#3647 - Wages And Salaries - Labour Law

Payment of wages and salaries

Deduction and retention at common law

The circumstances under which an employer can withhold all or part of the agreed wage are determined, in the first instance, by the common law.

(I) The first issue to consider where is the point at which the employee’s contractual right to payment accrues.

Where payment is governed by a time rate of some kind, an employee who has performed the contract as required becomes entitled to payment in respect of that period. There is a distinction to be drawn here between the point at which the right to payment accrues, which is when the performance is completed, and the point at which the wage becomes payable, which may be later. It is standard practice in many employments to pay wages and salaries a week or month in arrears; there is nothing unlawful about this practice, although it would be normal for it to be supported either by an express contract term or by one implied from a collective agreement or from custom and practice. Notwithstanding this possibility of an interval between accrual and actual payment of the wage, once the right has accrued it cannot be forfeited by anything which the employee does between that point and the time at which payment falls due (George v Davies), except to the extent that the employee may commit a subsequent breach of contract which gives rise to a counter claim or set off in damages.

The right to payment of an hourly-paid worker accrues hour by hour as the work is carried out (subject to the possibility of an employee showing that mere readiness to work suffices).

In the case of a salaried employee for whom no time rate as such is set, the interval between payments – normally a month – becomes important in establishing the point at which the right to payment is earned (Sim). In principle, performance must be rendered in full for each month before any part of the salary for that month (or other period) becomes due e.g. where employees quit or dismissed for breach of contract before the expiry of their fixed term of employment, the courts held that they had no claim for work done either in contract or in quantum meruit (Turner v Robinson). The outcome is sometimes seen as an aspect of the common law doctrine of entire obligations: the debt or price cannot be apportioned except to the extent that the contract itself provides for this. The courts do not normally imply a term allowing for pro rata payment where to do so would contradict an express agreement (Williams).

It is possible that an employee may invoke s 2 of the Apportionment Act 1870 which provides that “all rents, annuities, dividends, and other periodical payments in the nature of income shall be considered as accruing form day to day, and shall be apportionable in respect of time accordingly”; for this purpose, the term annuities is expressed to include salaries.

Although there is evidence that it was not the intention at the time this Act was passed to apply this part of it to contracts of employment in general (Matthews), in Sim, Scott J thought that it did apply to the salaries of monthly paid school-teachers which “may be regarded as accruing day by day”. The term wages is not mentioned in the 1870 Act and it is unclear whether the Act could apply to non-salaried employees. However, the recent tendency of the courts has been to give the Act a general application to contracts of employment.

The harshness of the common law doctrine of entire performance is also mitigated by the principle that substantial performance is sufficient to discharge a contractual obligation, and gives rise to the equivalent obligation on the part of the payor. In the context of employment this has been taken to mean that an employee cannot be prevented from claiming payment in respect of a particular period of employment merely because he has committed a minor breach of contract which falls short of being repudiatory (Williams) e.g. an hourly paid employee who completes a basic 39-hour week is prima facie entitled to the normal weekly wage based on the applicable hourly rate – if he has, at some point in that week committed a minor breach of discipline, this would not in itself entitle the employer to withdraw all or part of the payment for that week (Freedland). Under these circumstances a deduction would be lawful only if the employer could point either to an express term authorising the deduction (Davies v MJ Wyatt) or to an implied right of abatement or set off.

Any express term has to have been incorporated into the contract according to the tests discussed. Even then, the effect of the term is not guaranteed, since it could be struck down in equity as a penalty clause (Dunlop) if the court considers that it was inserted in terroem and not by way of genuine attempt at a pre-estimate of the cost of breach to the employer. The implied right of set off depends upon the employer showing that the employee committed a breach of contract which caused him loss of some kind; that loss can be abated or set off against the wages which are due to the employee.

Sim – schoolteachers who were taking part in industrial action refused to cover the classes of absent colleagues as they would normally have done. Their employers deducted a small percentage of their monthly salaries in respect of the hours when they refused to work normally. The teachers’ action was held to have been a breach of their contractual duty of trust and co-operation, resulting in damage to the employer which was at least the equivalent of the deductions made from their monthly salaries.

Scott J: “the correct approach in cases...is to start with the teachers’ contractual monthly salary entitlement. If in the course of the month there has been a breach of contract by a teacher, it is necessary to consider what, if any, damages can be claimed by the employer by reason of that breach of contract. If the breach of contract has not given rise to any recoverable loss to the education authority, then...there is no deduction that can properly be made from the salary on account of the breach. If recoverable loss has been caused to the education authority, it is necessary to consider whether the law allows, by way of abatement or by way of set off, the deduction of the damages from the monthly salary”.

The principal argument against allowing an implied right of set-off in contracts of employment is that it may undermine explicit procedures for dealing with breach of discipline. However, Scott J held that there was no distinction for this purpose between contracts of employment and other contracts to which set-off applied; the deductions made were thus lawful.

If the approach in Sim is adopted the employer must prove both breach and damage before any deduction may be made. The result may be described as “part work, party pay”: the partial failure of performance is reflected in the amount deducted by way of set-off.

In cases of industrial action involving a deliberate refusal to perform the contract as intended, cases decided after Sim suggest that the employer may be able to rely on a wider principle to withhold payment completely.

Miles – as part of an industrial action, a local government registrar refused to conduct weddings on Saturday mornings. He normally worked 37 hours a week. On the Saturdays in question he attended his office for the normal 3 hours and carried out other duties related to his work. His employer made a deduction of 3/37^th of his salary for the period of the industrial action; his action for the recovery of the full salary was rejected in the HoL.

Lord Templeman: “when a worker in breach of contract declines to work in accordance with the contract, but claims payment for his wages, it is unnecessary for the employer to rely on the defences of abatement or equitable set off. The employer may or may not sustain and be able to prove and recover damages by reason of the breach of contract of each worker. But so far as wages are concerned, the worker can only claim them if he is willing to work”.

The employee’s claim fails at the outset on the grounds of failure to perform the contract as required; and even though the employer may receive certain benefits from part performance, it does not have to pay for them if it informs the employees that it declines to accept partial performance as equivalent to the whole.

This left open the possibility of an action in restitution for the value of the partial services rendered by the employee. Lords Brightman and Templeman were prepared to entertain this possibility but Lord Bridge thought it “contrary to the realities of the situation” and Lords Brandon and Oliver expressly reserved their opinion on the question.

Wiluszynski - The full implications of Miles became clear. Local government officers taking part in industrial action refused over a period of several weeks to deal with queries from the constituents of councillors. During this period they carried out other duties as normal. After the industrial action was over they were able to deal with the backlog of queries in a matter of hours. The employer withheld payment in full for the period of the industrial action and was held to have acted lawfully in doing so.

A deliberate refusal in advance of performance to work under the contract as normally therefore completely defeats the employee’s contractual claim to wages or salary. This continues for as long as the refusal fully to perform goes on (in practice the duration of the industrial action) and the employer can defeat any claim to part payment by making it...