National Minimum Wage: Blinded by Kindness!

In 2020 Nicholas Siddall KC analysed the decision of the EAT in Middlesbrough AFC-v-HMRC [2020] ICR 1404. A link to his previous article is here.

The EAT (Judge Barry Clarke) In Commissioners for Revenue and Customs-v-Lees of Scotland Limited [2024] EAT 120 has recently revisited and confirmed that decision in a striking example of a situation where an employer’s benign actions in creating a payment scheme led them once again to fall foul of the Minimum Wage provisions.

The Facts

The respondent company operated a savings scheme. Its workers voluntarily paid contributions into the fund, which were deducted from their wages, to help them save for holidays. It was a laudable purpose. The company retained those deducted sums in its main trading account and paid them upon request to its workers so that they had a convenient lump sum to pay for a holiday. However, in the case of some of its workers, the deductions pushed their wages below the national minimum wage (“NMW”).

The appellant, HMRC served a notice of underpayment on the company requiring it to pay arrears of the national minimum wage to the workers named in the notice. The company appealed the notice to the ET, which had to decide whether these deductions were for the company’s “own use and benefit” for the purposes of Regulation 12(1) of the National Minimum Wage Regulations 2015. It decided they were not and rescinded the notice. HMRC appealed to the EAT.

The EAT’s Analysis

One might reasonably begin from an assumption that such a scheme has nothing to do with NMW compliance but (as in Middlesbrough) the employee’s consent and the benign nature of the scheme operated by the employer were found to be irrelevant in the context of NMW compliance.

The EAT found that the Employment Tribunal below had ignored the previous decisions in Middlesbrough and Leisure Employment Services Ltd-v-Commissioners for HM Revenue and Customs [2007] IRLR 450 (“LES”) when concluding that the sums held by the employer in its bank account were not available for the employer’s own use and benefit.

The following themes can be extracted from the EAT judgment.

• Protective Purpose

The EAT observed that regard needed to be had to the protective purpose of the NMW:

“72.      The NMW legislation is an archetype of a social policy measure, seeking to achieve the policy aims referred to at the start of this judgment. It must be interpreted and applied purposively. It is not desirable to carve out specific chapters or provisions within the NMWA or the  accompanying Regulations, or specific factual circumstances, that are more deserving than others of this purposive approach; it applies to all four corners of the legislation. To adopt Elias J’s clear steer, a “strong line” is needed to secure the NMW for workers even if this would preclude arrangements that are otherwise unobjectionable or produce outcomes in individual cases that may seem unfair to employers. To adopt the similar steer from Buxton and Smith LJJ, a purposive approach should strive for “broad and simple rules” that avoid “endless debate”.”

• Irrelevance of Employer’s Benign Purpose

Equally the EAT observed the laudable intentions of the employer are irrelevant.

“73.      Taking that approach, the issue of whether a payment or deduction is for the employer’s “own use and benefit” is not to be answered by reference to a factual comparison of whether it is the employer or worker who, in relative terms, benefits more from it. A “balance sheet” analysis of this sort invites complexity. It would detract from the simplicity and certainty needed to ensure that the NMW is properly paid.

74. Similarly, the issue of whether a payment or deduction is for the employer’s own use and benefit is not to be answered by reference to the purpose or intention (which may be benign) that an individual employer may have in delivering a non-cash benefit of some kind to its workers. That would leave open the possibility that a similar arrangement could be abused by a different employer, whose intentions may be different or which may change, resulting in a decision to decline to pay the money out of the fund or delay in doing so.”

• Examine Use and Benefit without Reference to Intention

“75.     …The answer to determining whether a payment or deduction is for the employer’s own use and benefit comes from asking a simple question: whether the employer can use the money paid or deducted, avoiding the distraction of looking at the purpose of the payment or deduction. That enquiry will usually focus on the employer’s financial position, but I do not rule out the possibility that there might be a non-financial impact.

76. As Elias J said in LES (EAT), if there is no legal limitation on the way that the employer can use the money paid or deducted, it will be for its own use and benefit. I would add that the contrary is not necessarily true; the presence of a legal limitation on the employer does not thereby mean that the payment or deduction ceases to be for its own use and benefit. I have in mind here the suggestion that an employer bears a contractual obligation to pay the money deducted to its worker, or the suggestion that the arrangement is imprinted with a trust of some sort (where, in any case, different considerations will apply in Scotland). These would not be “broad but simple rules” that enable a worker readily to determine whether they are receiving the NMW in cash or receiving the correct amount of arrears. Workers in a vulnerable position should not be expected to understand or enforce rights that may exist under contract or trust law to ensure that they receive the NMW. If any further emphasis is needed, it comes from Mr MacNeill’s point about the consequences of an insolvency: the workers would become creditors of the company in respect of money held in the savings scheme, but they would face complexity and uncertainty when seeking to demonstrate their preferential creditor status and/or when seeking to recover the unpaid wages from the National Insurance fund…
77. Specifically, the ET’s attempt to assess objectively the purpose and intention of the deductions, while superficially attractive, was contrary to authority and led it astray from the need to focus upon the effect of the deductions on the company’s position. The process of investigating objective purpose and intent reintroduced the concept of motivation that the Employment Tribunal earlier in its judgment declared to be irrelevant. In this case, to look at the purpose of a deduction separate from the purpose of the overall arrangement was a distinction without a difference. It was driven by the ET’s wish – explicitly articulated in its judgment – that certainty should not result in unfairness to the company.”

• The Concept of Deferred Wages is not consistent with the NMW

“80.      There is nothing on the face of the NMW legislation which supports the concept of delayed or deferred wages. The social purpose of that legislation is in fact achieved by the precise opposite: cash in hand for an easily identifiable pay reference period…

91. I concluded above, at paragraph 80, that the notion of delayed or deferred wages is contrary to the social purpose of the NMW legislation, which requires cash in hand for an easily identifiable pay reference period. It was an error of law for the ET to characterise the savings scheme deductions as nothing more than the temporary retention of wages for deferred payment, such that their return could similarly be characterised as the payment of additional remuneration. That approach has no basis in the legislation.
92. Another reason to reject the ET’s approach to the issue of NMW arrears is that it would introduce complexities and uncertainties that weaken the protection this legislation is intended to provide. It undermines the important link needed between pay and the reference periods to which that pay relates. It would be difficult, if not impossible, for a worker to be sure that the money they had received by way of withdrawn savings accommodated some or all of the uplift that may be required by section 17(4) NMWA. It would also frustrate the efforts of HMRC to enforce the legislation. The company’s acceptance that further money may be due to give effect to intervening changes in the rate of the NMW undermines its contention that the refund process was consistent with the statutory scheme for the payment of NMW arrears. Put bluntly, if the company were not correct on the first issue for the ET to decide, it is difficult to see how it could be correct on the second issue for the ET to decide.”

• Obligation to pay on Demand did not affect ‘Own Use and Benefit’

“81.      The company’s best point was that the existence of a contractual obligation to pay the money upon demand meant that its ability to use the money as it wished was limited by law. However, as noted, a tribunal must strive to ensure that a “strong line” is taken to ensure payment of the NMW. The ability of a worker to demand the sum does not assist the company’s argument, because – however benign its own intentions – a less scrupulous employer could decline or delay such payment. A contractual obligation is worthless if it is not honoured. A purposive approach must have regard to the possibility that another employer could use such a scheme for improper ends; for example, to present a false impression of its cash health which boosts its ability to discharge its debts as they fell due, or taking other steps that could increase the risk that the money was not paid to the workers and the NMW not secured.”

• Irrelevance that the Effect of the Judgment is that the Employees were Paid Twice

“95.      Like the ET, I have considerable sympathy for the company. Ms Robertson said that it will be required to pay its workers twice: having paid them their savings, it must now pay them NMW arrears. This was characterised as a windfall. She also suggested that there may also be an element of double taxation involved. I make no comment about the tax issue; liability to tax in this context is a separate matter between the company and HMRC (outside of its NMW enforcement function). Ms Robertson may or may not be right to say that the company would now be better off it if had chosen not to pay the money out of the savings scheme at all. I have already said that it may be scant comfort to the company for me to note that its intentions were benign. However, the possibility of an unintended windfall in this case should not distract the courts and tribunals from outcomes that properly secure the NMW for the lowest paid and most vulnerable workers across all parts of society.”

Conclusion

Thus an employer seeking to act to help its employees has once again been found to breached the obligation to pay the NMW.

Employers should therefore look to assess all payment schemes operated with their employees and assess (irrespective of motive) if the effect of their application is that employees shall be paid less than the NMW in any particular reference pay period. If so it is likely that a NMW breach shall be disclosed.

Nicholas Siddall KC has a particular interest in the NMW and advises employers of all sizes as to NMW compliance. He appeared for Middlesbrough in the EAT.

A link to the EAT judgment is here.