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NMW - deduction or payment?

National Minimum Wage – deduction or payment? Confusion increases!

The National Minimum Wage (NMW) exists to protect lower paid workers by providing a ‘wage floor’ that employers can’t legally go below. With 17 operational teams, HM Revenue & Customs (HMRC) enforces the NMW.

In 2010/2011 they identified almost £4million in arrears, which benefitted around 23,000 workers.

The major confusion on interpretation and application of the NMW, which in part is the reason for these arrears, is in relation to ‘deductions’.

HMRC claim that “in most cases, the National Minimum Wage is only worked out after any deductions an employer has made to cover things like uniform, tools, transport”. What is confusing is they go on to also include “purchases of goods and services”. So, if an employer is charging for these extras, they still need to ensure the remainder of the worker’s pay, after the deductions, meets the NMW for the hours worked.

The statement on work related items is sensible, but the latter claim of voluntary deductions for goods and services being counted as reducing NMW pay, will be a surprise to many employers.

A number of employer representatives via the HMRC Employer Consultation Forum attempted to have this clarified. HMRC remained firm and “do not agree that payments from wages are in fact deductions”.

HMRC’s view on the NMW is that:

• A deduction is an amount taken from the worker’s wages before they receive their pay.
• A payment is an amount paid by the worker to someone else (including their employer) after they have received their pay.

So, amounts that are taken off pay before it is actually made are deductions; amounts paid by the worker after they have received their pay are payments! It’s rather confusing, as generally all amounts of pay are referred to as payments, and any amount that reduces gross pay after being paid are deductions…

Accepting that certain payments from and deductions from gross pay are not permitted to impinge on NMW pay; there are equally deductions and payments that should be accounted correctly as being made after the payment of NMW.

Parts of the National Minimum Wage Regulations 1999 further add to the confusion:

Section 33 (The deductions excepted from the operation of regulation 32(1)(b)) – states:

• b) any deduction on account of an advance under an agreement for a loan or an advance of wages.

Section 35 (Payments not to be subtracted under regulation 31(1)(h)) – states:

• b) any payment on account of an advance under an agreement for a loan or an advance of wages.
• e) any payment in respect of the purchase by the worker of any goods or services from the employer, unless the purchase is made in order to comply with a requirement in the worker’s contract or any other requirement imposed on him by the employer in connection with his employment.

So, under S35 (e) deductions are allowed (except the law refers to them as ’payments’), yet not in the mind of the HMRC, who are stating that employers cannot make any deduction from NMW and that voluntary deductions are not payments.

To avoid confusion going forward, employers are advised from this day forward to change all “voluntary deduction” arrangements to rename them “voluntary payment”. This will become very confusing to all employees and payroll staff…

A sub group of the HMRC Employer Consultation Forum is to meet to seek further clarification, so hopefully things will become clearer soon!