if the parties wish it, through conciliation.

Either party to a dispute of this kind may seek the services of a conciliator of the Advisory, Conciliation and Arbitration Service (Acas). Once an employment tribunal complaint is made, Acas is automatically informed and a conciliator assigned to the case.

The conciliator's job is to promote a settlement of the complaint (or potential complaint).

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Contracting out of rights

In the case of most complaints to an employment tribunal, including a complaint about an unlawful deduction from wages or an unlawful payment, an agreement not to present or to continue with the complaint is not binding. However, it is binding if:

• it has been reached with the assistance of an Acas conciliator, as described above; or
• it is a 'compromise agreement' satisfying the requirements of the legislation.

In order for a 'compromise agreement' to be binding, the following conditions must be met:

• the individual must have received independent advice from a relevant independent adviser:
  • (1) a qualified lawyer (a solicitor who holds a practising certificate, or a barrister (in Scotland, an advocate) who is in practice as such or is employed to give legal advice, or (in England and Wales) a person who is an authorised advocate or litigator within the meaning of the Courts and Legal Services Act 1990; or
  • (2) an official, officer, employee or member of an independent trade union certified and authorised by the trade union to give advice; or
  • (3) an employer, officer or volunteer of an advice centre certified and authorised by the centre to give advice; or
  • (4) a person of a description specified in an order by the Secretary of State;
• the advice must be covered by a contract of insurance or an indemnity provided for members of a profession or professional body covering the risk of a claim against the adviser, in respect of the advice given;
• the advice must relate to the terms and effect of the proposed agreement and in particular to its effect on the individual's ability to pursue his or her rights before an employment tribunal;
• the agreement must be in writing, identify the legal adviser and state that the conditions regulating compromise agreements are satisfied.

A worker may, however, enter into a binding contractual agreement with an employer forgoing his or her right to make a breach of contract claim to a civil court or to an employment tribunal, even where that agreement has been reached without the assistance of an Acas conciliator and is not a 'compromise agreement'.

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Pre-Hearing Review

An employment tribunal chairman, or in some cases a chairman sitting with lay members, may conduct a Pre-Hearing Review of a case in advance of the full hearing. If the tribunal considers that either party's case has little prospect of success, it may order that party to pay a deposit of up to £500 as a condition of continuing to proceed with, or to defend, the case.

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The employment tribunal hearing

If a settlement is not reached and the claim is not withdrawn, the employee's claim will proceed to a full Hearing by an employment tribunal. Tribunals hold most of their hearings in their own offices in the larger towns and cities. In cases involving allegations of a breach of contract or an unlawful deduction from wages, each tribunal normally consists of a legally qualified chairman sitting alone. In certain circumstances, however, the chairman may sit with one or two lay members. The Hearing is conducted in a simple and straightforward manner, in such a way that the parties may put their own cases without the need to incur the cost of legal representation. Either party may however get a lawyer, a friend, a trade union official or some other representative to act on their behalf if they wish.

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The employment tribunal judgment

Where an employment tribunal finds that a breach of contract has occurred, it will order the party responsible for the breach to pay to the other party a sum of damages calculated in the same way as it would have been had the case been heard in the civil courts (subject to the statutory upper limit).

Where an employment tribunal finds that there has been an unlawful deduction from wages or an unlawful payment received by the employer, it will order the employer to pay to the worker the amount of the deduction made or payment received. It will however take into account and offset any payment or repayment already made by the employer. This enables an employer to sort out a genuine mistake by repaying the full amount in dispute before the employment tribunal hearing.

Any party who is dissatisfied with an employment tribunal's judgment may apply for a review of that judgment or, if the dissatisfaction concerns a point of law rather than one of fact, may appeal to the Employment Appeal Tribunal.

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