Discrimination – Employment – Government administration – Department for Business Innovation and Skills

R (on the application of Cordant Group Plc) (claimant) v Secretary of State for Business, Innovation and Skills (defendant) and HM Treasury (interested party): QBD (Admin) (Mr Justice Kenneth Parker): 30 December 2010

The claimant employment agency (C) applied for judicial review of a decision of the defendant secretary of state to amend the rules which determined what should count as the national minimum wage.

C employed around 30,000 employees, many paid at or near the national minimum wage. The secretary of state proposed to amend the National Minimum Wage Regulations 1999 by the National Minimum Wage (Amendment) (No.2) Regulations 2010, to come into force in January 2011. By regulation 31(1)(j) of the 2010 regulations, any money payments paid by the employer to a worker in respect of travelling expenses (that were allowed as deductions from earnings under section 338 of the Income Tax (Earnings and Pensions) Act 2003) would no longer count towards meeting the obligation to pay the national minimum wage. Employment agencies, such as C, had devised and implemented ‘salary sacrifice schemes’ whereby workers agreed to sacrifice part of their contractual remuneration which would otherwise be taxable and liable to national insurance contributions (NIC) and would be paid a sum in respect of travel and subsistence expenses from the agency (expenses that were tax deductible under section 338). The secretary of state proposed the contested amendment, having taken the view that salary sacrifice schemes could be exploitative of persons paid at or near the national minimum wage, in particular because such workers tended to benefit from such schemes to only a limited extent while the preponderant part of the benefit accrued to the agency; that a worker's entitlement to certain earnings-related benefits could potentially be adversely affected by participation in a salary sacrifice scheme; that some businesses either considered that it was unacceptable to, or were unable to, enter into salary sacrifice schemes and so found themselves at a competitive disadvantage; that when applied to workers paid at or near the national minimum wage, salary sacrifice schemes worked to the cost of the exchequer, not merely in respect of tax and NIC relief on the section 338 expenses payments, but also because the effect of those payments was to depress the taxable wages paid and thereby enhance the worker’s entitlement to (for example) working tax credits. C contended that, in introducing the 2010 regulations, the secretary of state had (1) failed to take account of relevant considerations, namely the economic consequences of the amendment, taken into account of irrelevant considerations and been irrational; (2) failed to have due regard to the aims identified in section 71(1) of the Race Relations Act 1976; (3) been discriminatory contrary to the article 45 of the Treaty on the Functioning of the EU, Regulation 1612/68 and Directive 2000/43.

Held: (1) The amendment validly corrected a regulatory mismatch and aligned the regimes applicable to income tax, NIC and the calculation of the statutory minimum wage. The secretary of state had solid and convincing reasons for concluding that employers, such as C, had inequitably exploited the current regulatory mismatch in order to generate substantial financial advantages for themselves and that low paid workers, at or near the minimum wage, received a disproportionate and inequitable part of the total financial benefit resulting from salary sacrifice schemes. Further, the secretary of state had solid reasons for concluding that under the present regime salary sacrifice schemes distorted, or had real potential for distorting, competition between enterprises competing in the same relevant market, and that the present regulation created unjustified discrimination, in respect of eligibility for state benefits such as tax credits, between low paid workers who entered into salary sacrifice schemes and those who did not. Accordingly, there was nothing irrational, unlawful or disproportionate in the conclusion reached by the secretary of state that the amendment would materially simplify the regulatory regime for the minimum wage and, in particular, would materially enhance the ability of both employer and low paid employee to recognise whether or not they were paying and receiving at least the minimum wage prescribed by law (see paragraphs 63-64 of judgment).

(2) In the course of composing the amendment, the secretary of state had conducted an equality impact assessment which addressed race equality. He had proceeded on the basis that ethnic minorities and migrant workers were more likely to be engaged in the type of work that would be affected by the proposed amendment and recognised that such workers were likely to be among the most vulnerable and accordingly susceptible to exploitation. In those circumstances, the secretary of state had complied with his duty under section 71 of the 1976 act (paragraphs 75, 77-78, 82).

(3) The secretary of state had had good reason to believe that low paid workers, comprising a higher percentage of ethnic or EU migrant workers, would not suffer significant reduction in net pay as an unavoidable consequence of the amendment, which validly corrected a regulatory mismatch, and that, even if they did so, the countervailing benefits to such workers, and the removal of indefensible discrimination as between such workers which constituted legitimate aims, fully justified the amendment. On that basis, C’s EU challenge could not succeed (paragraph 87).

Application refused.

Michael Fordham QC, Helen Mountfield QC, Diya Sen Gupta, Iain Steele (instructed by Osborn Abas Hunt) for the claimant; Jonathan Swift QC, James Cornwell (instructed by Treasury Solicitor) for the defendant.