HM Revenue & Customs -v- Leisure Employment Services Ltd

The complexity of the minimum wage regulations have been highlighted in the case of HM Revenue & Customs -v- Leisure Employment Services Ltd, in which the employment appeal tribunal (EAT) decided that payments for gas and electricity were, in effect, accommodation costs and therefore could not be included in gross pay.

What were the basic facts?

Every year, the company hired seasonal workers for a number of holiday camps. As part of the agreement between the two parties, workers had to pay £6 a fortnight for gas and electricity if they opted to stay in company accommodation.

This was normally taken as a deduction from salary through the payroll, although one payment was made in cash.

HM Customs issued three enforcement notices against the company in April and May 2005 on the basis that the utilities payments should not have been included in gross pay. Once those were deducted, the workers received less than the minimum wage.

The company appealed to the tribunal, arguing that the payments could be included in the calculation of gross pay.

What does the law state?

The minimum wage regulations state that employers have to calculate a worker’s salary by dividing their total gross pay by the total hours worked for that period. The question is: what is gross pay?

The regulations list a large number of items that cannot be included in gross pay, such as costs for “accommodation” and “deductions or payments for the employer’s own use or benefit”.

What did the tribunal decide?

The tribunal said the Revenue was wrong to label costs for gas and electricity as costs for “accommodation”. The latter referred only to the physical structure of the building and not to the provision of utilities. The £6 payment was not, therefore, in respect of living accommodation and should be included in gross pay.

Nor did the tribunal think that the deductions (or payment) had been made for the employer’s “own use and benefit”, as the company did not gain financially from this arrangement.

What did the parties argue on appeal?

The Revenue said that it was artificial to distinguish the utilities payment from payment for the accommodation itself, as workers could not opt for one without the other. It should only be considered separately if the workers paid for gas and electricity directly to the utilities companies themselves.

It also argued that the money could be used by the company in any way it thought fit. In other words, it was for the company’s “own use and benefit” and should not therefore be included.

The company, however, said that it did not make sense for employers to be caught by payments that they made directly to the utility companies, but to be exempt when workers made the payments themselves.

And it argued that because the payments also benefited the workers (as they were very low), they could not be said to be for the sole “use and benefit” of the company and could be included in the definition of gross pay.

What did the EAT decide?

The EAT was sympathetic to the employer’s arguments but found in favour of the Revenue. It said that, if a worker has to pay a certain sum of money to make use of the accommodation on offer, then that should be considered as being “in respect of the provision of living accommodation”.

But were the deductions (or payments) for the employer’s “own use and benefit”?

The EAT said that the payments for gas and electricity could only count as gross pay “if the money is deducted by the employer with an obligation to account to a third party on behalf of the worker”. In this case, however, the worker had no liability to the utility companies and so could not be included.

It was irrelevant, the EAT said, whether the money was taken by way of deduction or payment.