Unlawful deductions from wages claims and the furlough scheme

Employers face potential exposure to claims where furlough results in a reduction in pay.

Many employers and employees alike breathed a sigh of relief when the government's Coronavirus Job Retention Scheme (the 'Scheme') was announced in March. However, due to a combination of the novel nature of the Scheme, the lack of detail in terms of how it works and the speed at which it was introduced, it is unsurprising that in the ensuing confusion employers have been left open to potential liabilities.

This article looks at the possible risk of unlawful deductions from wages claims when furloughing employees.

What is an unlawful deduction from wages claim?

If an employer reduces the pay of an employee without either the prior agreement of that employee or an explicit statutory provision allowing that reduction, the employee can bring a claim under the Employment Rights Act 1996 ('ERA'96') for the value of the deduction in pay and may, in certain cases, also recover losses linked to that deduction (e.g. overdraft or bank fees). Both employees and workers (referred to collectively as 'employees' in this article) can bring such claims.

In order for an employee to agree to a deduction, ERA'96 specifically states that they must have 'previously signified in writing' their agreement or consent. It would therefore be a contravention of this provision if the employer:

- did not get the agreement of the employee before reducing their wages;

- did get the employee's agreement to reduce wages, but this was not given in writing; or

- retroactively got the written agreement of the employee to a pay reduction.

It is common for contracts to provide for lawful deductions – they are a regular feature in notice terms and may be generally included to say that if the contract is terminated the worker or employee agrees that the employer can deduct from their final pay packet any sums that are outstanding (e.g. outstanding season ticket loans or amounts relating to the overtaking of holiday entitlement). 

How does this affect furlough and the Scheme?

To date, nothing in the legislation relevant to the creation and operation of the Scheme gives an employer the authority to arbitrarily alter an employee's terms of pay whilst they are furloughed. This means that if an employer wants to reduce the pay of an employee whilst they are furloughed they must get the employee's agreement to do so in advance.

Additionally, the HMRC Guidance states that the employer needs to obtain the agreement of an employee they wish to place on furlough in order that the employer can then claim funds from the Scheme in respect of that employee's wages. This is distinct and separate from the need to obtain the agreement of the employee to reduce their wages whilst they are furloughed.

There is a concern that, in the face of the sudden emergence of this crisis and nuances such as this within the Scheme, some employers have interpreted the Scheme Guidance as treating an employee's agreement to go on furlough as being one and the same to agreeing to go on furlough at reduced pay. As a result, it is possible that employers have not properly obtained the agreement of furloughed employees and/or potentially misrepresented how the Scheme works to those employees.

It is important for employers to bear in mind that:

- there is no right to furlough;

- a furloughed employee retains all of their contractual entitlements, including to be paid their usual salary, save only that the employee is not required to actually do any work; and

- subject to the Scheme rules, an employer is entitled to claim a government grant to cover a proportion of wages (at present up to 80%) of eligible employees. That does not mean the government pays anyone's wages which remain the responsibility and liability of the employer.  

Another area in which an employer might come unstuck is where they have obtained the prior agreement of individual employees to a reduction but they have failed to agree that reduction in line with a collective agreement with a recognised union.

An agreement in writing in advance is the key

Employers who have clearly explained to employees that they need their prior written agreement to:

1. go on furlough; and
2. whilst on furlough, reduce their wages (for example to match the funding available to the employer through the Scheme in regard to their employment)

are at reduced risk of unlawful deductions from wages claims from employees they have furloughed.

That is not to mean that a lengthy legal document is required to evidence prior agreement, nor that there is any requirement for the employee to take independent legal advice before any agreement is effective.  An email exchange will be sufficient for the employee to signify their prior agreement, provided that there is clarity in terms of what is being agreed; i.e. is it furlough or is it furlough with reduced pay?

At the time of writing, we have had confirmation that the Scheme continue until the end of October, though it is not clear what, if any, changes will be made to its operation during this extension. The extension does allow an employer to repair any procedural errors, for example by re-furloughing an employee once the minimum three week furlough period has expired, but in doing so employers need to make sure that the requisite prior agreement for any reduction is in place. That won't protect an employer from claims for unlawful deductions already made, but it will help mitigate against the risk of further claims.  

Unlawful deductions claims can be brought whilst the employee is still employed or after they have been dismissed. Such claims must be brought within three months after the last deduction took place, but they can be 'chained' together if there is a series of deductions for up to a maximum of two years. If an employer reinstates full normal pay once furlough has ended then that will fix the timeline for a claim.  However, if reduced pay continues once lockdown is lifted then the deductions are continuing and the time limit for bringing a claim also continues.

One of the particular features of the unlawful deduction rules is that where an unlawful deduction claim is successfully made then the employer cannot then recover the monies in any other way, e.g. through a court claim for monies due.  

Employers facing an unlawful deduction claim may be best served by avoiding the costs of tribunal claims and agreeing to repay the difference between the employee's normal pay and what the employee received while they were furloughed. However, much greater liabilities are possible if an employer has unlawfully deducted pay from senior executives or managers where the reduction to £2,500 a month while on furlough is well under 80% of their normal wages.