National Minimum Wage – What reductions are considered in calculations?

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Key Contact: Claire Knowles

The National Minimum Wage is the minimum hourly rate that workers are entitled to be paid (‘NMW’). Although, at first glance, this is a relatively straightforward obligation to comply with, an employer must also account for deductions made to a worker’s pay. It is therefore not as straightforward as it may seem, and getting it wrong can be a costly mistake, both financially and reputationally.

In the case of Augustine v Data Cars Ltd, the Employment Appeal Tribunal (EAT) considered what types of payments will be considered deductions for the purpose of calculating NMW.

The facts in the case

Mr Augustine worked as a taxi driver for Data Cars Ltd. He brought claims for holiday pay, notice pay, and failure to pay NMW. In a preliminary hearing, Mr Augustine was held to be an employee. His claims for holiday pay and notice pay were approved.

In respect of the failure to pay NMW, Data Cars produced evidence demonstrating Mr Augustine was paid over £14 per hour (substantially more than NMW). A notional discount was applied for underpayments, which left an earnings figure of £12.91 an hour.

The question then arose as to whether the total earnings figure should be reduced to reflect other expenses Mr Augustine incurred.

What payments and expenses are deductions for NMW purposes?

Mr Augustine had to pay a licence fee and rent equipment from Data Cars before he could access Data Cars’ booking system. These were held to be payments imposed by Data Cars, in connection with his employment, and were deductions in accordance with regulation 12 (e) of the National Minimum Wage Regulations 2015.

The First instance Tribunal considered there to be little available guidance or case law on what constituted an expense in connection with employment under regulation 13 of the National Minimum Wage Regulations 2015.

The Tribunal considered HMRC guidance which directed the employer to consider expenses incurred that are ‘a requirement of the work, and not those that are made by choice’.

In applying this guidance, the Tribunal was satisfied that fuel costs, cleaning costs, and commercial insurance premiums, were a requirement of the job and were deductions for NMW purposes in accordance with regulation 13 (b) of the National Minimum Wage Regulations 2015.

Mr Augustine also rented a vehicle from Data Cars and purchased a uniform. This was not an obligatory expense and was an option if he wanted to take higher value jobs on behalf of Data Cars. It was accepted that taxi drivers were permitted to use their own vehicles and wear their own clothes if they wanted to take standard value jobs. In light of the HMRC guidance, the Tribunal held that these payments were not deductions for NMW purposes as it was Mr Augustine’s choice to rent the car and purchase the uniform.

The EAT disagreed. Regulation 13 (1) (b) of the National Minimum Wage Regulations 2015 provides that payments are deductions when the expenditure is in connection with the employment. The EAT considered the wording in the regulations to be much broader than what was provided in the HMRC guidance note. The fact that he chose to rent the vehicle and could have used his own vehicle was irrelevant. The uniform was also only purchased to be used for work and was not clothing he would have worn outside work. The EAT held that both the vehicle rental and uniform costs were clearly expenses “in connection with” his employment and were held to be deductions for NMW purposes.

What are the consequences of getting it wrong?

If an employer fails to pay national minimum wage, a worker can bring a claim for unlawful deduction of wages, which can result in compensation awards that go back two years from the date of the complaint.

The government also publicly ‘names and shames’ employers who pay less than national minimum wage, which can cause significant reputational damage to the business.

Concluding comments

An employer must make sure that it accounts for all expenses that a worker incurs in connection with employment for the purposes of calculating a worker’s pay for national minimum wage purposes. In the case, the EAT held that the expense does not have to be a requirement nor wholly or exclusively incurred for employment.

This has the potential to cover a significant number of expenses that a worker may make in connection with employment. If you follow the EAT’s logic in this judgement, a worker could argue that expenses incurred travelling to work, or purchasing clothes to wear in the workplace have the potential to be considered expenses incurred in connection with employment that should be considered deductions for the purpose of calculating NMW. This judgement leaves the door open for workers to argue that broader elements should be taken into consideration for the purposes of deductions and that their employer may not have paid them the correct rate.

This case also demonstrates that HMRC guidance should not be solely relied on without seeking advice. Any guidance notes issued by HMRC are intended as guidance only and will not take precedence over the law. This is not to say that HMRC guidance should not be used, as it can provide employers with a good indicator of what it should be doing to comply with the law. However, if the guidance is non-compliant with the law, it will not serve as an adequate defence in an Employment Tribunal claim for an employer to demonstrate it followed the HMRC guidance.

Complying with national minimum wage obligations can be complicated and it is important that businesses take advice when making deductions to a workers’ pay and when a worker incurs expenses in connection with their employment. If you require any assistance or support, please contact our employment team.

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