This issue commonly arises where an employee is alleged to have caused financial loss, damaged company property, breached a workplace policy, failed to meet a target or committed an act of misconduct. Employers may be tempted to recover the resulting loss or impose a financial sanction through payroll.
However, the fact that an employee may have breached an obligation does not, by itself, make a salary deduction lawful. The principal statutory provision is section 5 of the Labour Act, Cap. L1, Laws of the Federation of Nigeria 2004, which places restrictions on deductions from workers’ wages. The National Industrial Court of Nigeria (NICN) has also consistently recognised that an employer has no general right to unilaterally deduct an employee’s salary.
The General Rule
Section 5 of the Labour Act generally prohibits deductions from a worker’s wages unless the deduction is authorised by the Act or another applicable law. The provision nevertheless recognises specific circumstances in which deductions may be made. Of particular relevance is where an employee causes injury or loss to the employer through wilful misconduct or neglect.
Even in such circumstances, the employer must obtain the prior written consent of an authorised labour officer, and the deduction must be reasonable. The significance of this requirement is that an employer cannot simply determine that an employee is responsible for a loss and deduct the alleged amount from the employee’s next salary.
The NICN has adopted this approach in a number of cases. In Adebayo Adekola v. Incorporated Trustees of Ikoyi Club 1983, the Court considered salary deductions made during the COVID-19 period and addressed the restrictions imposed by section 5 of the Labour Act.
In that case, the court held as follows; ‘’The law treats the issue of salaries with such sacredness that except expressly permitted by law or the employee, no employer is permitted to make any deductions from an employee’s salary. So, when a deduction is made from an employee’s salary, it must be applied for the intended purpose. See Chemical and Non-Metallic Products Senior Staff Association v. Benue Cement Company Plc [2005] 2 NLLR [Pt. 6] 446 at 470. Under the Pension Reform Act, 2014, and the Personal Income Tax Act, employers are required to deduct a certain percentage of the employee’s salary and pay to designated authorities. Since the deductions made in this case were not authorised by the Claimant, they are unlawful and breached the provisions of the Labour Act and the Protection of Wages Convention, 1949 [No. 95]. In addition, the COVID-19 pandemic is not a justification for the unilateral variation of the Claimant’s salary. In a related case, I said this “While the Covid-19 pandemic impacted on [the] global economy, it did not obviate the necessity for compliance with contractual obligations.’’
Lawful Deductions
The restrictions under the Labour Act do not mean that every deduction from salary is unlawful. Certain deductions are expressly permitted or required by law. These include statutory deductions such as PAYE tax and pension contributions, as well as certain contributions to approved schemes and trade union deductions where the applicable statutory requirements are satisfied.
The Labour Act also permits the recovery of salary overpayments, although the legislation places a limitation on the period of overpayment that may be recovered in this manner.
The important distinction is that these deductions derive their authority from legislation or a recognised legal arrangement. They are fundamentally different from an employer unilaterally imposing a financial penalty on an employee.
Salary Deductions as Disciplinary Sanctions
One of the more common practices that raises legal concerns is the imposition of monetary penalties for workplace misconduct. An employer may, for example, have a policy providing for a fixed deduction for lateness, failure to meet a target, insubordination or another disciplinary breach.
The existence of such a policy, however, does not make the deduction lawful. Section 5 of the Labour Act specifically regulates deductions in respect of fines. Employers must therefore consider the statutory basis for the proposed deduction rather than assume that an internal policy is sufficient authority. The question of consent may also arise.
In Akinrinade Adebowale v. Orchid Hotels Limited (NICN/LA/63/2020), the NICN considered whether an employee had actually consented to a proposed deduction and emphasised the importance of establishing genuine consent rather than simply inferring it from silence or participation in a meeting.
Where the Employee Causes a Financial Loss
The position becomes particularly important where an employee’s conduct causes financial loss to the employer. An employee may, for instance, negligently damage company equipment, lose company property or carry out an unauthorised transaction that results in financial loss.
While the employer may have a legitimate claim against the employee, it does not necessarily follow that the employer can recover the loss directly from the employee’s salary. Where the statutory requirements under section 5 apply, those requirements must be satisfied before a deduction is made.
In Hannah Adebola Anike Oluyemi v. Nigerian-German Chemicals Plc (NICN/LA/491/2016), the NICN rejected an employer’s attempt to recover an alleged loss through salary deduction where the required prior written consent of an authorised labour officer had not been established. The principle is therefore straightforward: an employer’s determination that an employee caused a loss does not authorise a deduction from salary.
An employer may have other legal remedies for recovering a legitimate debt or loss, but the availability of those remedies should not be confused with a unilateral right to deduct from payroll.
The Importance of Consent
Employee consent can be relevant to the validity of certain deductions. However, consent should not be regarded as a blanket solution to every salary deduction. Where consent is required, it should be clear and properly documented. Employers should also consider whether the deduction is otherwise authorised by law, whether the amount is reasonable and whether any statutory limitation applies.
A clause in an employment contract or employee handbook may be relevant, but contractual freedom operates within the framework of applicable legislation. An employer cannot rely solely on a contractual provision to justify a deduction that is otherwise prohibited by law. For example, an employer cannot claim a right to deduct an employee’s salary for lateness or insubordination merely because such a provision is contained in the employment contract. Where the deduction is prohibited by law, the contractual provision will be unenforceable.
The One-Third Limitation
The Labour Act provides an additional safeguard by stipulating that the total amount of deductions that may be made from a worker’s wages in any month shall not exceed one-third of the worker’s wages for that month. Thus, for an employee earning ₦900,000 per month, the statutory one-third threshold would be ₦300,000. In other words, deductions including pension, and any other deduction must not exceed one-third of the employee’s salary.
This provision should not, however, be misunderstood as giving an employer an automatic right to deduct one-third of an employee’s salary. The proposed deduction must first be legally permissible. The one-third rule operates as a limitation on deductions that may lawfully be made; it does not itself create the right to make a deduction.
Deduction of Salary and Reduction of Salary
A further distinction should be made between a deduction from salary and a reduction or variation of remuneration. A deduction generally involves withholding part of an amount already due to the employee. A salary reduction, on the other hand, may involve changing the employee’s remuneration going forward, perhaps as part of a restructuring, demotion or revised remuneration arrangement. Such a change raises separate contractual and employment-law considerations.
An employer contemplating a reduction in remuneration should therefore consider the terms of the employment contract, applicable policies or collective agreements and whether employee consent is required.
What Happens When a Deduction Is Unlawful?
An employee who considers a salary deduction unlawful may challenge the deduction and seek recovery of the amount withheld. Depending on the circumstances, the employee may also pursue claims arising from breach of contract, unlawful deduction of wages or unfair labour practice.
The NICN has, in appropriate cases, ordered employers to refund amounts unlawfully deducted from employees’ salaries. In Mr. Olusola Idowu Bello v. Pacific Diagnostics Limited, for example, the Court considered the legality of a unilateral salary reduction and ordered payment of the outstanding salary balance.
Accordingly, an employer should not assume that a deduction becomes lawful simply because it has been processed through the payroll system or authorised internally.
Practical Considerations for Employers and Employees
For employers, the prudent approach is to establish a clear legal basis before making any deduction. The employer should consider whether the deduction is authorised by statute, properly incorporated into the employment relationship, supported by the necessary consent and compliant with applicable statutory limits.
For employees, an unexpected deduction should prompt a request for an explanation and the legal or contractual basis for the deduction. Employment contracts, payslips, company policies, HR correspondence and other relevant records should be preserved where the deduction is disputed. Where the issue cannot be resolved internally, the employee may seek legal advice and pursue appropriate remedies before the relevant labour authorities or the National Industrial Court.
Conclusion
The law recognises the legitimate interests of employers in maintaining workplace discipline, protecting company assets and recovering legitimate debts. Those interests, however, do not translate into an unrestricted power to deduct an employee’s salary. For employees, the fact that a deduction appears on a payslip or is contained in an internal policy does not necessarily make it lawful.