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Case Study
Lees of Scotland Limited, famous for teacakes, snowballs and other snacks, operated a holiday fund for its employees.
The holiday fund was entirely voluntary. It was completely up to the workers whether they participated at all and, if so, how much they contributed to the fund. If the workers did sign up to the fund, deductions were made from their net wages.
There was no suggestion of any foul play by Lees, but the effect of the holiday fund meant that some workers’ pay fell below the National Minimum Wage. HMRC sent a notice to Lees in 2022, identifying arrears of nearly £81,000.
Lees appealed HMRC’s notice to the Employment Tribunal (ET). The ET determined that the main issue was whether the monies in the holiday fund were for Lees’ own use and benefit. The ET decided that they were not, and it rescinded HMRC’s notice.
Reaching that conclusion, the ET placed considerable emphasis on the word “for” in “for [Lees’] own use and benefit.” The ET held that it was the purpose of the deduction which was key to the question of use and benefit, not the consequences.
This was important because the purpose of the deduction was not for Lees’ benefit whatsoever. Although the deduction may have resulted in some unintended benefits for Lees (such as the accrual of interest), this was secondary to the purpose.
Even if this was wrong, the ET also decided that, since the holiday fund had been closed down following HMRC’s notice, all the workers had been reimbursed in satisfaction of any arrears of the National Minimum Wage.
HMRC appealed the ET’s judgment. It argued that the ET erred in law when it decided that the deductions were not for Lees’ own use and benefit, and that the ET erred in law when it decided that the sums paid to the workers after the holiday fund was closed meant that there was no arrears of wages.
Case Study
The EAT allowed the appeal on both grounds. On the first ground, it held that the National Minimum Wage Regulations need to be interpreted with reference to its purpose: to ensure that the lowest paid and most vulnerable workers in society receive a basic floor of income.
The EAT determined that a strong line was needed to secure this, even if it might prohibit arrangements that otherwise seem fair; simplicity and certainty is needed to ensure that the National Minimum Wage is properly paid.
As to this particular arrangement, where it could be said that the workers might have been entitled to the deducted monies under contract law, the EAT highlighted that workers in a vulnerable position should not need to understand or enforce rights that may exist under contract or even trust law to ensure that they receive the National Minimum Wage. The EAT also highlighted that, although Lees’ intentions were laudable, another employer might not be so honourable, commenting that a contractual obligation is worthless if it is not honoured.
The EAT’s response to the second ground largely reinforced the points made above. It held that it was fundamental to the purpose of the Regulations that workers were able to easily work out whether they were receiving the National Minimum Wage. It was especially important for workers to be able to easily calculate what was owed to them if they did not. The EAT determined that the ET’s approach did not allow for this.
Finally, perhaps in an effort to clarify what the employer should have done, the EAT confirmed that there would have been no problem if Lees had deposited the funds in a third-party savings account (i.e., not an account held in its own name).
Most employers will already know how important it is to pay the National Minimum Wage.
However, this case highlights that even well-intentioned employers can fall foul of the Regulations, even if they, on the face of it and even in the eyes of one Employment Judge, have done nothing wrong.
Despite the EAT’s drive for simplicity and certainty, cases related to the National Minimum Wage are often anything but. To avoid the financial cost and the reputational cost of being named and shamed by HMRC, we strongly encourage businesses with workers on or close to the National Minimum Wage to take advice to ensure that they are not exposed to any risk.
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