Sometimes employers try to do the right thing and still get it wrong. Lees of Scotland are in that boat right now, having set up a holiday savings fund to help workers save money directly from their earnings. The Employment Appeal Tribunal has found in HMRC’s favour that savings deposits amounted to deductions from wages for Lees of Scotland’s own use and benefit and therefore reduced pay for the purposes of the National Minimum Wage (NMW) regulations. This has resulted in Lees being found to have underpaid NMW, meaning that they’ve breached NMW regulations. It’s not the first of these types of cases but there are some reminders to take away. 

Headline point

An employer’s intentions may be honourable when helping employees save money for whatever reason (be that a holiday fund, a rainy-day pot or a Christmas savings pot). The crucial question in cases where the savings are deducted directly from pay, is: can the monies be used by the employer without any legal limitation? If the answer to this question is yes, then the savings scheme could fall foul of NMW compliance as the payments into the savings scheme are viewed by HMRC and the tribunals as deductions from wages. This means that if the payments into the savings scheme bring the employee’s wages below NMW rates, the employer will be in breach of the NMW regulations. 

Background 

Lees operated a holiday savings fund that workers could use, where any money that workers wanted to save was deducted from their wages and paid into the fund. The fund was part of Lees’ main trading account and monies were paid back to the workers on request. There were no restrictions on this money, Lees had access to it as it was in their main account, but it was intended that the fund was ringfenced and was not to be seen as part of the company’s funds. However, importantly, there were no actual legal or financial limitations placed on the funds; the ring-fencing was just an intention. The funds were not protected from the employer’s creditors and the employer even earned interest on the funds which it kept. 

The important legislation is Reg 12(1) of the NMW Regulations 2015; this states that deductions made by the employer in any pay reference period[…] for the employer’s own use and benefit are treated as reductions. HMRC argued that the monies put into the holiday fund were reductions in the workers’ pay which meant that Lees were paying their workers who used the holiday fund less than the NMW. 

The tribunal found in favour of Lees. It found that the monies were not for the employer’s use and benefit. Rather they were delayed or deferred wages, the intention of the payment was a savings for the workers and not for use by the employer.

The EAT overturned this decision. It noted that the purpose or intention of the fund was not relevant, what was relevant was whether Lees could use the money without any legal limitation. They could use the fund as their own money because the monies were in their main trading account and so under Reg 12(1) the deductions were for their use and benefit and so resulted in an underpayment of NMW for those workers who used the fund.

Interestingly, the Judge noted his sympathy for the company and acknowledged that they were trying to do the right thing and that there had been no impropriety. However, he noted the social purpose of the NMW and its aim to ensure a minimum income for the lowest-paid and most vulnerable workers. 

Learning and action points

• Any type of scheme where monies are taken before payment of wages can be risky. This is not the first case of its kind; Middlesbrough Football Club were caught several years ago by deducting season ticket payments from wages. Iceland’s Christmas club scheme is also another notable case. Always seek specific advice before setting such a scheme, particularly if the pay rates you have in place are not far above NMW rates or indeed, at NMW rates. 
• If you set up a savings scheme, consider the Judge’s comments in this case. He noted that had the funds been kept in a separate account held by a third party there would have been no breach of NMW Regulations. Ensure that there are legal limitations on the monies collected so as to remove them from monies that could be collected for the company’s own benefit and use. 
• To help your employees with their personal savings goals, consider whether you can provide or signpost them to learning resources so that they can improve their habits and knowledge around budgeting, saving and reducing debt. 

What’s the future for NMW?

The new Government made it clear in its campaigning and manifesto that it intends to increase the NMW and make it a uniform rate for all workers, regardless of age. The increase will consider the cost of living and so we could see NMW rates rising more than normal from April 2025 onwards. This will impact budgets for next year. First because of the rise in NMW and second because all workers, regardless of age, will be on that rate. In March 2024, the Low Pay Commission projected a rate of £11.89 for 2025/26 NMW. We are expecting the actual rate to be higher and await confirmation in October this year. 

If you would like any specific advice on this matter, please contact me. For further information on the Government’s new legislation and HR changes, listen to our podcast.