Deductions and employment termination - what employers should know

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(Commissioners for HM Revenue and Customs v Lorne Stewart plc)

Miss Brade was employed by Lorne Stewart plc. During her time at the company, she attended a training course. Prior to the course, Miss Brade signed an agreement, where she agreed to repay the course fee if she left before attending it, or part of the costs if she left within two years after the course date. As part of this agreement, Lorne Stewart would make deductions from Miss Brade’s final pay to recover the relevant cost, should her employment terminate.

Miss Brade left the company within the two year period, and Lorne Stewart made the necessary deduction to her final pay. The deduction meant that Miss Brade’s final salary now fell below that required by the National Minimum Wage legislation (1999). HMRC picked on this issue, and the matter was appealed to the employment tribunal, who ruled that the decision fell within Regulation 33(a), which provides that “any deduction in respect of conduct of the worker, or any other event, in respect of which he (whether together with any workers or not) is contractually liable” should also be excluded from the calculation, and was therefore not relevant in this scenario. HMRC subsequently appealed to the EAT, arguing that Regulation 33(a) should be narrowly construed so that “conduct” would mean “misconduct”.

Although the EAT agreed on this terminology, they rejected HMRC’s appeal. The EAT reasoned that there was no evidence of misconduct present. It was decided that as Miss Brade resigned voluntarily, rather than her agreement with Lorne Stewart, entitled the latter to recover the costs without infringing the National Minimum Wage legislation.

Stephen Calderbank Says: Whilst this is helpful clarification for employers on what can be deducted from remuneration when calculating the NMW, be aware, the EAT did point out that the deduction could be ignored for the purposes of the NMW because Miss Brade had voluntarily resigned, not because of the agreement entitling LS to make the deductions. Had she been dismissed for redundancy for example, the NMW legislation would still require that the NMW was paid in the final reference period.

Consider having a repayment of training cost clause that unlike LS’s agreement, makes clear that the employee will not have to make repayment where the employer terminates the contract, except in circumstances of gross misconduct.


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