An employee savings scheme which might result in a £21m NMW employers liability

The supermarket Iceland has recently been told by HMRC that due to pay deductions for a Christmas holiday savings scheme, it now owes its workers around £21 million. Iceland is disputing HMRC's finding.

It is understood that Iceland’s workers could join the savings scheme voluntarily to spread the cost of Christmas with the employer deducting money from their pay throughout the year, which the workers could then access at Christmas. 

Under the NMW Regulations 2015 (NMW Regs), certain deductions made by the employer count towards NMW compliance. This means the employer should look at the pay the worker receives after the deduction has been made to establish NMW compliance purposes. The NMW Regs state that deductions from pay “which are for the employers’ own use and benefit” will count towards NMW compliance. Iceland’s case is therefore likely to hang on whether the pay it deducted from workers could be defined as for Iceland’s own use and benefit. Arguably, if the money deducted was kept in an escrow account which Iceland could not use and gained no benefit from, it would not count as a deduction for NMW compliance purposes.  

If Iceland are unsuccessful in their fight, HMRC will require them to repay their workers up to £21 million and potentially issue Iceland with a financial penalty of up to double that amount. 

Have the workers suffered any financial harm?

It is important to note that we do not know the full details of Iceland’s savings scheme or the basis of HMRC’s findings. 

But if we assume the workers volunteered to have deductions from their pay to spread the cost of Christmas and received that pay back at some point to spend at Christmas, one can see Iceland’s issue. The workers chose to have deductions from pay made and suffered no financial harm. In that scenario, if Iceland were required to pay the affected workers back £21 million, the workers would effectively be getting a windfall as they would be paid again for work they had already done. That would surely be a perverse outcome. 

Government consultation welcomed

This is not the first time a well-known retailer may have fallen foul of a technicality in NMW compliance. In 2016, it was reported that John Lewis repaid its staff approximately £36 million in NMW underpayments resulting from pay averaging. 

Social care providers have also had to deal with the NMW implications of sleep-in shifts, and how the time spent sleeping on site should be allocated against pay. A Court of Appeal decision in July last year reversed the original ruling against the employers which would have resulted in an approx £400 million NMW liability across the industry. This saga may not yet be over as permission to appeal is being sought by Unison. 

These examples illustrate the complexity of NMW compliance and the significant liabilities that can accrue when employers get it wrong. 

The Government has recently announced a consultation on two further issues which have tended to catch employers out but which have not resulted in financial harm for the affected workers – the definition of salaried work and salary sacrifice schemes.  Incorrectly categorising workers as carrying out salaried work and failing to take account of the post salary sacrifice pay can often lead to NMW underpayments.

Whilst tackling the exploitation of vulnerable workers is a priority, balance is needed to ensure employers who are doing their best to comply are not unfairly penalised, particularly where workers suffer no financial harm.

The Iceland story serves as a reminder for those employers with similar savings schemes in place, or who make other deductions from pay for workers paid at or near NMW, to check their procedures to ensure they remain NMW compliant.

For more details on the National Minimum Wage regulations and our guide to compliance, click here or contact our NMW experts.