According to the Employment Rights Act 1996, an employer may not make reductions or deductions to an employee’s salary, unless the employer has specified the right to do so within an employee’s contract, or the employee has agreed to the reduction in writing.
To ensure the employer stays on the right side of the law, HR and the wider workforce, they must be clear from the outset about corporate spending boundaries and the responsibilities of every party involved. Make sure you handle overspend lawfully and in compliance with an employee’s contract, not just in accordance with the stipulations made in the employee handbook and expenses policy.
Senior Associate Solicitor at Lupton Fawcett, Nathan Coombes, specialises in employment law and says any deductions should be specified in the employment contract from the off. At the start of employment, the employer should incorporate a deduction clause into the employee’s contract as a strand clause. It’s common practice and will usually say ‘the employer is entitled to deduct any money you owe to the company.’ Without a deduction clause, the employer has few rights to reclaim overspend. If the employer reclaims money from an employee’s salary without their consent, it’s an unlawful deduction and could lead to legal action. There’s also a sting in the tail for employers. If a tribunal decided the deduction was unlawful, the company is prevented from recouping the cost.
While a deduction clause is contractually binding, expenses policies are not. As such, employers cannot claim expenses from an employee’s salary based purely on the expenses policy within an employee handbook.
Citizens Advice says that in the absence of a clear, written expenses policy, employers should be clear about what expenses would be acceptable before each employee trip. However, it is advisable that employees trusted with a company credit card, petty cash, currency or a corporate card should be briefed with an expenses policy document as part of their employee handbook, as it gives concrete guidance about the employee’s and manager’s responsibilities, the costs covered and the exclusions, plus what’s considered to be fraud and corruption.
It doesn’t necessarily mean the employee will read it. Nathan says: “Employers can ask the employee to sign a release that unequivocally confirms the employee has read, understood and agreed to the terms of the expense policy.
Nathan warns: “The contract is actionable, whereas the policy is just the detail. The onus is on employers to make sure the employer understands their duty and responsibilities, plus when to flag if an expenditure could land them in hot water. For example, there are instances where an overspend could be viewed as in breach of a bribery or corruption clause, such as wining and dining a third-party while tendering for a contract.” The employer will also want to avoid an influx of employees panicking about innocent and everyday spending, so running workshops and sessions to educate employees about these technical details of expenses could decrease problems in the long-run.
A clawback clause can be used in a variety of ways, but it can describe terms in an employee contract that will allow an employer to ‘claw back’ pay under certain circumstances. For example, it could be imposed when the good performance of the employee is re-assessed as poor, if the employee attends a training course and leaves the company within a certain time frame, or if the business suffers because of their actions. Nathan says: “clawback clauses are usually in place if an employee is forward-paid for future performance, and they aren’t usually used to reclaim overspend unless it’s specifically drafted with expenses in mind. Employers are better to focus on the details of the deduction clause.”
It’s proven that clawback clauses within contracts reduce accounting inaccuracies, imposing such a clause if it’s not within an employee’s contract puts the employer in breach of the contract terms and conditions. It can also be seen as effectively terminating the employee’s original contract and starting a new one, and forcefully imposing a new contract without the employee’s consent.
How to handle serious overspend
It is the employer’s duty to prove the employee was aware of their responsibilities if using a company credit card, petty cash or prepaid corporate card. If, despite prior knowledge, they overspend anyway, the correct process is for the employer to launch an investigation, overseen by a competent individual such as a manager or HR personnel to discover more about the context of the spend. If a company is small, they may seek third-party advice from a solicitor, Acas or Citizen’s Advice.
“Large overspend cases are rare,” says Nathan, “because company policies are flexible, and employees have discretion to decide what is and isn’t acceptable. Sometimes however, a company must act. In 2012, for example, in the case of Atkinson v Community Gateway Association, the employee overspent £1.8million surprisingly for legitimate purposes. In that case, the employee was responsible for two breaches of contract; the first failing to report the overspend and the second the overspend itself.”
Five tips to keep your firm safe from serious overspend:
- When you hire a new employee, put a deduction clause in their contract to ensure you can claim back overspend lawfully
- Write an expenses policy as part of the employee handbook and ask the employee to confirm they’ve read it in writing
- Put a sentence on expenses forms that points the employee to the correct page in their handbook
- Prevention is better than cure, so ask employees to attend regular workshops with accounts to keep them up-to-date with policy change
- Encourage employees to recognise an unusual cost and flag it up before handing over the credit card. Hospitality is a regular payment for accounts, but a missed flight or new laptop will raise alarm bells.
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