Under the National Minimum Wage legislation that applies to employers across the UK, with some limited exceptions pay deductions from employees’ wages for the employer’s "own use and benefit" where the deduction is made by the employer and the employer is free to use that money in any way they wish, are treated as pay reductions for the purposes of the National Minimum Wage (NMW).
As Government guidance makes clear, in determining whether the deductions are for the “employer’s own use and benefit” it does not matter whether the employer makes a profit from the transaction or not, whether the deduction is made under an agreement with the worker, or whether or not the worker benefits from the arrangement. Even where the employee has requested that the deductions be made from their salary and has received the services purchased, the fact that they have been paid less than the NMW means that the employer may be required to repay the deductions, plus pay the correct NMW arrears and may also face penalties.
In this appeal case, the employer operated a scheme where employees could voluntarily pay an amount directly deducted from their wages into a savings scheme to help employees save for holidays. Those sums were then paid upon request to its employees as a lump sum to pay for a holiday. When employees paid into the fund, the money was deducted directly from their wages. The money deducted was held in the employer’s business current account, accruing interest for the employer and a cashflow benefit. HMRC issued a notice of underpayment for breaches of the NMW regulations where contributions to the scheme took wages below the NMW. The question for the employment tribunal was whether the holiday fund deductions were for the employer's "own use and benefit" and thus reduced their pay below the NMW rate.
While the Employment Appeal Tribunal recognised the benefit of the scheme to the workers and had considerable sympathy for the employer, the Employment Appeal Tribunal overturned the employment tribunal's finding that the deductions were not made "for the employer's own use and benefit" for the purposes of regulation 12(1) of the National Minimum Wage Regulations 2015.
Following an appeal by HMRC, the Employment Appeal Tribunal disagreed and restored HMRC's notice of underpayment.
The Employment Appeal Tribunal ruled that as the deductions from wages were held in the employer’s main business bank account, they were for the employer’s use and benefit. The employer gained a cashflow benefit from keeping additional funds in its business current account, by earning interest on those sums. Additionally, the employer could in principle use the money whilst in the fund. In the event of the employer’s insolvency, the employees would be at risk of losing their contributions. As the deductions were at the employer’s disposal, they were for its "use and benefit" for the purposes of the NMW legislation.
The employment tribunal's approach that the contributions were temporarily deferred wages had no basis in legislation and did not reflect the wording of the National Minimum Wage Act 1998, which required arrears to be paid at the NMW rate in force at the date of determination of the arrears.
In reaching their judgment, the Employment Appeal Tribunal acknowledged that this resulted in a windfall for the employees as the employer would effectively be required to pay its workers twice; having repaid them their savings contributions (deducted from their wages), it must now pay them their earnings at the NMW rate.
At first instance, HMRC had conceded that had the company chosen to place the funds in an account separate from its main business account, or a third-party provider of the scheme, there would be no concern about the NMW because the employer would have had no benefit at all. In that situation there would have been a full separation of the funds from the employer. This case is a reminder of the importance of using a reputable third party that is independent from the employer in setting up such employer schemes.