NMW, deductions and holiday savings

As an employer, you’ll be aware of your National Minimum Wage (NMW) obligations.

The rules are somewhat technical. What can you do to avoid being named,  shamed and hit with hefty fines for what could be an inadvertent breach?

Background

The Employment Appeal Tribunal (EAT) recently considered a notice of underpayment issued by HMRC to an employer who operated a holiday savings scheme for employees. Employees could voluntarily pay into a holiday fund with deductions from their wages. A lump sum could then be withdrawn down the line.

The savings were held on a separate ledger in the employer’s business account, accruing interest and providing a cash flow benefit for the company.

HMRC issued a notice of underpayment for breaches of the NMW rules. The company appealed to the Employment Tribunal (ET) which found in its favour.

Decision

On appeal, the EAT found for HMRC. The ET should have asked whether the company could use the money without legal limitations. The deductions were at its disposal and held in the main trading account. They were for its use and benefit. Had the company held the money in a separate third-party account, there would have been no breach.

Citing the social purpose, the judge observed:  “…a strong line is needed to secure the NMW for workers even if this would preclude arrangements that are otherwise unobjectionable…”.

Comment

You can reduce the risk of underpayment by considering:

• Deductions made for the expenditure in connection with the employee’s work (e.g. uniforms or tools)
• Payments for employee expenditure in connection with the employment (but not where the employer reimburses the employee or intends to do so).
• Deductions for the employer’s use and benefit (including holiday savings schemes where the deductions remain within the control of the employer!)
• Costs of living accommodation beyond the allowance

These deductions don’t count:

• Tax and National Insurance contributions
• Anything not connected to the worker’s employment or for their own use or benefit (such as employee pension contributions)
• Contractual deductions
• An agreement for a loan or advance
• Recouping accidental overpayments
• Purchase of shares, securities, share options or a partnership
• Payments for the purchase of goods or services from the employer, unless:
  • required by contract or otherwise in connection with employment; and
  • you reimburse the worker
• For accommodation to a social landlord or housing authority

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