Written by Brabners LLP
Another employer has fallen foul of the complicated rules on National Minimum Wage (NMW).
In July, in the case of Revenue and Customs Commissioners v Lees of Scotland Ltd, the Employment Appeal Tribunal (EAT) ruled in favour of HMRC over a notice of underpayment of NMW which HMRC had issued to an employer who had operated a holiday saving scheme for its employees.
Case Summary
The employer, Lees of Scotland Ltd (Lees), allowed employees to voluntarily pay a portion of their wages into a ‘holiday fund’ to help them save for holidays. The employee could then make lump sum withdrawals from their accrued fund at any time. The benefit to Lees was that it provided the company with a cashflow benefit, as although the contributions were accounted for on a separate ledger, they were held in Lees’ business current account accruing interest.
Although the scheme was entirely voluntarily, the fact that a portion of the employees’ wages went directly into the holiday fund meant that their take-home pay in some cases fell below NMW. This would nevertheless have been lawful if Lees could show that the payments into the holiday pay fund were not“for the employer’s own use and benefit”.
HMRC believed that the payments into the fund were for Lees’ own use and benefit and accordingly it issued a notice of underpayment of NMW to Lees. Lees appealed to the Employment Tribunal, which initially ruled in Lees’ favour. HMRC in turn appealed to the EAT.
The EAT was sympathetic to Lees, recognising that the employer had not tried to do anything underhand and was genuinely trying to help its employees. However, the EAT reinforced the social purpose of the NMW legislation and its aim of protecting the lowest paid and most vulnerable workers. Therefore, a “strong line” is taken in relation to technical breaches, even where it produces an outcome that may appear unfair.
In this case, whether the payments into the holiday pay fund were “for the employer’s own use and benefit” depended on whether Lees could use the monies without legal limitation. As the deductions were at Lees’ disposal in its main trading account, they were for its use and benefit. If Lees went bust, the employees would be at risk of losing their contributions.
For this reason, the EAT overturned the Tribunal’s decision and restored HMRC’s notice of underpayment on the ground that the payments into the holiday pay fund were for Lees’ own use and benefit.
Interestingly, both HMRC and the EAT agreed that if Lees had kept the contributions in a separate account held by a third party, there would have been no breach of NMW. This highlights how complicated following the NMW legislation can be and how easily technical breaches of the rules can occur. In most cases, employers who fall foul of the rules do so unintentionally.
Consequences of breaching National Minimum Wage legislation
As umbrella employers well know, care must be taken to comply with the NMW legislation as the consequences of breaches can be significant. For umbrella companies and agencies in particular, even a relatively small fine issued per underpaid worker could be drastically amplified due to the sheer number of employees in their employment who may be affected.
Breaching the NMW legislation will open employers up to the possibility of Employment Tribunal claims from employees and/or action from HMRC. HMRC have several courses of action including:
- serving notices of underpayment;
- imposing civil penalties;
- publicly naming and shaming businesses;
- recovering the underpayment through Tribunals or civil courts; and
- criminally prosecuting the business.
Employers can face fines of up to 200% of the underpayment up to a maximum of £20,000 per underpaid worker, in addition to having to pay back the underpayments of NMW. These penalties are non-negotiable, but they may be reduced by 50% if paid within 14 days. Importantly, there is no reduction in penalties for inadvertent breaches of the NMW legislation; so, when an employer makes an accidental underpayment, they will still be liable to pay any penalties imposed by HMRC.
Key takeaways
Whilst HMRC understands that not all NMW underpayments are intentional, it has been clear in its intention to take robust enforcement action against those employers who don’t pay their staff correctly. Unfortunately for umbrella companies and agencies, the recruitment sector is perceived as a high-risk sector by HMRC due to the high volumes of workers being paid and the fact that many of them are low-paid, meaning that a minor discrepancy with a worker’s pay could still cause their wages to fall below NMW.
This case serves as a timely reminder that the NMW rules are complicated and easy to accidently breach and that good intentions will not be enough of a defence to avoid penalties. Umbrella companies should take this opportunity to refresh their memories on the rules surrounding NMW to ensure compliance.
This bulletin is for general guidance only and should not be used for any other purpose.
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