Kirsty L. Swan LL.B (Hons) Principal Solicitor Swan Craig Solicitors highlights some contradictions in the national Living/Minimum Wage provisions.

On 1st April 2017, the National Living Wage (NLW) and the National Minimum Wage (NMW) are due to increase. The new hourly rates coming into force are as follows:

NLW (age 25+) - £7.50
NMW standard rate (age 21+) - £7.05
Development rate (age 18-20) - £5.60
Young worker rate (age 16-17) - £4.05
Apprentice rate - £3.50

Now would be a good time to review your staff wages to ensure these minimums are being met, particularly with the use of salary sacrifice arrangements being more widely used.

What would happen, for example, if a deduction from salary was made having a bicycle under the Cycle to Work scheme, or a deduction for childcare vouchers. However, that deduction took the employee’s wages below the NLW/NMW, would you need to make a top up?

There are conflicting views if you search the internet for the answer, some websites say it is permissible, some say you cannot allow anybody to take salary sacrifice if it means they fall below national minimum wage. However, aside from advising, the internet is not the best tool for legal advice, to find out what is the correct answer and whether the restrictions are applicable to all deductions?

The answer initially lies in the legislation. The original source is the National Minimum Wage Act 1998 but the operation of the NMW is predominantly covered by many statutory instruments in the form of regulations. The National Minimum Wage Regulations 2015 (‘the Regulations’), came into force therefore to consolidate the twenty plus previous regulations into one piece of legislation.

Regulation 10 sets out what deductions or payments do not reduce the NLW/NMW, as they are not considered to form part of a worker/employee’s salary. Regulations 11 to 15, on the other hand, set out the payments that do reduce pay for NLW/NMW calculating purposes. However, there is a lot of divided legal opinion about salary sacrifice and the NMW. The legislation says one thing but interpretation of the law says another.

In applying the Regulations, salary sacrifice deductions should fall under Regulation 10(g) a voucher, stamp or similar document capable of being exchanged for money, goods or services (or for any combination of those things) i.e. benefits in kind whether they have a monetary value or not. However, both the Government website and legal articles provide that where a salary sacrifice arrangement is in place, employers should count it and top up salary if it drops below the NLW/NMW. We also have an Employment Appeal Tribunal (EAT) decision which could also support the Government's position.

In Peninsula v Donaldson, a case regarding discontinuing childcare vouchers during maternity leave, the EAT concluded that the salary sacrificed to purchase childcare vouchers was part of the employee’s “remuneration” under regulation 9(2) of the Maternity and Parental Leave etc. Regulations 1999 (MPL Regulations). Remuneration under the MPL Regulations means “sums payable to an employee by way of wages or salary.” Seemingly, a benefit provided because of salary sacrifice is not remuneration for MPL Regulations purposes because it is not a sum payable to the employee; it is a benefit. However, the EAT took the view that the term salary sacrifice is not really a sacrifice of salary but rather it is a diversion of salary. Therefore, the diverted salary was classed as remuneration along with the non-diverted remuneration.

This reasoning is questionable because it does not consider the contractual underpinning of a salary sacrifice arrangement. However, there is a risk that a tribunal could apply the same logic in interpreting the NMW Regulations, finding that while childcare vouchers, and other such benefits in kind, are not remuneration as they are provided as benefits without any sacrifice of salary (per Regulations 9 and 10(g), any salary sacrificed to obtain those benefits could conceivably be counted as remuneration.

The Regulations specifically provide for the classification of vouchers so therefore care should be taken to extend the Peninsula decision outside of the MPL Regulations’ interpretation of remuneration. However, a potential risk applies that there may be an argument to apply the same logic, given the similar wording of Regulation 9 under the two sets of regulations. It may therefore be wise to consider topping up salary therefore where a salary sacrifice arrangement brings an employee’s salary below NLW/NMW but there are Regulations themselves to rely on for salary sacrifice arrangements.