Q&A: Can we deduct lottery contributions from staff pay if this takes some workers below the National Minimum Wage?

Question

Our staff have grouped together to set up an optional ‘lottery’ scheme. Those who want to take part will make a monthly contribution to the prize fund which, at their request, we propose to deduct from their gross pay each month. Are we allowed to do this? Does it matter if deductions take staff below the prescribed National Minimum Wage rate?

Answer

Whether making deductions from staff pay for schemes like this is permitted or advisable is a real hot topic at the moment, with a number of high street names making the news in the past few months.

For example, Iceland Foods are currently in dispute with HMRC over a voluntary ‘savings scheme’ which allows staff to put aside money from their wages into a separate pot, which they can draw from on demand (typically at Christmas). While the total remuneration received by the employees effectively remains the same, HMRC has reportedly told the supermarket that it is in breach of minimum wage legislation, and owes significant arrears of pay, as these contributions have taken some members of staff below the statutory National Minimum Wage (NMW). It is reported that Iceland is appealing against this ruling.

A similar situation arose for Middlesbrough Football Club, which was pulled up by HMRC for deducting the cost of season tickets from employees’ wages over several weeks, again causing pay to dip below minimum levels in some cases. However, an Employment Tribunal disagreed with the hard line taken by HMRC, holding that the deductions did not in fact breach the NMW rules.

The legislation around the NMW is complex and pay issues are notoriously fact-sensitive. However, broadly, if your organisation is planning to embark on a new scheme of deductions, an important issue to consider is whether the sum to be deducted reduces gross pay or is a deduction from the employee’s net pay.

If deductions for this staff lottery scheme are to be made directly from gross pay, the employees are effectively taking part in a form of salary sacrifice scheme. The amount is likely to be treated by HMRC as a reduction in gross salary, and not as a payment by the employee. HMRC guidance makes clear that employees are not permitted to sacrifice pay below the level of the NMW.

A more cautious approach would be to make sure that employees are paid their salary in full, before making a deduction from the net pay received in respect of the lottery scheme. This is likely to be a permitted deduction under the NMW regulations and is less likely to be treated as a reduction in salary for NMW purposes.

The authority for this is Regulation 12(2)(e) NMW Regulations 2015 which states that “payments as respects the purchase by the worker of goods or services from the employer, unless the purchase is made in order to comply with a requirement imposed by the employer in connection with the worker’s employment” will not reduce pay for NMW purposes. A payment to participate in a staff lottery is likely to fall under this heading.

This part of the NMW Regulations flags up a key danger area. If a deduction is arguably being made in connection with an obligation imposed by the employer, HMRC may regard it as unlawfully reducing pay for NMW purposes. An entirely optional offering such as a staff lottery or savings scheme will not fall foul of this. However, for example, if you require your staff to wear a uniform, or even a certain colour or style of clothing for work, think carefully before deducting these expenses from salary.

Remember that just because a deduction may be made for the benefit of an employee or at the employee’s request does not necessarily mean that your organisation won’t find itself in breach of the NMW rules. Further, HMRC may not always distinguish between deductions made in error and deliberate underpayment by an employer.

If you are worried that your current or proposed pay arrangements may not comply with minimum wage legislation, or want to talk through any potential unintended consequences of making deductions from pay, we would be happy to advise you.