NMW and interaction with the £1 deduction fee for AEOs
04 November 2016
4 November 2016
Some readers may remember that some 6 or 7 years ago now, the then IPP Policy team were working to have the National Minimum Wage (NMW) regulations and associated guidance reviewed and amended in light of some employers being caught out with compliance. At the time we were receiving several queries relating to the treatment of the £1 deduction fee for Attachment of Earnings Orders (AEOs) and the interaction with the NMW.
We began communications with the Department for Business, Innovation and Skills (BIS) (now BEIS) and were informed that employers were not permitted to operate the £1 deduction for operation of an AEO, in cases where this would take an employee below the NMW. According to BIS, the fee is seen as a benefit to the employer when in fact, we understand the fee is meant to compensate the employer for operating the AEOs on behalf of the Courts, Child Support Agency and Local Authorities.
The above situations are grey areas for employers and for this reason we contacted HMRC and BIS again to request that they consider the following:
- That the guidance is clarified as to the correct tax and NI treatment for the £1 administration fee.
- That the NMW regulations are reviewed in order to remove the regulation preventing employers from deducting the £1 administration fee when the employee earns the NMW.
The initial response from HMRC said that the effect of these deductions remains the same in that an employer can deduct an amount from a worker’s remuneration and pay it to someone else on their behalf without that amount affecting the worker’s NMW. Therefore any deduction in respect of the AEO itself will not reduce a worker’s NMW. However, a deduction for a related administration fee is a charge which is retained for the employer’s own use and benefit and will accordingly reduce the NMW under Regulation 32(1) (b) of the NMW Regulations 1999.
HMRC reiterated that an employer cannot make a deduction which reduces the pay below NMW rates. When this happens, the employer must pay the arrears to the worker, which is subject to tax and NICs, as with any arrears of pay. The legislation is clear in this matter and this is reflected in guidance for employers which states in this respect:
“You cannot make any deduction or take a payment that reduces a worker’s pay below national minimum wage rates, even if you have their permission to do so”.
The Policy team went back to HMRC with the concern that the £1 deduction is taken from net pay, after the deduction of tax and National Insurance so does not reduce the gross element for NMW purposes, so why is the deduction not permitted? We also questioned the “employers own use and benefit” and argued that the employer has had the duty to process AEOs imposed on them, it is not employer choice to provide the service on behalf of the courts etc. but merely a vehicle to deduct and pay over amounts on behalf of these organisations. The £1 deduction is not an employer benefit but recompense for the employer and in some cases the employer will employ resource to cope with such an admin duty and the £1 deduction does not come close to funding that resource. For legislation to be written in such a way to prevent the deduction does appear to be unfair.
At this point we respectfully requested again that consideration be provided to review Regulation 32(1) (b) of the NMW Regulations 1999 in relation to the £1 deduction for AEOs. We also requested provision of employer guidance that reiterates and clarifies the current rules as they stand and to give consideration to the inclusion of this guidance within the HM Courts and Tribunal Services (HMCS) Handbook for operation of AEOs.
We were then informed that BIS would be considering the NMW regulations as part of other employment law reviews and would consider the points we raised in relation to Regulation 32(1) (b) as part of this work.
It may surprise readers to know that this review did not come to fruition. This has been raised again recently with HMRC and BEIS (formerly BIS) and their position has not changed:
“The £1 deduction for administration charges does have the effect of reducing pay for National Minimum Wage purposes. NMW Regulations 2015, Regulations 12(1) & 12(2)(e) (formerly NMW Regulations 1999, Regulations 32(1)(b), 34(1)(c) and 35(e) specifically cover deductions from workers.”
This is covered in the NMW Manual.