National Minimum Wage compliance: the EAT's verdict on Revenue and Customs Commissioners v. Lees of Scotland Ltd

August 21, 2024

The intricacies of adhering to the National Minimum Wage (NMW) can often present unexpected challenges. The crux of these challenges often rests on whether deductions from employees' wages are considered to benefit the employer financially, regardless of the intention behind such deductions. This issue was at the centre of a legal challenge when the Revenue and Customs Commissioners (HMRC) appealed against the Employment Tribunal's (ET) decision in an NMW challenge brought by Lees of Scotland Ltd (Lees). The dispute hinged on a critical interpretation of the NMW regulations 2015 - specifically, whether a deduction from wages was made for the employer's "own use and benefit". This determination is critical as it looks at whether there is a financial benefit to the employer, regardless of whether there may also be a benefit to the employee. The outcome of this case has significant implications for how employers should approach wage deductions and NMW compliance.

Case Facts

Lees, a company known for its confectionery creations, embarked on a venture to support its employees with a "holiday fund" scheme. This initiative was designed to allow staff to set aside a portion of their wages into a savings pot, earmarked for holidays. The funds would stay in Lees' main trading account and paid to employees on their request. Employees who chose to participate in the scheme had the freedom to decide the amount they wished to save and had the flexibility to withdraw their savings at their convenience. On the surface, the scheme appeared to be a straightforward employee benefit, but the practical outcome was that it inadvertently led to complex legal issues regarding compliance with NMW regulations.

It came to light that wage deductions for the holiday fund were causing some employees' earnings to fall below the NMW threshold. This unintended consequence caught the attention of HMRC, which issued a notice of underpayment to Lees, asserting that the company had breached the NMW regulations. Defending its position before the ET, Lees challenged this notice, arguing that the deductions should not be counted for NMW purposes as the employees chose how much was paid into the scheme and these sums were not for Lees' own financial gain. It argued that the scheme was established purely to assist employees to save money to use whilst on annual leave. The ET found merit in Lees' argument, ruling that the deductions were not made for the company's use and benefit, and thus were not in violation of the NMW regulations.

HMRC appealed the decision, escalating the case to the Employment Appeal Tribunal (EAT) which was now faced with the task of dissecting the finer points of the NMW regulations and determining whether the ET had indeed made a legal misstep in its interpretation of what constitutes an employer's "own use and benefit".

EAT Decision

In contrast to the ET's earlier verdict, the EAT considered the pivotal question of whether the deductions from employees' wages for the holiday fund were for Lees' "own use and benefit". The EAT determined that the ET had misinterpreted this key aspect by focusing on Lees' intention behind the holiday fund, rather than who had actual control and use of the funds. It was found that, because the deducted sums were held in Lees' main business bank account, the company had the ability to use these funds freely until employees requested them to be paid out. This led to the funds accruing interest and providing a cash flow advantage for Lees - factors which signified a financial benefit to the employer.

The EAT went on to address the repayment of the deductions to employees, stating that these repayments did not rectify the initial underpayment of wages below the NMW. The EAT pointed out that any arrears should be calculated using the NMW rate in effect at the time the arrears are determined, in accordance with section 17 of the NMW Act 1998, and not the rate applicable when the wages were first due. So, an underpayment of £10 in March is not resolved by repayment of the £10 in August when new NMW rates mean the deduction would be calculated as £12.

The EAT also criticised the ET's characterisation of holiday fund withdrawals as "additional remuneration" as this undermined the essential link between pay and pay reference periods in the NMW regulations. It concluded that the ET had erred by assuming that each payment from the fund related to the earliest pay reference period with an outstanding liability. The earlier ET decision was overturned and the notice of underpayment originally issued by HMRC was reinstated.

The EAT also criticised the ET's characterisation of holiday fund withdrawals as "additional remuneration" as this undermined the essential link between pay and pay reference periods in the NMW regulations. It concluded that the ET had erred by assuming that each payment from the fund related to the earliest pay reference period with an outstanding liability. The earlier ET decision was overturned and the notice of underpayment originally issued by HMRC was reinstated.

Comment

The key takeaway from the EAT's ruling is the emphasis on the actual use by and financial benefit to the employer arising from deductions made from employees' wages, rather than the employer's stated intentions to offer any benefit to their employees. It is important to note that Lees would not have fallen foul of NMW regulations if it had held the holiday fund money in a third-party bank account (in the third-party's name) for the employees. This ruling echoes the key issues we highlighted in our March blog post, "Navigating the National Minimum Wage: an employer's guide to compliance" which stressed the importance of understanding and adhering to NMW regulations to avoid costly penalties and reputational damage.

This case also connects to broader discussions on NMW compliance, as highlighted in the Department for Business and Trade's recent "name and shame" list and educational bulletin. The bulletin, aimed at guiding employers through the common pitfalls of the NMW regulations, emphasises the need for a comprehensive understanding of what constitutes "working time", the impact of deductions and the correct calculation of wages for apprentices and salaried workers.

Employers should carefully review any similar schemes they offer to ensure they are not inadvertently falling into the same trap as Lees. The EAT's decision and the guidance provided in the educational bulletin serve as crucial resources for employers to refine their compliance checks and fully grasp the legal standards set by the NMW regulations.

Furthermore, the government has recently updated the Low Pay Commission's remit on the NMW, requiring it to consider the cost of living when recommending the national living wage rate and to take steps toward a single adult rate. This all highlights a shifting landscape in wage regulation. Employers must stay informed about these legislative changes to ensure their practices remain compliant.