Can a company reclaim monies from an employee’s final salary without considering the implications for the National Minimum Wage?
HMRC v Lorne Stewart Plc is a really interesting piece of recent case law and impacts employers. Grab a cup of coffee and have a read…
Many companies will pay for staff training and require them to enter a contractual agreement, whereby the employee will repay some or all of the costs if they leave within a certain period. Such was the case for Louise Brade, who worked at Lorne Stewart plc. The company agreed to fund a £1,800 foundation degree starting in 2009 and she was required to sign a repayment agreement whereby these costs would be repaid on a pro rata basis if she left the company within 2 years. She also signed a deduction agreement, authorising the company to make deductions from her final salary.
(There is nothing strange or interesting here, as, in my experience, this is a standard agreement that companies will have and employees will expect to sign.)
Miss Brade voluntarily resigned from Lorne Stewart within two years and, therefore, the company made a deduction in accordance with the agreement that she had signed.
Employment Tribunal 2014
The deduction meant that her final salary was paid at a rate less than the National Minimum Wage (NMW). HMRC issued a Notice of Underpayment and Lorne Stewart appealed against it to the Employment Tribunal. In April 2014, the Employment Tribunal found that the deduction was not relevant for the purposes of calculating whether she had been paid at the NMW. It cited regulation 33 (a) of the National Minimum Wage Regulations 1999, which provided that ‘any deduction in respect of conduct of the worker, or any other event, in respect of which he is contractually liable’ should be excluded from the calculation – i.e. such a deduction does not need to be taken onto account when checking to see if the employee has been paid at least the NMW for the Pay Reference Period.
Consequently, the Employment Tribunal found in favour of Lorne Stewart and dismissed HMRC’s Notice of Underpayment. HMRC appealed this decision to the Employment Appeals Tribunal (EAT).
Employment Appeal Tribunal 2015
HMRC contended that the deduction for the training costs that Miss Brade had to repay did not fall under 33 (a) of the 1999 Regulations. Specifically, the use of the word ‘conduct’ and ‘any other event’ should be interpreted that 33 (a) only applies when the employee had been terminated as a result of their conduct whilst in employment – i.e. a deduction could be made if the reason the employee had left employment through dismissal because of conduct. HMRC continued that, as Miss Brade had left Lorne Stewart voluntarily and there was no relation to conduct, she had been paid at less than the NMW, there was an infringement of the 1999 Regulations and the Notice of Underpayment was correct.
The EAT accepted that the use of the word ‘conduct’ in the 1999 Regulations should be interpreted that a deduction would be allowable if the termination was as a result of termination because of misconduct. However, it was the phrase ‘any other event’ that clearly allows such a deduction to be made by the employer without considering whether the employee had been paid at the NMW. Therefore, Lorne Stewart were entitled to deduct the money due without infringing the Minimum Wage legislation. HMRC’s appeal was dismissed.
Comment (and what it actually means)
Wow, this was a complicated ruling to interpret. I think employers should note that, whilst this case was specifically about the right to deduct training costs, it is actually about an employer’s right to make any contractual deduction from an employee’s pay. Therefore, with a couple of notes, I summarise below as it affects employers:
- All of the above references relate to legislation and tribunals that have jurisdiction on the UK mainland only. So, this is not relevant case law in Northern Ireland. However, the nature of such rulings is that the judicial system in Northern Ireland will usually find it ‘persuasive’ when making similar rulings
- Note that any references to the 1999 Regulations are irrelevant today, given that they were remade into the National Minimum Wage Regulations 2015. 33 (a) in the 1999 Regulations is now replicated in Chapter 2, 12 ’Reductions’ – i.e. it says the same thing as the 1999 Regulations but is in a different place in the current 2015 Regulations!
The EAT ruling means that ‘any other event’ should be interpreted as having a direct link to conduct for which the worker is responsible – i.e. a voluntary termination of employment. In these instances, the employer can make a contractual deduction without considering whether it reduces the employee’s pay below the NMW for that Pay Reference Period. However, in the instances that ‘any other event’ is a circumstance for which the employee had no control, the employer has to consider the NMW in the Pay Reference Period before making a contractual deduction. This would be for a situation such as redundancy or dismissal on the grounds of ill-health, both events where the employee cannot be said to have control.
Simply – think control. If the employee has controlled their own dismissal, the employer can make a deduction without considering the NMW. If they have not controlled their dismissal, the employer has to consider NMW.
I think that this case law has provided some useful guidance on what employers can and cannot deduct without infringing the NMW Regulations. Most important is the contractual clause that allows deductions to be made in the first instance, and employers may want to consider revising this clause in the light of the above ruling.