What happens when a well-meaning holiday savings scheme clashes with the uncompromising rules of the National Minimum Wage (NMW)? In a case that underscores the strict social purpose of the NMW, Lees of Scotland Ltd learned the hard way that good intentions don’t always shield employers from legal repercussions. Here’s the full story of Revenue and Customs Commissioners v Lees of Scotland Ltd [2024] EAT 120 and what it means for businesses.
Background
Lees operated a voluntary holiday scheme for employees, which allowed employees to voluntarily contribute a portion of their wages into a “holiday fund,” from which they could make lump-sum withdrawals. These funds were kept in Lees’ business account, providing a cash flow benefit, and accruing interest for the company. While the scheme was seemingly benign, the legal problem arose when HMRC determined that these deductions breached NMW regulations.
The EAT’s Decision
The EAT, led by Judge Barry Clarke, overturned the initial tribunal ruling, reinstating HMRC’s notice of underpayment. The reasoning included:
- A Purposive Approach to NMW Legislation:
The EAT emphasised that NMW laws aim to secure a guaranteed minimum cash income for the lowest-paid workers, prioritising their financial security over employer intentions. - “Use and Benefit” of the Deductions:
According to the EAT, the funds in Lees’ business account were at the company’s disposal, meaning the deductions were for the employer’s “use and benefit” under regulation 12(1) of the National Minimum Wage Regulations 2015. - Risk of Employee Loss:
Had Lees become insolvent, employees could have lost their holiday savings entirely. - Repayment Misstep:
The EAT rejected the notion that repaying the deducted amounts on request negated wage arrears. The tribunal’s view that these were “temporarily deferred wages” conflicted with the statutory requirement for arrears to be paid at the current NMW rate.
Key Takeaway
Interestingly, HMRC acknowledged that had Lees kept the holiday fund in a separate account managed by a third party, there would have been no breach. This small but critical detail highlights the importance of structuring employee savings schemes correctly to avoid unintended NMW violations.
Judge Clarke’s ruling reinforced the social purpose of NMW laws, stating that a “strong line” must be drawn, even when it leads to seemingly unfair outcomes for well-intentioned employers. For businesses, this serves as a stark reminder that compliance with NMW rules must take precedence over operational conveniences or even employee preferences.
Lessons for Employers
- Check Wage Deductions: Any deductions, even voluntary ones, must not reduce an employee’s pay below the NMW.
- Use Separate Accounts: Keeping employee-contributed funds in a segregated account can prevent compliance issues.
For further advice, please contact [email protected].
