NMWM11150 - Deductions and payments from workers: repayment of loan or advance of pay

Relevant legislation

The legislation that applies to this page is as follows:

  • National Minimum Wage Regulations 2015, regulation 12(2)(b)

Where an employer has made a formal loan or advance of pay to a worker (NMWM09210), payments or deductions made on account of the loan or advance, such as repayments, charges or interest, will not reduce National Minimum Wage pay. However, there must be relevant supporting documentation and corresponding entries in the pay records to show that a genuine loan or advance has been made and the worker has received the money (or it has been paid to a third party).

It is important to ensure that any arrangement described as a loan or advance is actually a loan or advance and to ensure that funds have been provided to the worker to spend as they may choose (although they may choose to ask the employer to pay the amount to a third party - see example 1).

Example 1 - Employer agrees to loan the worker £400 to cover the purchase of an annual travel ticket for private use. The employer pays the £400 on behalf of the worker directly to the travel company. The employer subsequently makes 2 deductions of £200 to repay the loan. Provided documentation supports that the parties have correctly entered into a loan then the deductions to repay the loan will not reduce National Minimum Wage pay.

Example 2 - Employer runs a “loan account” and charges amounts to the account in respect of transport provided by the employer. Deductions are then made from pay to repay the amount outstanding in the loan account. Such an arrangement would be unlikely to meet the criteria of a true loan (NMWM09210) as the worker has not entered into a loan arrangement and the employer is simply maintaining a record of costs being associated against the worker. In such a case each deduction by the employer would reduce National Minimum Wage pay since it is for the employer’s own use and benefit.

Example 3 - informal “advance”

An employer provides “home to office travel” using the employer’s own minibus. The workers are under no obligation to use this service, but if they do so, they usually pay for it in cash on a daily basis. If they do not have the cash, the employer offers them an advance of pay. In these circumstances, the worker signs a form applying for the advance and is then given the amount in cash. The cash is then paid to the driver to pay for the transport. The amount of the “advance” is then deducted from the worker’s pay at the end of the month.

In such circumstances the NMW Officer would need to consider the full facts of the arrangement and consider if the “advance” is genuine (NMWM09210). If so, neither the payment made to the driver, nor any deduction to repay the advance would reduce National Minimum Wage pay. However, if the advance is not actually paid to the worker in money for the worker to use as he wishes, then no advance would have been provided and any associated deductions would simply be for the employer’s use and benefit and would reduce National Minimum Wage pay.