Pendragon has been fined £5,000 by Her Majesty’s Revenue & Customs (HMRC) and ordered to repay staff more than £30,000 after deductions from pay took 40 employees below the national minimum wage.

The UK’s biggest car dealer and parent company of top 20 FN50 leasing company Pendragon Contracts made deductions from employees’ pay packets to cover the cost of a lease car, as well as a range of other benefits.

However, the Nottingham-based business was summonsed to an employment tribunal in Sheffield last month, where an HMRC claim that the company had underpaid workers was upheld.

The company has now been ordered to pay a total of £30,254.68 to the 40 staff and a penalty of £5,000 was also imposed. There are different levels of the national minimum wage depending on employees’ ages and whether they are an apprentice.

The current rates (from October 1, 2011) are: £6.08 – the main rate for workers aged 21 and over; £4.98 – the 18-20 rate; £3.68 – the 16-17 rate for workers above school leaving age but under 18; and £2.60 – the apprentice rate, for apprentices under 19, or 19 or over and in the first year of their apprenticeship.

Speaking after the Pendragon case, Michelle Wyer, head of national minimum wage enforcement at HMRC, said: “Our aim is to enforce the law and protect vulnerable workers.”

Pendragon was making deductions from the wages of employees under the heading of “motorway” to pay for a lease car from Pendragon Contracts.

However, the company had argued that the alleged deductions did not amount to deductions and were actually payments made by the employees to the employer for their own use and benefit. It added that the sums had been collected from the net pay of the employees purely for “administrative simplicity”.

Mike Moore, director of Deloitte’s Car Consultancy, said: “The tribunal considered the deductions made by Pendragon from employees’ salaries as payment for a car provided under a lease. The judgement highlighted that where an employer retains the deduction from an employee’s pay, with a few prescribed exceptions, the deduction could not be counted towards their salary for minimum wage purposes.

“The judgement recognised that the employees in question had agreed to the deduction and benefited from the use of a car.
“However, it stated that the minimum wage legislation only considered whether the deductions were for the employers’ own use and benefit.”

In his judgement, Employment Judge Chris Chapman, said: “It was axiomatic that these were payments made to the employer to reimburse him for the provision of a vehicle. It was the employer’s car. The employer retained the sums paid.

“Although it was a benefit also of use to the employee, it was a payment made for the use and benefit of the employer.”

In a briefing from HMRC issued in respect of the Pendragon case, it focused on the importance of the interrelation between salary sacrifice and the national minimum wage.

However, the judgement makes no reference to salary sacrifice as the case was in respect of deductions from net pay. That is, the case considered deductions from pay after the withholding of tax and National Insurance, as opposed to salary sacrifice arrangements, which involve contractual reductions in pay prior to the withholding of tax and National Insurance.

Salary sacrifice schemes need to be properly constructed and implemented with in-built safeguards to prevent employees from surrendering too great a proportion of their salaries.

David Hosking, managing director at Tusker which currently has more than 75 live salary sacrifice car schemes in operation, said: “It is imperative that an employee has an accurate picture of the costs involved so they are able to make an informed decision. This is especially true if the salary sacrifice they make takes them from a higher tax band into a lower one, or even takes them below minimum wage.

“If the salary sacrifice scheme is not correctly introduced, there may be serious tax, pensions and employment law implications.”

Moore concluded: “This case highlights that care needs to be taken where employers deduct from net pay. Therefore, manufacturers, fleet providers and dealerships that provide cars to their employees that are paid for by net deduction from pay, should take care that the deduction does not take an employee’s pay below the national minimum wage.”

Pendragon was unable to comment at the time of going to press, but hoped to make a statement in due course.

 

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