Commissioners for Revenue & Customs v Lees of Scotland Limited is an example of how easily employers can breach the requirement to pay national minimum wage (NMW) with no ill intent and, in this case, how easily the breach could have been avoided.
Background
The employer operated a "holiday fund" for its workers. Involvement in the scheme was entirely voluntary, but those who wanted could have sums of money deducted from their regular wages to be held in the fund. That involved the money being held in the employer's business current account, but the workers could make lump sum withdrawals whenever they wanted to. When deductions were made it brought wages below NMW rates for some of the workers. HMRC issued a notice of underpayment to the employer requiring it to pay arrears of NMW to the workers named in the notice. The employer appealed the notice to the employment tribunal.
Under NMW legislation, where deductions are made from wages that are for an employer's "own use and benefit", those deductions are treated as reducing pay for NMW purposes. At first instance the employment tribunal focused on the employer's intent behind the fund, to help them save for holidays and concluded that the deductions were not for the employer's own use and benefit. The notice of underpayment was rescinded.
However, when HMRC appealed to the Employment Appeal Tribunal (EAT) that judgment was overturned. Although the EAT described the holiday fund as a "laudable purpose", it found the deductions were held for the use and benefit of the employer. Rather than looking at the motivation for setting up the holiday fund, which was in the interests of the workers, the EAT considered whether the holiday fund money could be used by the employer without limitation. As it was held in the business current account the money was at the disposal of the employer. The employer benefited by retaining the interest that accrued on the money and it also had a cashflow benefit. As such, the deducted wages were for the employer's "use and benefit". The EAT also held that the repayment of funds to the workers did not extinguish or reduce the employer's liability to pay them arrears of wages. The EAT restored the notice of underpayment, which identified nearly £81,000 of arrears.
How could this have been avoided?
The employment tribunal, in reaching its decision to rescind the notice of underpayment described the holiday funds as "effectively ringfenced" within the employer's business current account. The EAT pointed out that this could not be correct as a matter of law, by their presence in the employer's account the funds were at its complete disposal. However, both the EAT and HMRC acknowledged that had the funds simply been kept in a separate third-party bank account, the issue of underpayment would not have arisen. Had that been done the money would not have been for the employer's "own use and benefit" and therefore the deductions made would not have been treated for NMW purposes as reducing pay.
What can employers learn from this?
The main takeaway from this case is that well-intentioned plans can result in breaches of NMW if not fully thought out. The laudable purpose could not override the effect the deductions had - pay had fallen below NMW and a breach of NMW rules had therefor occurred. What is more, HMRC can "name and shame" organisations that breach NMW rules and, with no context as to how or why a breach may have arisen, that can result in reputational damage to the businesses listed.
Where workers are being paid at or around the NMW particular care needs to be taken to ensure rules are complied with. Circumstances where this type of issue may arise accidentally include voluntary deductions covering costs of uniforms or seasonal office parties. Salary sacrifice schemes can also result in employers falling foul of the rules, as can inaccurate time recording systems and getting the distinction between travel on the job and travel to the job. As the EAT noted in this case, NMW legislation is a social policy measure, and it must be interpreted and applied purposively. A "strong line is needed to ensure NMW for workers even if this would preclude arrangements that are otherwise unobjectionable".
