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National Minimum Wage – When is a Deduction not a Deduction?

In a rare victory for Middlesbrough FC (“MFC”) it has succeeded in challenging the interpretation of HMRC of the National Minimum Wage Act (“NWMA”) and the 2015 Regulations (“NMWR”) in a decision of an Employment Tribunal sitting at Teeside.

Nicholas Siddall QC analyses the law, the Employment Tribunal decision and comments on the likely arguments in HMRC’s pending appeal.

The Facts

MFC offered an option to its employees to purchase season tickets for family members. It operated a scheme whereby the employees (if they so chose) received the season ticket at the start of the football season but could pay for the same over the course of the year. To the uninitiated this might be felt to raise no issue of NMWA compliance, as it was simply an indulgence afforded to staff, but HMRC considered otherwise. This was on the basis that the sums for the season ticket were deducted at source by MFC from the employee’s wages and thus were considered to fall foul of NMWR.

The Legislative History

The current NMWR follow the initial Regulations from 1999. Regulation 35(e) of the 1999 NMWR read as follows

‘Payments not to be subtracted under Reg 31(1)(b)….

(e) any payment in respect of the purchase by the worker of any goods or services from the employer, unless the purchase is made in order to comply with a requirement in the workers contract or any other requirement imposed on him by the employer in connection with his employment.

The effect of that provision was considered by the EAT and Court of Appeal in Leisure Employment Services-v-HMRC [2007] EWCA CIV 92 and [2006] ICR 1094.

In the EAT Elias J (whose reasoning was endorsed by the Court of Appeal) held that the motivation behind a deduction was irrelevant. If the sums were deducted by the employer -as opposed to being paid to the employee and paid back to the employer- then they were a deduction and could not fall within the scope of the provision.

Elias J said this

  • In my judgment, the act of withholding money at source from the sums which would otherwise have been paid to the worker constitutes a deduction. A deduction is to be contrasted with a payment by the employee which is a situation arising where the money is initially formally paid over by the employer to the employee but is then paid back to the employer. The distinction simply focuses on the mechanism whereby the money is received. It has nothing to do with its purpose.
  • …However, it seems to me that there is no way of regulating the employer who does not seek to give what are, in effect, benefits in kind and who charges a distortionate price. The legislation has to take a strong line to ensure that the statutory minimum wage is properly secured for workers even if this means that certain   arrangements, not objectionable in themselves, cannot be permitted.

The Current Legislative Provisions

Regulation 12 NMWR now provides as follows:

  1.  deductions made by the employer in the pay reference period, or payments due from the worker to the employer in the pay reference period, for the employer’s own use and benefit are treated as reductions save as specified in paragraph (2) and regulation 14 (deductions or payments as respects living accommodation).
  2.  the following deductions and payments are not treated as reductions-

(a) deductions or payments in respect of the worker’s conduct, or any other event, where the worker (whether together with another worker or not) is contractually liable;

(b) deductions, or payments, on   account   of   an   advance   under   an agreement for a loan or advance of wages….;

(e) payments as respect the purchase by the worker of goods or services from the employer unless the purchase is made in order to comply with a requirement imposed by the employer in connection with the worker’s employment.

On the face of the provisions they create a mechanism by which all payments and deductions in the relevant period which are for the employer’s own use and benefit are calculable for minimum wage compliance unless they fall within the specific exceptions in Regulation 12(2). A comparison of Regulations 12(2)(a) and (b) suggests that they capture both deductions and payments whereas Regulation 12(2)(e) applies only to payments.

The HMRC Guidance

On the basis of the decision of LES the HMRC Guidance states as follows as to the proper scope of Regulation 12(2)(e) NMWR.


The following deductions by you or payments by a worker will not reduce a worker’s pay for minimum wage purposes:

  • Voluntary payments by the worker for the purchase of goods and services from you – for example payments for meals the worker has freely chosen to buy in the staff canteen (however, if you deduct money from the worker’s pay in these circumstances this will reduce minimum wage pay).

The Employment Tribunal Judgment

The Employment Tribunal was addressed as regards the structure of the NMWR and it was submitted by HMRC that it was bound to follow the decision in LES. The Employment Tribunal held not. Its reasoning was as follows:

    51.  “The title of 1999 Regulation with which Elias J in LES was concerned is: ‘Payments not to be subtracted under Regulation 31(1)(h)’. Regulation12(2) of the 2015 Regulations is preceded by the phrase ‘the following deductions and payments are not (my emphasis) treated as reductions. Although I am not specifically asked to distinguish the decision of Elias J, to find in favour of the appellant I either have to ignore the comments of Elias J (which clearly I cannot do) or compare and contrast the two sets of Regulations to determine if the interpretation in respect of the 1999 Regulations still stands in light of the new wording in the 2015 Regulations.
    53. In order to do this I read the 2015 Regulation as a whole: ‘the following deductions and payments are not (my emphasis) treated as reductions……payments as respects the purchase by the worker of goods or services from the employer, unless the purchase is made in order to comply with a requirement by the employer in connection with the workers employment.’
    54. I have carried out this exercise and I conclude that deductions as respect the purchase of the season card on behalf of third parties by the employees of the appellant in the specific and unusual circumstances of this case are not to be treated as a reduction. The workers were not required to purchase the season cards in connection with their employment but chose to ask to do so on behalf of family member third parties. Taking a purposive approach to the 2015 Regulations and noting that the employees simply exercised their freedom of choice, I am able to distinguish the LES case and conclude that the appellant was entitled to make the deductions in respect of the season cards which are challenged by the notices issued by the respondent in this case.

Great Result: But is it Full Time?

HMRC has lodged an appeal in this matter. It is imagined that it shall make the point that it is difficult to see how Parliament’s deliberate linguistic choice to distinguish between a ‘payment’ and a ‘deduction’ can be treated as being of no effect. Further the wording of the 1999 and 2015 NMWR are indeed different but it may again be felt to be challenging to discern a logical basis why this difference impacts on the correct meaning of the word ‘deduction’ thereby rendering the decision in LES distinguishable. Equally it may be argued that the unusual circumstances which the Employment Tribunal considered to apply in this matter (requiring it to adopt an apparently strained linguistic construction) are not readily discernible.


The judgment of the EAT is awaited with interest but until such time as its promulgation it appears that employers are able to rely on the MFC decision to seek to challenge decision notices issued by HMRC which turn on the proper construction of Regulation 12(2)(e) NMWR.

Nicholas Siddall QC has a particular interest in the National Minimum Wage and advises employers of all sizes as to NMWA compliance.

A link to the Employment Tribunal decision is here:

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