Out-Law News 5 min. read

'Doing the right thing' can cause employers to fall foul of minimum wage rules

ANALYSIS : Businesses trying to 'do the right thing' and help their employees can fall foul of the very prescriptive and difficult to administer national living wage and national minimum wage (NMW) rules. A government consultation which closes on 1 March is a chance for employers to tell the government where they feel NMW rules are not working as intended.

Alleged breaches of NMW rules

According to press reports, HM Revenue & Customs (HMRC) has alleged that Iceland Foods has been underpaying its staff under NMW laws due to how the company operates a Christmas savings scheme. The savings scheme allows employees to put aside money from their pay packets, which is kept for them in a ring-fenced Iceland bank account managed by independent trustees. Employees are not obliged to join the scheme, or to spend the proceeds at Iceland. They can get their money back at any time, with many of them choosing to get the money back at Christmas time.

In total, Iceland said the alleged underpayment of wages is around £3.5 million a year. NMW rules allow HMRC to go back six years, so HMRC is apparently claiming that the scheme means that Iceland has underpaid workers a total of £21 million, even though the staff have received back all the money they paid in to the scheme

As if this was not bad enough, breaches of NMW rules carry swingeing penalties. They are calculated as a percentage of the wages underpaid and were increased from 1 April 2016 from 100% to 200% up to a maximum penalty £20,000 per worker, though lower penalties applied before 2014.

It appears that HMRC is claiming that because the savings were deducted by Iceland from employees' salaries, rather than contributed by employees after they had been paid to them, they amount to a deduction from pay which reduces the employees' pay for NMW purposes. This is presumably on the grounds that it is deduction 'for the employer's own use or benefit' – although this is difficult to see if the payments are held in a separate ring fenced account for the benefit of the employee and are repayable on demand. The 'deductions for the employer's own use' area usually causes difficulties where employers make deductions from pay for things like meals or transport provided to employees. In these cases it is easier to see that there is a benefit to the employer in recouping some of the cost, even if the employer is not making a profit on the services.

Press reports suggest that Middlesbrough Football Club has recently been cleared of failing to pay staff the NMW in another case involving deductions 'for the employer's own use or benefit' This case involved deductions from wages to spread payments for season tickets. It appears that the club succeeded in the employment tribunal as it could prove the staff had requested the deductions to help spread the payments for the season tickets.

Apparently, Iceland is also accused of breaching NMW rules in relation to guidance it issued to shop staff to wear 'sensible shoes'. The company provides safety shoes free of charge for staff who request them – typically warehouse workers rather than store staff -  but store staff can, and usually do ,provide their own shoes .

HMRC's argument is that the pay for store staff who chose to buy their own footwear would have fallen below the minimum wage in the weeks that the shoes were purchased and has argued that Iceland should refund store staff for two shoe purchases a year, at a notional value of £20 each, going back six years.

Other businesses with NMW breaches

Iceland is the latest retailer to fall foul of the rules. Debenhams, John Lewis, Argos, Monsoon, Karen Millen, Primark and Sports Direct are among those who have previously been in breach, as well as restaurant chains Wagamama and TGI Fridays. The Wagamama and TGI Fridays cases look to bear some similarity to the Iceland 'sensible shoe' issue as press reports suggest that Wagamama asked restaurant staff to wear black jeans or a black skirt with their Wagamama-branded top and did not reimburse them for the cost. The TGI Fridays case apparently related to the purchase of black uniform shoes.

HMRC's attitude

HMRC seems to be particularly looking at issues around what employees are required to wear to perform their duties. Uniforms in the strict sense of the word tend to be provided by the employer and may therefore be more straightforward, unless the employer is trying to charge for them. Dress codes tend to be more problematic as most employers will have some form of policy on what people must wear to work. This should not be a problem for employers paying significantly above the NMW as the cost of clothing should not reduce wages below the NMW.  However, employers who pay workers at or slightly above the NMW need to take particular care that their dress code could not cause technical breaches of the NMW rules. This is a particular problem for the retail and hospitality sectors.

If NMW rules are breached, it does not matter whether the breach has occurred accidentally or deliberately – or even if the breach seems more of a technical breach which has not resulted in any economic disadvantage for the employee.

HMRC appears to be determined to pursue anything it sees as a breach and seems to be taking a much tougher stance, even over simple technical breaches. This is borne out by the figures.

The number of investigations opened by HMRC into employers over potential breaches of the NMW increased 43% to 3,975 for the year ending 31 March 2018, up from 2,775 in 2016/17. In total, HMRC identified £15.6 million in pay that employers owed to more than 200,000 workers in the year to 31 March 2018 and NMW fines amounted to £14 million. More than 600 employers were 'named and shamed' in that period.

Chance for employers to express their views

In December 2018 the Department for Business, Energy and Industrial Strategy (BEIS) launched a consultation on possible changes to the NMW rules in relation to salaried workers and salary sacrifice schemes. As part of this the government is asking for input from employers on areas where they feel NMW rules "unfairly penalise them without generating any benefit or protection for workers".

The consultation also looks at the way the NMW rules work in conjunction with salary sacrifice schemes, where employees can choose to receive a lower rate of pay in exchange for non-cash benefits such as childcare vouchers or arrangements where employers agree deductions from pay in return for goods and services. The government is concerned about reports that salary sacrifice schemes are being withdrawn for employers on low pay, who are not being offered the same arrangements as those earning well above the NMW.

The consultation closes on 1 March 2019. This is the opportunity for businesses grappling with the technicalities of the rules to point out where the NMW rules are producing unintended results.

The consultation is encouraging as an indication that the government may be prepared to make changes to the rules. However, in the meantime employers could still be exposed to HMRC investigations. Those with workers paid at, or slightly above, the national living wage or national minimum wage need to take particular care and consider NMW whenever any change to pay, benefits in kind, dress codes or working practices is proposed. Non-compliance with NMW, even as a result of a technical breach can be very costly, both in financial terms but also in adverse media attention. 

Steven Porter and Catherine Robins are tax experts at Pinsent Masons, the law firm behind Out-law.com. This is based on an article which was first published in Taxation on 14 February 2019.

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