Pendragon plc v HM Revenue and Customs ET/2802811/11
Date added: 31 May 2012
national minimum wage | salary sacrifice | benefits in kind
A large employer has been fined £5,000 by HM Revenue and Customs (HMRC) and ordered to repay over £30,000 in wages to 40 workers who were underpaid, in a stark reminder to employers to beware of making deductions from wages for a benefit that takes pay below the national minimum wage.
Benefits in kind, other than accommodation, cannot count towards the national minimum wage.
Salary sacrifice, whereby an employee gives up the right to receive part of the wages due under his or her contract of employment, must not result in him or her being paid less than the national minimum wage.
There is nothing to stop an employer and employee agreeing to a deduction being made from wages to go directly to a third party, for example for a trade union subscription or a donation to charity.
A deduction from wages that goes directly to the employer is permitted to repay an advance under a loan agreement or an advance of wages, or to recover an accidental overpayment of wages made to the employee.
Pendragon plc is a large car dealership that the tribunal described as "the third largest independent motor car retailer in the world". It employs around 10,000 people in 250 UK and four US locations. The company runs a scheme allowing staff to lease a car from its car dealership in return for a deduction from the net pay of participants. The payment for the benefit is recouped from employees by way of a deduction from their wages, with the company retaining the sums and not remitting them to an external party such as a finance company.
In a national minimum wage enforcement notice, HMRC ordered the employer to pay:
- £30,254.68 to 40 workers who chose to take part in the scheme and whose pay was taken below the national minimum wage by these deductions; and
- a £5,000 penalty for non-payment of the national minimum wage.
The employment tribunal heard Pendragon plc's appeal against the HMRC decision. The company accepted that the money taken from the workers' pay brought their pay below the national minimum wage in the amount of £30,254.68. However, the company argued that:
- the amounts taken were not deductions, but were payments made by the workers to the employer for their own benefit and use;
- the sums had been taken directly from the workers' net pay "purely for administrative simplicity"; and
- to disallow its arrangement would be contrary to the Government's aims in enforcing the national minimum wage.
The employment tribunal said that it had to decide, under the National Minimum Wage Regulations 1999 (SI 1999/584), whether the sums should:
- be excluded from the calculation of the national minimum wage because they are a "deduction made by the employer for his own use and benefit (and accordingly not attributable to any amount paid or payable by the employer to any other person on behalf of the worker)" under reg.32(1)(b); or
- not be subtracted from the calculation of the national minimum wage because they are a "deduction in respect of conduct of the worker, or any other event, in respect of which he (whether together with any other workers or not) is contractually liable" under reg.33(a).
The employment tribunal recapped on Leisure Employment Services Ltd v Commissioners for Her Majesty's Revenue and Customs  IRLR 450 CA, in which the Court of Appeal gave the leading judgment on deductions from workers' pay in return for benefits. The Court of Appeal underlined the principle that the minimum remuneration required by national minimum wage legislation should be paid in money and not by way of benefits in kind. Employers are not generally permitted to make compulsory deductions that take workers' pay below the national minimum wage for the provision of goods and services. It is the right of the worker to decide for him- or herself how to use the remuneration.
The tribunal stressed the significance of the Court of Appeal's interpretation of the phrase "to the employer for his own benefit and use" in reg.32(1)(b) to this case. The Court of Appeal said that the question is simply whether or not the deduction is for the use and benefit of the employer. It does not matter whether or not the deduction also happens to benefit the worker. The Court of Appeal highlighted that, if the legislators had intended to require the payment to be made for the sole benefit of the employer, the legislation would have said so.
Applying these principles to this case, the tribunal held that it was self-evident that the deductions were payments made to the employer to reimburse it for providing a vehicle. It was the employer's car and it retained the sums paid. Although the workers also benefitted, these were payments made to the employer for its use and benefit.
The employment tribunal felt that the exception under reg.32(1)(b) was intended to cover circumstances where payments are made to the employer for onward transmission to another party, in an arrangement in which the employer does not benefit. The tribunal repeated the examples given by the Court of Appeal of an employer deducting a sum from wages to pay a trade union subscription or a donation to charity, at the request of the worker and on his or her behalf. In those circumstances, the employer has no interest in whether or not the payment is made. The payment is taken by the employer purely for "administrative convenience". The car dealership's deductions could not be excluded under reg.32(1)(b).
The other key issue for the tribunal was how to interpret the phrase "or any other event" in reg.33(a). Regulation 33 envisages that, when calculating the national minimum wage, a deduction should be disregarded in respect of:
- the "conduct of the worker, or any other event, in respect of which he (whether together with any other workers or not) is contractually liable" (reg.33(a));
- an advance under an agreement for a loan or an advance of wages (reg.33(b));
- any deduction made to recover an accidental overpayment of wages made to the worker (reg.33(c));
- the purchase by the worker of any shares, other securities or share option, or of any share in a partnership (reg.33(d)); or
- the provision of living accommodation (reg.33(e)).
The tribunal said that, in all of these circumstances, the payments are made in respect of the working relationship and, in particular, the contract of employment. The tribunal did not accept the employer's argument that the "event" in question that applied in this case is the monthly payment to the employer of a sum repayable to its contract-hire company for which the worker is contractually liable under the leasing agreement. Payment under a leasing agreement is not in itself an "event" for these purposes, but a consequence of the provisions of the agreement and its repayment terms.
The tribunal concluded that, for reg.33(a) to apply, the "event" must be conduct or an occurrence that relates to something done by the worker under which he or she is contractually obliged to make a payment to the employer. To construe reg.33(a) in any other way would be to undermine the purpose of the legislation, which is designed to require that workers be paid a minimum level of remuneration and be free to spend it as they please.
Having decided that Pendragon plc's arrangement unlawfully took the workers' pay below the national minimum wage, the employment tribunal declined to offer an opinion on the legality of the workers being paid their wages and a separate arrangement for the workers to pay a sum to the employer in return for the benefit. It is not the tribunal's function to say what its decision would have been in an alternative hypothetical scenario.