Employment Update: Deduction Wages

17 March 2008

Employer’s right to clawback overpaid commission.

In the case of Key Recruitment UK Ltd v Lear the EAT has given guidance on the extent to which an employer may claw back overpayments from a departing employee.

The employee in this case had introduced new staff to one of his employers' clients for which he was paid commission by the employer of £1831.18. However the client defaulted on payment to the employer of the fee for the introduction. In such circumstances, under the terms of his contract, the employer was entitled to 'claw back' the commission payment from the employee. However it did not actually do so for several months until the employee gave notice of his intention to resign.

The employer then deducted £1831.18 from the sums due to him on termination.

The employee claimed that this was an unlawful deduction from wages under s.13 Employment Rights Act (ERA). The Employment Tribunal found in his favour but the employer appealed to the EAT.

The employer had two arguments and the EAT decided that the Tribunal had been wrong to think that the two arguments were interdependent.

Either - under the exception granted by s.14 ERA - the employer was entitled to deduct the sum as an overpayment - but the EAT held that this exception probably would not apply in this case. The commission payment was probably not an overpayment at the time it was made. It was only the client's subsequent default that had made it refundable. More evidence was needed on this point.

Alternatively the employer argued that the exception in s.13(1)(b)ERA applied - by virtue of the 'clawback' provision in his employment contract the employee had ‘signified in writing his agreement or consent to the making of the deduction’.

The EAT agreed that s.13(1)(b) might be applicable but needed more evidence as to whether the employer's right to make the 'clawback' under his contract had in fact crystallised i.e. had the employer taken sufficient steps to recover the fees from the client before making the deduction from what was otherwise due to the employee?

The case was remitted to the Tribunal for rehearing.

Key points for employers:

  • This case demonstrates that the wording of the relevant clause in an employee's contract will be critical in deciding whether you are entitled to 'clawback' any overpayments of commission or other sums and, if so, when. Employers should check that their contract terms are clear.

  • Otherwise, the 'overpayment' exception in s.14 ERA can only be applied to sums that are overpayments at the time they are made, not sums that become subject to 'clawback' at a later date.