United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR KENDERIK HORNE (of Counsel) Instructed by: Messrs Bermans LLP Solicitors Lancaster House Mercury Court Tithebarn Street LIVERPOOL L2 2QP
For the Respondent	MR J C LEAR (The Respondent in Person)

SUMMARY

Unlawful Deduction from Wages

The Claimant received a commission payment. On termination of his contract, the employers deducted it from the wages due on the grounds that he was not entitled to it because the client had failed to pay the fee due to them. The claimant alleged that this was an unlawful deduction. The issue arose whether either sections 13 or 14 of the Employment Rights Act 1996 justified the deductions. The Employment Tribunal held that they did not. The EAT allowed the appeal, on the basis that the Tribunal had misconstrued the application of those provisions, but remitted the case to a fresh Tribunal because certain material findings of fact necessary to determine the case had not been made.


 


THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

1. This is an appeal against the finding of the Employment Tribunal sitting at Manchester, which held that the Claimant before that Tribunal (as we shall continue to call him although he was the Respondent before us) suffered an unlawful deduction from his wages in the sum of £1,831.18.
2. The essential facts can be very briefly stated. The Claimant was employed by a recruitment agency. He was paid a basic wage of £15,000. and would earn commission from introducing new staff to clients. He terminated his contract by a month's notice, given on 27 March 2007 and due to expire on 27 April 2007. He worked out his notice.
3. When making the final payment the employers deducted the sum of £1,874.00. They gave the Claimant no advanced notice that they would do this. The reason for withholding the money was that there had been commission paid to the Claimant in June 2006 with respect to a particular contract. However, the client had defaulted on payment and the company alleged that as a consequence they were entitled to recover part of the commission paid.
4. The Tribunal recorded in its decision that "it was not disputed by the Claimant that if the sum was recoverable he had been paid a bonus of £2,874.40 when he was in fact only entitled, as the invoice had not been paid, to a bonus of £1,000." The company withheld the difference, which meant that nothing was due to the Claimant since it exceeded the basic monthly pay. The Claimant was understandably aggrieved at that action and asserted that it was unjust for the company to act in that way when they had allowed him to retain the money right up to the point of termination. The issue in the case was whether the employers could in law deduct this element of the commission payment from the final salary.
5. The employer claims to be entitled to do so under either sections 13 or 14 of the Employment Rights Act 1996. Section 13 lays down the basic rule that deductions cannot be made unless certain conditions are satisfied. I return to consider these below. Section 14 then sets out a number of situations where the deductions can be made and are exempt from the obligations imposed by section 13. Logically, therefore, it makes sense to consider that section first. The relevant exemption relied upon here is in section 14(1) and is as follows:

"Section 13 does not apply to a deduction from a worker's wages made by his employer where the purpose of the deduction is the reimbursement of the employer in respect of –

(a) an overpayment of wages, or

(b) an overpayment in respect of expenses incurred by the worker in carrying out his employment,

made (for any reason) by the employer to the worker."

The definition of "wages" encompasses any payments made to the employee in connection with his employment, including commission: section 27(1)(a).

6. Other exemptions include deductions made to third parties pursuant to certain statutory obligations and where money is withheld because the worker has taken industrial action. Where an exemption applies, the only function of the Tribunal is to determine whether the deduction was in fact for the exempt purpose specified and not whether the appropriate amount had been deducted: see the two decisions of this Tribunal in Sunderland Polytechnic v Evans [1993] ICR 392 (Wood P presiding) and Gill v Ford Motor Company Ltd UKEAT/1006/03 (Beatson J presiding).
7. In this case the Tribunal considered this section of its own motion (neither party being legally represented below.) The employment judge held that this section did not justify the deduction. His reasons were as follows:

"Based on all the authorities which I have considered before giving my judgment in this case I am not prepared to hold that what the employer was doing in this instance came within the clear wording of section 14. Section 14 is designed to deal with the situation where an employer in month 2 or 3 spots the fact that there has been an overpayment of wages in the previous month and makes a deduction either in the next month's payment or by agreement with the worker over a period of time. Section 14 is not a section that permits the employer relying on the provisions of section 14 to override the very, very clear wording of section 13."

8. Mr Horne, counsel for the employer, submits that the employment judge was in error. It was not disputed here that there was an overpayment, and it was plainly of wages as defined. There is no basis in the section for saying that any deduction must be made in the months immediately following the overpayment. The fact that the moneys could have been, but had not been, recovered at an earlier date is immaterial. Moreover, it is expressly stated that section 13 does not apply where the conditions specified in section 14 are met, and accordingly it is an error to seek to limit the scope of section 14 by having regard to section 13.
9. Subject to an important qualification, I agree with that submission. In my judgement the section is in principle applicable. The reasons given by the employment judge are unsustainable. It is not a case of section 14 undermining the operation of the clear provisions of section 13. Section 14 simply provides exceptions to section 13 and it must be construed in the normal way.
10. Furthermore, there is no limitation in the section either as to the amount that may be recovered, nor the period of time within which any recovery of overpayment must be made. There are such limitations in section 18 which apply to deductions made for cash shortages or stock deficiencies in retail employment, but not in the general run of employment cases.
11. The qualification in this case arises because it is far from certain whether there ever was an overpayment. In my judgment, to be an overpayment, the moneys would have had to have been wrongfully paid at the point when they were received by the Claimant in June 2006. If the Claimant was at that time entitled to the commission and to retain it subject only to a power conferred upon the employer to deduct it later if the client did not in fact meet the company's invoice, then I do not think that it could not sensibly be described as an overpayment. The fact that there may at a later date have arisen a duty to reimburse the employer would not retrospectively allow the original payment to be characterised as an overpayment. Indeed, if the Claimant had a contractual right to the full commission at that stage (albeit subject to a conditional right to reimbursement) and it had been withheld, that would have been an unlawful deduction since it would have been a failure to pay what was legally due: see Delaney v Staples [1991] IRLR 112 (CA).
12. It follows that the section would apply here only if, when the Claimant received the commission in June 2006, he was paid more than he ought to have been. I doubt whether he was, and the case does not seem to have been run on that basis. However, the position is not absolutely clear and since I am remitting the case in any event, I will not prevent the employers arguing this on remission if they allege that that is indeed what occurred.

Section 13.

13. On the premise that section 14 is inapplicable, the issue is whether the deduction was made in accordance with the conditions specified in section 13. If it was not, the deduction was unlawful.
14. Section 13 is headed "Right not to suffer unauthorised deductions" and, so far as is material, is as follows:

(1) An employer shall not make a deduction from wages of a worker employed by him unless –

(a) the deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker's contract, or

(b) the worker has previously signified in writing his agreement or consent to the making of the deduction.

(2) In this section "relevant provision", in relation to a worker's contract, means a provision of the contract comprised –

(a) in one or more written terms of the contract of which the employer has given the worker a copy on an occasion prior to the employer making the deduction in question, or

(b) in one or more terms of the contract (whether express or implied and, if express, whether oral or in writing) the existence and effect, or combined effect, of which in relation to the worker the employer has notified to the worker in writing on such an occasion.

15. The issue for the Tribunal under section 13 was whether the deduction was authorised by a provision in the worker's contract and therefore justified under section 13(1)(a). It was not suggested that there was any specific agreement, signified in writing, to the deduction being made.
16. The only clause which the Tribunal considered which could potentially justify this deduction was clause 9, which is as follows:

"The company shall be entitled at any time during your employment or in any event on termination to deduct from your remuneration thereunder any monies due from you to the company including but not limited to outstanding loans, advances, relocation expenses, training costs, any sums to be deducted under the company's car policy, the cost of repairing any damage or loss to the company's property by you (and recovering the same), any sums due from you under the company's holiday policy, and any other monies owed by you to the company." [Italics added.]

17. The Tribunal noted that the only possible category under that list under which this deduction could fall was the final general category, italicised above, of "other monies owed by you to the company". The Tribunal rejected the argument that this provided an appropriate basis for the deduction in the following terms:

"… There is a principle in law that a contract must be construed (in the Latin which we are not allowed to use any more) contra preferentem. What that means is it must be given the least favourable interpretation that the person relying on it is able to deduce from the provision in question. Applying that principle to this case I am not prepared in the absence of express provision in the contract permitting the employer to recoup any overpayment of commission to rely on that clause in paragraph 9 to give the employer the implied contractual right under this contract of employment to recoup an alleged overpayment of commission. For the employer to be able to rely on the very clear wording of section 13 it would have required extremely clear wording in the contract of employment. I am not prepared to construe paragraph 9 of this contract as giving the employer the authority to make the deduction that he did in this case."

18. The single ground of appeal here is that the employment judge simply misconstrued the scope of clause 9. It is submitted that he was not entitled to apply the contra preferentum rule. This is a principle which is applied only in the case of ambiguity: see for example Chitty on Contracts, 29^th edition, para 12-083. Here there was no ambiguity; once it was established that the Claimant owed this money to the employer, it was a payment falling clearly within the scope of clause 9.
19. I agree with that submission and would accept that, in principle, once the situation had arisen that the money was owed by the Claimant to the employer, the latter could exercise the power to deduct conferred by this clause. In my judgment the employment judge was wrong to say that the clause is sufficiently ambiguous so as to attract the application of the contra preferentum rule. I therefore conclude that on the assumption that the money was owed at the date of deduction, the deduction was lawful.
20. However, it is far from clear to me that the money was owed at that date. The Tribunal made no findings as to how the commission payments operated and in particular whether, assuming that there was a right to receive the commission in June, the obligation to repay had crystallised by the date of termination at the end of April.
21. It is far from obvious that the obligation had arisen by the date of termination in this case. Assuming, for example, that the commission could be recovered once it became clear that the client was in default, there must be some doubt as to whether that point had been reached. There were two letters from the company to the Claimant before the Tribunal which certainly raise a question mark as to whether the company had given up on the debt by the date of dismissal. First, the Claimant was told in May, shortly after termination, that the commission would be restored to him if the money were subsequently paid by the client. Then later, in June, some two months after termination, he was told that the debt had been written off. So if the duty to reimburse did not arise until the debt had been written off, there is plainly evidence to suggest that this position may not have been reached.
22. I am not seeking to suggest that this is necessarily the point at which the employee became under a legal obligation to reimburse the commission. I am merely seeking to show that unless and until that issue is determined, it is impossible to say on the evidence before the Tribunal whether the money was owed at the date of termination or not.
23. It follows that whilst in principle either sections 13 or 14 may justify the deduction, it is not possible to determine that on the findings of the employment judge. The relevant evidence was simply not before the Tribunal.
24. Mr Horne has run two arguments why I should uphold the appeal notwithstanding what he accepts is a factual and legal vacuum as to the practice with respect to commission payments. The first is that the employee had conceded that the money could be recovered, as recorded by the Tribunal (see para 4 above). I do not accept that the concession necessarily extends to any admission that the commission was owed at the date it was deducted. If a litigant in person in particular is to be held to a concession, it must be absolutely clear to what he is conceding and that was not the case here.
25. Alternatively, Mr Horne submits that there must be an implied contractual term that on termination the employers can deduct the commission if the underlying debt has not been paid by the client, even if there would otherwise have been no right to deduct the commission at that stage had the employee remained at work. I see no basis on which to imply such a term. It may be desirable from the employer's point of view, but that it not the basis on which terms are implied into the contract of employment.

Disposal

26. I have sympathy for the employment judge seeking to construe these provisions without any legal assistance from the parties. However, in my judgment he did err in law in his construction both of section 14 and clause 9 of the contract. Since the deduction may have been lawful, the appeal succeeds. Whether it was lawful will depend upon whether the employee was overpaid in June 2006 (in which case section 14 would apply) and if not, whether he was legally obliged to repay the relevant part of the commission by the date of termination in April 2007 (in which case he owed the money and section 13 would apply.) Both parties may call such evidence as they wish, and the Claimant is not to be bound by any concession he may have made in the past.