In the case of Revenue and Customs Commissioners v Lees of Scotland Ltd, the employer (Lees) allowed staff to voluntarily pay into a 'holiday fund' as a means of saving across the year. Staff could make lump sum withdrawals from the fund whenever they wanted.
When employees paid into the fund, the money was deducted from their wages. This resulted in wages falling below the National Minimum Wage where staff chose to pay into the fund. HMRC issued a notice of underpayment for breaches of the National Minimum Wage rules. Lees appealed to the Employment Tribunal, which found in its favour. HMRC then appealed to the EAT.
Under the National Minimum Wage framework, pay deductions made by an employer for its "own use and benefit" are to be treated as pay reductions for the purposes of the National Minimum Wage. There are some limited exceptions to this rule, but none of those apply in this scenario. The question for the Tribunal therefore was whether the holiday fund deductions were for the employer's "own use and benefit". In the first instance, the Tribunal answered this question by focusing on Lees' purpose and intention in setting up the holiday fund in the first place. The fund was created to help staff budget and save for holidays, rather than to benefit Lees in any way. On this basis, the Tribunal found that the deductions were not made by Lees for its own use and benefit.
The EAT however found that the Tribunal should not have approached the question in this way. Rather than examining Lees' motivation in setting up the holiday fund, the correct approach was to ask whether Lees could use the holiday fund money without legal limitation whilst it was kept in the fund. On the basis that the money was held in Lees' business current account, Lees could benefit from the accrued interest on the fund. Lees also gained a cashflow benefit from keeping additional funds in its business current account, and could technically use the money whilst in the fund. As the deductions were at Lees' disposal, they were for its "use and benefit" for the purposes of the National Minimum Wage framework.
In respect of the repayment of the contributions, the EAT also disagreed with the Tribunal's findings here. The repayment of the fund contributions did not reduce Lees' liability to pay wage arrears. The legislation requires arrears to be paid at the rate of the National Minimum Wage in force at the date the arrears were determined.
This decision demonstrates the care that must be taken to comply with National Minimum Wage rules, even in cases where employers set out employee savings funds to help staff manage their finances. Employers who fall foul of National Minimum Wage rules risk being named and shamed by HMRC, which risks causing reputational and commercial damage to employers.
Interestingly, HMRC conceded, and the EAT acknowledged, that had the holiday fund been kept in a separate third party account, there would have been no breach of the National Minimum Wage rules.