Can training costs constitute a deduction for the purpose of calculating National Minimum Wage?
For the purposes of calculating whether the national minimum wage has been paid, the Employment Appeal Tribunal has held that deductions for the cost of training should be treated as reducing the total pay used to calculate the workers' hourly rate.
Commissioners for HMRC v Ant Marketing UKEAT/0051/19/OO
Under the National Minimum Wage Act 1998 (the Act), workers in the United Kingdom are entitled to be paid the national minimum wage (NMW). At the time of writing, the current minimum rate for a worker aged 25 or over is £8.72 per hour. If a worker has not been paid the NMW, they may be eligible to bring a claim for unlawful deduction from wages. An employer may also find themselves in receipt of a Notice of Underpayment from HMRC, which requires such a shortfall to be rectified.
When calculating whether an individual has received the NMW, it is not necessary to show that they have be paid the minimum rate for each hour worked. Instead, it need only be shown that their total pay was, on average, at least the NMW for the time worked over a pay reference period. A pay reference period will be the intervals at which the worker is paid, with a maximum permitted period of one month.
A worker's total pay takes into account the payments that are received, with the exception of some payments and benefits. Regulation 10 of the National Minimum Wage Regulations 2015 (NMWR 2015) lists the payments that do not form part of a worker's remuneration. In most cases, any sort of 'benefit in kind', i.e. a non-cash benefit, will not count towards the calculation of total pay when considering the NMW.
An exception to this is where the employer provides accommodation to the worker as a benefit in kind i.e. free of charge. In these circumstances, a notional amount in respect of the value of any accommodation provided by the employer can be added onto the total pay, up to a limit of £8.20 per day from 1 April 2020 (Accommodation Offset). Where accommodation is not provided as a benefit in kind, but the worker pays rent to the employer (whether or not deducted from wages or paid directly by the worker), any rent up to the value of the accommodation offset can be disregarded, but any excess will be treated as a deduction so as to reduce the pay for NMW purposes.
What were the facts in HMRC v Ant Marketing?
The Respondent recruited hourly-paid telesales workers who were required to undertake three days of training at the commencement of their employment. The contract included an express training clause, which required that the training costs be deducted from a worker's salary if the following circumstances arose:
- the worker failed their probationary period;
- the worker was dismissed for gross misconduct; or
- the worker otherwise left the Respondent within 12 months, using a sliding scale approach for the repayments of 100% for up to 6 months' service, 50% for 6-9 months' service and 25% for 9-12 months' service.
Some of the workers were also tenants of residential flats owned by Mayfield Properties, a separate business wholly owned by the 100% shareholder of the Respondent, and requested that their rent be deducted from their wages paid by the Respondent and paid directly to Mayfield Properties. In any event, the accommodation was not provided on behalf of the Respondent, and the tenants were not required to live in the properties for the purposes of their role.
The Claimant subsequently issued three Notices of Underpayment against the Respondent in respect of 359 workers, totaling wage arrears of over £53,000 and penalties of over £28,000. The Respondent appealed those Notices of Underpayment to an Employment Tribunal (ET), arguing that:
- the training costs deductions did not constitute a deduction for the purposes of calculating the NMW; and
- the payment of rent to Mayfield Properties was not in respect of the provision of living accommodation by the employer to the worker.
What did the ET decide?
The ET dismissed the Respondent's appeal in respect of the training costs issue. The question was whether the deduction was worker expenditure in connection with the employment. The nature of the training was mandatory and subsequently considered as a worker’s expenditure, which meant that it was caught by the NMWR 2015 and would be treated as a deduction from the total pay for NMW purposes. The appeal in respect of the accommodation issue was, however, upheld. Mayfield Properties was not the 'employer' within the meaning of the Act. As such, only accommodation provided by the Respondent would have fallen within the Act.
The Claimant subsequently appealed to the Employment Appeal Tribunal (EAT) against the accommodation decision, and the Respondent cross-appealed in respect of the training costs decision.
What did the EAT decide?
In relation to the accommodation issue, the EAT held that the Act provided that an 'employer' means "the person by whom the employee or worker is … employed". As a result of the way the appeal was brought before the ET, it was constrained to consider the interpretation in a restrictive manner, by focusing entirely on the meaning of ‘employer’ and paying no regard at all to the words, ‘as respects the provision of living accommodation’. It was quite possible that, had it done so, the ET might well have come to a different conclusion. As a result, the Claimant's appeal was forced to fail.
In relation to the training costs issue, the EAT emphasised that each reduction in the NMWR 2015 must be considered in turn to determine whether it applied. The EAT held that it did not make a difference that the deductions were only made if the worker left for any reason, save for redundancy, within the first 12 months of their employment. The deduction was still in respect of expenditure on training, which, given its mandatory nature, could not be anything other than ‘in connection with employment’. Accordingly, the EAT held that the training costs were to be treated as deductions in pay during the pay reference period and the appeal failed.
What does this mean for employers?
Many employment contracts include a training costs clause, requiring repayment of a proportion of such costs on a sliding scale approach. Whilst this clause is beneficial in many respects, including providing a disincentive to workers from leaving a company, it is important to note the implications for the purposes of NMW.
This judgment is of particular importance to employers who engage workers on hourly rates equivalent, or close, to the NMW. Any contractual deductions for the costs of training may be treated as reductions in pay because they constitute expenditure in connection with employment. This will depend on whether such deductions are contingent on an employee leaving within 12 months of commencing employment and repayable on a sliding scale approach. It is also worth noting that, whilst mandatory training is more likely to be regarded as being 'in connection with employment', non-mandatory training costs are still capable of amounting to a deduction for NMW purposes.
One final point to note is with regards to the decision on the accommodation allowance in this case. Whilst the decision was in favour of the employer on this occasion, this was largely due to the way the appeal in this particular case was brought. In other cases where a linked employer is providing accommodation to a worker, it is likely to be found that the rent paid above the Accommodation Offset will be treated as such a deduction.
This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact Siobhan Murphy to discuss any issues you are facing.