The claimant, a provider of manpower services who employs around 30,000 workers, many of whom are unskilled and being paid at, or close to, the minimum wage, was challenging a proposed amendment to the NMW regulations which would exclude s338 expenses from being included in the calculation of remuneration. s338 expenses are those travel expenses attributable to an employee’s necessary attendance at any place in performance of the duties of his employment, and are deductible for tax purposes so long as the expenses do not relate to ‘ordinary commuting’. The claimant, in common with many other businesses, devised a ‘salary sacrifice scheme', whereby the employee could opt to sacrifice part of his contractual remuneration which would otherwise be taxable and liable to NIC.  The worker is paid a sum in respect of travel and subsistence expenses from the agency (i.e. expenses that are tax deductible under section 338).  The section 338 expenses are not subject to income tax, or employee or employer NIC.  The agency does not pay NIC (currently 12.8%) on a proportion of the sums that it pays to the worker, and the worker receives a proportion of the moneys paid to him free of income tax and NIC deductions.  Typically the section 338 expenses that the agency pays to the worker are less than the amount of remuneration that the worker has given up.  This element, which may be called the “lost sacrifice”, accrues to the immediate benefit of the agency.  However, the section 338 expenses when added to the remuneration paid are typically more than the net amount (that is remuneration less income tax and employee NIC) that would otherwise have been payable. Even though both employee and employer benefit financially from this arrangement, the employer’s share is far greater than that of the employee, and thus, amongst other factors, could be viewed as exploitative of persons paid at or near the minimum wage. It was argued that the proposed amendment would prevent those workers from entering such salary sacrifice schemes because, as s338 expenses would no longer be allowed to be included in the total remuneration of the worker, the employer could be in breach of the regulations. Without the option of the salary sacrifice scheme most low paid workers would be paid less than if they were still in the scheme. However, salary sacrifice schemes could still be operated for employees with higher salaries, since NMW considerations would cease to be relevant.

Parker J considered all 3 grounds put forward by the claimant, which included an assertion that there was a failure by the Secretary of State to take into account relevant considerations, including the result that if the amendment went ahead, low paid workers would suffer financially. However, the Judge said, amongst other things, that the Secretary of State had brought the regulatory system into alignment – a result well within the purposes of the enabling power – fully appreciating that the low paid worker, other things being equal, might receive less net pay, but on the basis that the benefit to the worker would be marginal and that, in the light of the current inequitable distribution of the financial advantage, the loss of any such marginal benefit was not a compelling reason for not proceeding with the amendment.
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Neutral Citation Number: [2010] EWHC 3442 (Admin)**

Case No: CO/10670/2010

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

ADMINISTRATIVE COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 30 December 2010

Before :

MR JUSTICE KENNETH PARKER

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Between :

The Queen on the Application of CORDANT GROUP PLC (Claimant)

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SECRETARY OF STATE FOR BUSINESS, INNOVATION AND SKILLS (Defendant)

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HER MAJESTY'S TREASURY (Interested Party)

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Mr Michael Fordham QC, Ms Helen Mountfield QC, Miss Diya Sen Gupta, Mr Iain Steele (instructed by Osborn Abas Hunt) for the Claimant

Mr Jonathan Swift QC and Mr James Cornwell (instructed by Treasury Solicitor) for the Defendant

Hearing dates: 20 and 21 December 2010

Judgment

Mr Justice Kenneth Parker :

Introduction

1. The Claimant challenges the proposed amendment by the Secretary of State for Business, Innovation and Skills ("the Secretary of State") of the National Minimum Wage Regulations 1999 ("The NMW Regulations") by the Minimum Wage (Amendment) (No. 2) Regulations 2010 ("the 2010 Regulations").

1. The Claimant is a public limited company with a number of subsidiaries which provide manpower staffing services in the security, cleaning and recruitment sectors to major companies and public sector organisations throughout the United Kingdom and Eire. The Claimant employs about 30,000 employees, many of them in unskilled jobs that are paid at or near the national minimum wage, and has for several years operated arrangements that will be affected by the challenged legislative change.

1. The 2010 Regulations are made pursuant to the Secretary of State's power under section 2(5) of the National Minimum Wage Act 1998 ("the NMW Act"), and in accordance with the procedure prescribed by section 51 of that Act, that is, by statutory instrument and affirmative resolution. The 2010 Regulations were laid on 2 November 2010. They were approved by the House of Commons Second Delegated Legislation Committee on 29 November 2010 and by the House of Lords Grand Committee on 8 December 2010. They will come into force on 1 January 2011.

1. The amendment that the Claimant challenges is an amendment of the rules which determine in essence what should count as the national minimum wage. Section 2 of the NMW Act contains a comprehensive power to make regulations for the purpose of determining the hourly rate of remuneration. Section 2(5) provides as follows:

"(5) The regulations may make provision with respect to –

(a) what is to be treated as, or as not, forming part of a person's remuneration, and the extent to which it is to be so treated;

(b) the valuation of benefits in kind;

(c) the treatment of deductions from earnings;

(d) the treatment of any charges or expenses which a person is required to bear. (Emphasis added)

1. The amendment made by the 2010 Regulations will add regulation 31(1)(j) to the NMW Regulations. Regulation 31 of the NMW Regulations is an important provision relevant to determining whether or not a worker has been paid the national minimum wage. By section 1(3) of the NMW Act the national minimum wage is the single hourly rate prescribed by the Secretary of State from time to time (for the present rate, see regulation 11 of the NMW Regulations). Regulation 14 of the NMW Regulations requires the hourly rate paid to a worker to be calculated by reference to the sum obtained by subtracting the amounts referred to in regulation 31 from the "total of remuneration" paid to the worker as identified at regulation 30. Thus regulation 31 identifies the sums that do not count for the purpose of meeting the obligation to pay the national minimum wage.

1. With effect from 1 January 2011 regulation 31(1)(j) will provide that:

"any money payments paid by the employer to a worker in the pay reference period in respect of travelling expenses, that are allowed as deductions from earnings under section 338 of the Income Tax (Earnings and Pensions) Act 2003"

will not count towards meeting the obligation to pay the national minimum wage. These payments will be referred to in this judgment as "section 338 expenses".

1. The Claimant challenges the introduction of the 2010 Regulations on essentially three bases:

i) A common law allegation of failure to take account of relevant considerations, the taking into account of irrelevant considerations and irrationality.

ii) An alleged failure to comply with the general equality duty under the Race Relations Act 1976 ("the RRA 1976").

iii) Discrimination contrary to Article 45 of the Treaty on the Function of the European Union ("TFEU"), Regulation 1612/68 and Directive 2000/43/EC.

The Factual and Policy Background

1. This application concerns a decision to change the treatment of section 338 expenses for the purposes of the national minimum wage. Section 338 of Income Tax (Earnings and Pensions) Act 2003 ("the ITEPA") provides that travel expenses attributable to an employee's necessary attendance at any place in performance of the duties of his employment are deductible for tax purposes so long as the expenses do not relate to "ordinary commuting". Ordinary commuting is defined by the ITEPA so as to exclude home to work travel expenses from section 338 if the journey made is to a "permanent workplace". Permanent workplace is defined in distinction to a "temporary workplace" which is a place the employee attends "for the purpose of performing a task of limited duration" or "for some other temporary purpose": see section 339 ITEPA. Paragraph 3 of Schedule 3 to the Social Security (Contributions) Regulations 2001 applies the same principles to National Insurance Contributions ("NIC"). Thus travel costs from a worker's home to his or her permanent place of work are not deductible for the purposes of tax and NIC. However, travel costs from home to a temporary place of work and associated subsistence costs may be deductible. (For a clear and comprehensive explanation of the deductibility of travel expenses for income tax, including a description of the historic position that prevailed until the enactment of section 338 see Tiley, Revenue Law, Sixth Edition 2008 at section 18.2).

1. Following the tax treatment of expenses under section 338, Employment Businesses (commonly referred to as employment agencies), such as the Claimant, devised and implemented schemes known as "salary sacrifice schemes". The agency and the worker enter into a contract of employment which is often referred to as an "overarching" or "umbrella" contract as it is intended to cover both the time when the worker is undertaking an assignment for the agency and the time between such assignments. Each assignment given to the worker is regarded as work at a temporary workplace for section 338 purposes. Thus what would otherwise be home to work travel for the worker (and therefore not a tax deductible expense) is treated as travel from home to a temporary place of work. Expenses incurred in travelling from home to a permanent place of work are not eligible for tax and NIC relief. Expenses incurred for travel to a temporary place of work are tax deductible and qualify for NIC relief. An agency that did not employ workers but made providers of services available to end users could not make use of section 338 in this way for, under the income tax legislation, the workers would be treated as being employed by the end users under a series of employment contracts, and the worker would (if employees at all) be treated as travelling from home to a permanent place of work.

1. Workers enter into salary sacrifice schemes (also known as "travel schemes" or "travel and subsistence schemes") and agree to "sacrifice part of their contractual remuneration which would otherwise be taxable and liable to NIC. The worker is paid a sum in respect of travel and subsistence expenses from the agency (i.e. expenses that are tax deductible under section 338). The section 338 expenses are not subject to income tax, or employee or employer NIC. The agency does not pay NIC (currently 12.8%) on a proportion of the sums that it pays to the worker, and the worker receives a proportion of the moneys paid to him free of income tax and NIC deductions. Typically the section 338 expenses that the agency pays to the worker are less than the amount of remuneration that the worker has given up. This element, which may be called the "lost sacrifice", accrues to the immediate benefit of the agency¹. However, the section 338 expenses when added to the remuneration paid are typically more than the net amount (that is remuneration less income tax and employee NIC) that would otherwise have been payable.

1. The Secretary of State maintains that the benefit to the employee is marginal (£5-£10 per week). The Claimant says that larger amounts can be earned, and provided an example of an employee who gained a benefit of about £17 per week from a salary sacrifice scheme. The amount of the benefit is in essence a product of two variables, namely, the amount of the sacrifice and the amount of the section 338 expenses. The latter variable sets a limit on the amount of the benefit and in turn depends on the extent of travel expenses legitimately incurred by the employee in travelling to his temporary place of work. In the example referred to above, the employee incurred monthly expenses of £460, nearly 26 percent of the remuneration payable in the absence of a salary sacrifice scheme. The example raises the question of how typical would be such a ratio of genuine travel expenses to total remuneration for an employee at or near the minimum wage.

1. It should be noted that if the scheme is to be a legitimate scheme for the purposes of section 338 the payment received by the employee in respect of travel expenses must be payment for expenses properly incurred. The employee gives up part of the sum that would otherwise be paid to him as remuneration in exchange for a payment in respect of section 338 expenses. It is also immediately obvious that such arrangements offer potential for abuse. If amounts paid by way of "expenses" did not represent costs genuinely incurred in travelling to work, the employer would evade payment of NIC on what was in truth employee remuneration, and the employee would evade payment of income tax and NIC on such remuneration. It is clear from the recent history of section 338 that serious issues relating to compliance and abuse have arisen.

1. The schemes are also organised so that the total of section 338 expenses and remuneration is equivalent to or marginally greater than the value of the national minimum wage. As the law currently stands, there is an apparent regulatory mismatch. For the purposes of income tax and NIC, section 338 expenses are deductible in calculating chargeable remuneration. For the purposes only of assessing whether the national minimum wage is being paid, home-to-work travel expenses paid by the employer are treated as remuneration of the employment: they do not fall to be deducted from remuneration under any of the categories of deductions set out in regulation 31 of the NMW Regulations. Workers being paid at or around the rate of the NMW can sacrifice wages under a travel scheme (or in an umbrella company which operates in a similar manner to a travel scheme), provided that the total of actual remuneration and expenses paid under the travel scheme taken together does not fall below the NMW rate. As already observed, when such a scheme is in place it is usual for the worker to receive a net amount marginally above what he or she would otherwise have received (said by the Secretary of State to be typically around £5-£10 per week). However, in such situations it is also the position that the financial gain achieved by the employer operating the scheme is likely to be substantial: the employer reduces the charge for NIC, and also pays the worker a sum in respect of section 338 expenses that is less than the pay given up by the worker (the lost sacrifice). The Secretary of State maintains that in a not untypical case the employer could achieve a benefit of £25-£30 for the former element in respect of NIC and a benefit of £10-£15 for the latter element in respect of lost sacrifice, a total benefit of £35-£45 per week. (In the example referred to at paragraph 11 above the Claimant benefited by about £45 per week).

1. To confirm that the national minimum wage is being lawfully paid it is not sufficient simply to add together net wages and section 338 expenses. It is necessary to verify that a number of necessary conditions have been satisfied, for example, that a real overarching employment contract is in place, that expenses have genuinely been incurred, and that the worker has in fact agreed to sacrifice wages. Each of these elements must be operating in reality not just on paper.

1. In the Pre-Budget Report published in December 2009 the Chancellor of the Exchequer stated that HM Treasury, HMRC and the Secretary of State would consult on proposed changes to the NMW Regulations intended to address the possibility that salary sacrifice arrangements might be exploitative of persons earning at or near the national minimum wage.

1. A consultation document was published in February 2010. That document proposed amendment of the NMW Regulations so that payments of section 338 expenses would no longer count as remuneration for the purpose of determining whether or not a worker was paid the national minimum wage. This amendment would, therefore, remove the mismatch and align the regulatory position: the amount of pay chargeable to income tax and NIC would be the same as that used for determining the minimum wage.

1. The amendment was proposed for a number of proferred reasons:

i) 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

ii) A worker's entitlement to certain earnings-related benefits could potentially be adversely affected by participation in a salary sacrifice scheme.

iii) Some businesses either considered that it was unacceptable to enter into salary sacrifice schemes or were unable to adopt such schemes. They found themselves at a competitive disadvantage to those businesses that had adopted them.

iv) 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 these payments was to depress the taxable wages paid and thereby enhance the worker's entitlement to (for example) working tax credits.

1. The consultation document sought views on the following matters.

i) Alternatives to the proposed amendment of the NMW Regulations to address the present consequences of applying salary sacrifice schemes to persons paid at or near the national minimum wage.

ii) Whether the proposed amendment might have adverse impacts on persons working at or near the national minimum wage level, other than those impacts already identified in the consultation document.

iii) The implementation date for the proposed amendment (then proposed as 1 October 2010).

iv) Views on the possible effect of the proposed amendment on administrative processes and business costs; and comments on the impact assessment that was published with the consultation.

1. In July 2010 the Secretary of State published a document titled "A Summary of responses to the National Minimum Wage workers: travel and subsistence expenses schemes" ("the consultation response document"). The consultation response document stated that: (1) action should be taken to address the application of salary sacrifice schemes to persons paid at or near the national minimum wage; (2) what was required was an amendment of the NMW Regulations to ensure that payments of travel and subsistence expenses did not count towards meeting the obligation to pay the national minimum wage; and (3) that the amendment should take effect from 1 January 2011 (i.e. not 1 October 2010 as originally proposed).

1. In the course of the consultation response document, the Secretary of State indicated the various considerations that resulted in the overall conclusions identified at paragraph 19 above.

(1) It was reasonable to assume that the low paid workers may not understand the schemes in use.

(2) In principle it was clearly preferable that the national minimum wage regime was as simple as possible. This would assist understanding and acceptance of the scheme on the part of employers and employees, and aid effective enforcement of the NMW legislation. The proposed amendment meant that the value of the national minimum wage was clearly identified. This assisted in protecting the integrity of the national minimum wage as a wage floor. This was also a matter identified by the Low Pay Commission ("the LPC") in its response to the consultation. (The LPC is the independent body established under the NMW Act which makes recommendations to the government on the national minimum wage.)

(3) There was a widespread recognition that when salary sacrifice schemes were applied to the low paid, the employer gained significantly more than the worker. Because, in particular, there was evidence that the way in which the schemes worked was not understood by a significant proportion of the low paid workers concerned, this was a form of exploitation of the low paid. It was also the case that it was wrong for profit to be made from low paid workers through the use of salary sacrifice.

(4) The suggestion made by some respondents to the consultation that the amendment proposed to the NMW Regulations had the potential to affect workers earning as much as £9 per hour was not accepted. It was also noted that the proposed amendment would not prevent employees and employers taking advantage of the tax relief available under ITEPA section 338; it would only have the effect that payment of such expenses would not go to discharging the obligation to pay the national minimum wage.

(5) The impact that salary sacrifice schemes might have on a worker's ability to qualify for earnings-related benefits was difficult to predict. Nevertheless, it was possible that the application of such schemes to the low paid would put at risk their ability to meet the qualifying earnings factor ("the QEF").

(6) One consequence of the present arrangements was unfairness as between low paid workers who received payments under salary sacrifice schemes and those who did not. Because the taxable wages of those who received payments of section 338 expenses were artificially depressed, their eligibility (for example) for Working Tax Credits was increased by comparison with low paid workers paid the same amount but not through the means of a salary sacrifice scheme.

1. Introducing the draft of the 2010 Regulations to the House of Commons on 26 November 2010 the Parliamentary Under-Secretary of State for Business, Innovation and Skills (Edward Davey MP), identified a number of problems with the use of salary sacrifice schemes for workers paid at or near the national minimum wage.

(1) Preserving the integrity of the national minimum wage required workers to know what they were entitled to and employers to be able easily to demonstrate that they met their obligations. Allowing some salary sacrifice schemes to qualify when others did not unduly complicated the regime.

(2) Employers gained far more from the schemes than the workers which amounted to a form of exploitation.

(3) Salary sacrifice schemes potentially affected the entitlement of low paid workers to certain benefits, particularly basic and state pension because they increase the number of weeks for which a worker has to work to meet the QEF.

(4) Businesses not using salary sacrifice schemes were at a competitive disadvantage.

(5) Fairness was in issue as the artificial reduction in taxable pay increased entitlement to certain benefits compared to other workers paid the same amount but not through a salary sacrifice scheme.

The same factors were explained by Baroness Wilcox when she presented the draft 2010 Regulations to the House of Lords Grand Committee on 8 December 2010.

The Grounds of Challenge: The Common Law Challenge

1. At the outset it is necessary to say something about the proper approach to this challenge.

1. First, the Secretary of State is exercising a broad discretionary power in a social, economic and (at least to some extent) political context. He has to balance a number of complex, and perhaps conflicting, social and economic variables in order to determine what he believes is the fair, effective and efficient solution to the central issue in question. It is almost inevitable that some economic operators, especially if their own commercial and financial interests may be adversely affected by the chosen proposals, will be opposed to change, or will put forward other options that they allege would secure the relevant regulatory objectives, but at a lower cost to themselves and others. However, it is trite law that this court must be cautious in interfering with such an exercise of discretionary power, unless there are solid legal reasons for doing so, and must not allow itself to become an umpire of a social and economic controversy that has been settled by due political process.

1. The Claimant cited a number of authorities as indicative of the correct legal approach in this case. I shall not burden this already lengthy judgment by their recitation. I recognise readily that judicial review challenges have succeeded on conventional grounds in respect of regulatory legislation, but I would reiterate the caution that, where the challenge is to legislation regulating economic and social matters, the court must at all times be careful to distinguish real grounds of illegality from a possibly disguised attack on the economic wisdom of the legislation.

1. Second, it is important at all times to keep in mind the broad scope of the relevant regulatory power: it is to determine what "charges or expenses" should, or should not, properly form part of the minimum wage.

1. Thirdly, the exercise of that regulatory power in this case appears, on its face, to fall squarely within the purpose for which Parliament granted the power. As set out above, before the challenged amendment, there was a regulatory mismatch. For the purpose of determining the amount of remuneration chargeable to income tax and NIC, section 338 expenses are discounted. It is not hard to grasp the rationale for that treatment, a rationale that in one form or another has characterised fiscal law practically from the outset (see paragraph 8 above and the exposition by Professor Tiley referred to). Such expenses are necessarily incurred in the performance of the employee's duties qua employee. He or she cannot perform the job without incurring them. Such expenses, therefore, may not fairly and reasonably be treated as forming part of the worker's remuneration, or the pay that he or she would otherwise take home and could otherwise apply to current consumption or saving, and so should not form part of the amount upon which income tax and NIC are charged. It does not matter whether the worker has paid the expenses (he deducts the expenditure from chargeable income), or the employer has reimbursed the worker for the expenditure, or the employer has paid the expenditure on behalf of the worker (in the latter cases, the amounts received or paid do not form part of the chargeable emoluments of the employment, or if they did, would be immediately deductible as legitimate expenses of the job).

1. However, before the challenged amendment, the calculation of the minimum wage proceeded on an entirely different footing. Section 338 expenses, necessarily incurred in the performance of the worker's duties, were allowed to count as part of the worker's genuine "remuneration", notwithstanding the fact that (if employer and employee were both strictly complying with the qualifying conditions) the amounts so paid, as a matter of economic reality, could not be applied by the worker to current consumption or saving, because ex hypothesi they did no more than compensate him or her for a necessary cost of doing the job.

1. The challenged amendment removes this mismatch and aligns the regulatory position: section 338 expenses paid by the employer do not form part of chargeable income for income tax and NIC (as before); but nor do they any longer count as part of net "remuneration" for the purpose of applying the rules in respect of the minimum wage². Given that background, it is at first sight difficult to see how the exercise of the relevant power would not fall within the proper scope of the power or would otherwise be unlawful. Indeed, Mr Michael Fordham QC, who appeared for the Claimant and presented this part of the challenge at the hearing, stated in reply that he did not challenge the validity of the amendment (under the ultra vires principle).

1. However, in this claim the Claimant points to alleged economic consequences of the exercise of the relevant power which the Claimant says the Secretary of State either misunderstood or failed, or failed adequately, to take into account. In my view, only in a clear case would the court, confronted with an exercise of regulatory power falling plainly and squarely within the purposes for which the power was intended, and accepted to be a valid exercise of power, interfere on such a basis. For reasons that will become apparent, this claim in effect invites the court to evaluate the merits of competing economic arguments and to prefer at the end of the day those advanced by the Claimant.

1. At the outset of this part of the judgment I must also refer to a preliminary point that has divided the parties. Mr Jonathan Swift QC, who appeared on behalf of the Secretary of State, contends, correctly, that the amendment, as a matter of law, does not preclude an employer from continuing to pay to a worker, as part of the worker's total take home package, section 338 expenses which would remain income tax and NIC free. Nor is there anything in law to preclude the employer from offering salary sacrifice schemes under which the employee would trade part of the otherwise taxable remuneration for payment of (a typically lower amount of) non-taxable and NIC free section 338 expenses.

1. However, in response Mr Fordham submitted that that argument ignored economic reality. If the worker was paid at or very near the minimum wage, the employer would be unable to offer any, or any meaningful, salary sacrifice, for under the amendment the amount of section 338 expenses paid in return for the salary sacrifice would not count in determining the minimum wage, and the employer would ipso facto be in breach of the minimum wage regulations. The inevitable result of the amendment would be that salary sacrifice arrangements would end for employees at or very near the minimum wage. As a matter of simple arithmetic, that would appear to me to be the case. Indeed, Mr Fordham contended, employers would no longer use "overarching agreements" under which they employed low paid workers (with resulting employment law benefits, such as notice periods, redundancy payments and so on), because the central reason for using such agreements is to facilitate salary sacrifice arrangements.

1. The Secretary of State meets that objection by recalling that the relevant public policy issue in this present context is not whether salary sacrifice arrangements will disappear, or will at least substantially recede, for the low paid worker, but whether such workers are likely to receive lower pay under the amendment. The evidence strongly suggests that low paid workers currently benefit only to a relatively small extent (see paragraph 11 above) under salary sacrifice schemes. If employers, such as the Claimant, do not wish their workers to suffer a small reduction in net pay as a result of the amendment, the solution lies in their hands: with or without salary sacrifice arrangements, the employer remains free to pay a modest increment to lower paid workers, by way of income tax and NIC-free section 338 expenses, and the worker would suffer no detriment. (Of course, the incentive for employers, such as the Claimant, to do so may be reduced, because, in the absence of a salary sacrifice arrangement, the employer would lose the benefit of substantial savings achieved by way of the element of lost sacrifice and NIC reduction in respect of the amount of salary sacrificed).

1. In other words, the Secretary of State was not required in law to assume that the amendment would ineluctably cause the pay of low paid workers to fall in the relatively small amount to which they currently benefit under salary sacrifice arrangements. One feasible and by no means unrealistic response by employers who wished to advance the interests of their low paid workers following the amendment would be to pay a modest increase in wages by way of income tax and NIC free section 338 expenses, an option that under the amendment remains legally open to them.

1. That appears to me to be an entirely rational basis upon which the Secretary of State was entitled to proceed. In this context it is also worth noting that any modest increment to the wage of the low paid worker by way of payment of section 338 expenses would ex hypothesi be intended to reimburse the worker for costs genuinely incurred by him in doing the job (not in getting to work), of a kind that it is well known that many solicitous employers cover as a matter of course in many sectors of industry and public employment. It is somewhat unattractive for the Claimant on the one hand to put itself forward as a champion of the interests of the low paid worker, but on the other hand to assert that any additional payment to these workers to cover expenses genuinely incurred in order to do their job is beyond the reach of the Claimant and other employers in a similar position.

1. As to the use of "overarching agreements", Mr Swift drew my attention to evidence that employers had used such agreements before the enactment of section 338, and submitted, in my view correctly, that it should not readily be assumed that, if salary sacrifice schemes for low paid workers ceased to be feasible, employers would jettison the use of such agreements which confer other benefits on employees and would appear to constitute an attractive and competitive offer to employees. Such overarching agreements are in any event necessary to allow the worker himself, if he decided to do so, to claim section 338 expenses, and so to protect his income just as if (indeed potentially to a greater extent than if) he continued to enjoy the benefit of a salary sacrifice arrangement.

1. I should add that, although Mr Swift did not at all accept the main premise of the Claimant's case, namely, that as a result of the amendment the pay of low paid workers would ineluctably fall in the relatively small amount by which they currently benefit from salary sacrifice schemes, he contended that, even if that premise was correct, the Secretary of State nonetheless had independently good reasons for the amendment. I now turn to explore those reasons.

1. First, it is clear that a strong, if not dominant theme, in the Secretary of State's explanation of the amendment is that the current treatment of section 338 expenses exploits, or has the potential for exploiting workers, especially low paid workers at or near the minimum wage. "Exploitation" is, of course, a somewhat emotive epithet and its use has perhaps tended to obscure the real issue in this context.

1. The Claimant points out that the present treatment of section 338 expenses generally brings material benefit to the worker, whether low paid or not: the wage is likely to be higher than would otherwise be the case, because a significant part of it is not chargeable to income tax and NIC. It is true that a worker, well-organised, keeping full and accurate records, and understanding the not altogether straightforward applicable income tax regime, and having the time and resources and incentive, could deduct for herself the section 338 expenses in her income tax return, and so reduce chargeable income to the same net amount. However, particularly for low paid and/or migrant workers, such a scenario might at the moment be considered questionable.

1. It is in any event irrational or perverse, contends the Claimant, for the Secretary of State to make an amendment that would render workers, particularly low paid workers, worse off. Even accepting a loss of benefit (see paragraph 33 above), the Secretary of State replies by observing, first, that the net financial benefit to the low paid worker is, on available evidence, marginal, and that, secondly, the net financial benefit to the employer is very substantial (see paragraph 13 above), so that the distribution of the financial benefit from the relevant arrangements between worker and employer is inequitable. Plainly the last conclusion entails a value judgment, but that is a matter for political debate, and is not something upon which the court may pronounce unless the conclusion was unsupported by the primary evidence, which is not the case, or the judgment was one that no reasonable Secretary of State, having regard to the purposes of the NMW Act, could properly make, which is also not the case. In other words, the Secretary of State has brought the regulatory system into alignment – a result well within the purposes of the enabling power – fully appreciating that the low paid worker, other things being equal, might receive less net pay, but on the basis that the benefit to the worker is marginal and that, in the light of the current inequitable distribution of the financial advantage, the loss of any such marginal benefit is not a compelling reason for not proceeding with the amendment.

1. On the contrary, the removal of that inequitable distribution of overall advantage is seen as a virtue of aligning the regulatory system in the manner proposed. In principle, this appears to me to be a correct analysis.

1. There is a further dimension to the present issue. The Secretary of State believes, not unreasonably, that low paid workers in particular might not fully understand "salary sacrifice" schemes, and might well not know how the advantages from such schemes are distributed between employer and worker. Given such asymmetric information between the two contracting parties, the worker may not be able to bargain effectively for a greater share of the benefit of the scheme into which he is invited to enter.

1. Mr Fordham's response to that problem of asymmetric information is that a less intrusive form of amendment would have been sufficient, namely, a regulation that would have required employers to explain precisely (a) what total benefit accrued under the putative salary sacrifice scheme and (b) how that benefit was distributed between employer and employee. However, I have seen no economic evidence that the low paid workers who are tempted to enter such schemes, even if (which is itself a questionable assumption) they had perfect information about, and understanding of, the distribution of the financial benefit from a putative salary sacrifice scheme, would be able effectively to bargain for what could colloquially be described as a significantly bigger slice of the cake. There is probably no such evidence because it is counter intuitive to believe that the low paid workers in question, whatever their knowledge and understanding, could bargain for a significantly larger slice of the cake.

1. In other words, there appears no evidential basis for assuming that what is perceived by the Secretary of State as an unacceptable distribution of benefit could, under achievable conditions, be self-correcting.

1. Mr Fordham also argues that it is irrational to preclude low paid workers from enjoying the benefit of salary sacrifice schemes, because the distribution of the benefit is said to be inequitable, but to continue to permit their operation for higher paid workers (where the arithmetic allows their continued operation), when the distribution of the benefit is likely to be the same or similar.

1. There are, in my view, two answers to that argument. First, as explained earlier, the amendment corrects a current regulatory mismatch. By definition, there is no regulatory mismatch in respect of higher paid workers: section 338 expenses are deductible for the purposes of income tax and NIC; they have no consequences for the purpose of determining the minimum wage of higher paid workers, for ex hypothesi such workers are not on the minimum wage. The amendment is, therefore, proportionate. It corrects a regulatory mismatch that applies uniquely to workers on the minimum wage. The amendment does not affect the general application of section 338 and does not, in particular, affect, in law or fact, the use of salary sacrifice schemes for higher paid workers for whom the minimum wage regulation is not of significance.

1. Secondly, the core of the Secretary of State's objection to the current position in the present context is that employers are exploiting a regulatory mismatch, applicable only to low paid workers, to generate financial benefits that largely accrue to themselves rather than to the low paid workers for whose protection the NMW Act was enacted and the regulations promulgated. Furthermore, the amount of the financial benefit accruing to the employer is proportionately large compared to the gross or net remuneration of the low paid worker (by definition, proportionately larger, other things being equal, than in respect of higher paid workers). That feature exacerbates the inequitable nature of the current distribution of benefits from salary sacrifice schemes. In my judgment, on this point the Secretary of State's core objection is not only rational, and properly grounded in law, but represents a convincing application of public policy in this area.

1. Mr Fordham's final argument on this issue is that low paid workers have the choice of refusing to enter into salary sacrifice schemes. It is irrational, he contends, to deprive the low paid worker of the choice of taking any part of the cake (to use the colloquial analogy), simply because, if the worker were freely to decide to take the slice open to him, he would in fact be taking less than his fair share. In other words, the amendment rests upon misguided paternalism on the part of the Secretary of State.

1. However, the Secretary of State does not accept that low paid workers at or near the minimum wage have a real choice to decide to opt out of salary sacrifice schemes. He points to the economic incentives. The employer – this is common ground – incurs significant costs in setting up and operating salary sacrifice schemes. The financial benefit and cost savings of such schemes to employers, as demonstrated by the data, are very substantial; and the employer has every incentive to urge the worker to enter into a salary sacrifice arrangement. The employee, for his part, may see an immediate tangible financial benefit, and no obvious detriment, in entering into such an arrangement. He may fear (whether or not the fear is well grounded) that if he were to refuse to accept the offer of salary sacrifice, he might not be offered employment under an "overarching" contract (as distinct from a traditional agency arrangement); or that, other things being equal, he might not be preferred for work placements (because the employer would be financially better off by placing a worker who had accepted a salary sacrifice agreement).

1. In the consultation there were indeed representations from the TUC and Unite (a major trade union) that the notion that low paid workers had a real choice of opt out from salary sacrifice schemes was an economic illusion.

1. These points appear to me to have very powerful force, and I am unable to conclude that the Secretary of State acted irrationally or unlawfully in declining to accept that the voluntary nature of salary sacrifice schemes provided an answer to his fundamental objection, based upon the inequitable distribution of benefit as explained above, to the use of those schemes in the case of low paid workers.

1. A second theme in the Secretary of State's explanation for the challenged amendment is that the present regulatory scheme, with its mismatch between net income for income tax/NIC and remuneration for the minimum wage, causes, or is likely to cause, competitive distortion. A number of employers choose not to adopt salary sacrifice schemes and contend that they are then placed at a competitive disadvantage to those that do adopt such schemes.

1. It is plain that the financial benefit to employers who adopt salary sacrifice schemes represents a substantial cost saving (see paragraph 13 above). That cost saving can be applied in a number of ways: prices to end users may be reduced, marketing or promotional budgets may be expanded, capital investment may be increased, executive incentives may be made more attractive, and so on. Other things being equal, the cost saving can reasonably be expected to increase the market share, and profitability, of the advantaged enterprises. The advantage arises solely from the fiscal regime: it is not because the advantaged firms are superior suppliers of services to end users. One effect of the challenged amendment, says the Secretary of State, is to reduce the incentive to employers to enter into salary sacrifice schemes and hence to reduce the present competitive distortion or scope for such distortion.

1. The Claimant argues that this is an irrelevant or impermissible consideration. Salary sacrifice schemes are open to all employers and, to the extent that certain employers choose not to offer such schemes, they then cannot legitimately complain about competitive disadvantage, and, if they do, the Secretary of State must not give weight to such complaints.

1. In my view, there is an important missing element in this argument. It assumes that those employers who eschew salary sacrifice schemes can have no good business reason for doing so, and that the resulting loss of competitiveness is nothing more than an unnecessary self-inflicted wound. However, there is evidence that there are significant impediments to setting up and running salary sacrifice schemes. For example, they appear to entail appreciable expenditure on IT and in compliance measures, an investment that may not be viable for the smaller enterprise with lower revenues against which to spread the cost. Dispensation for the scheme must be sought and obtained from HMRC, and the scheme must be operated in accordance with the strict qualifying conditions on pain of the imposition, or threatened imposition, of unwelcome and unanticipated tax assessments and penalties. All this entails cost. There is furthermore evidence that certain employers prefer not to offer such schemes because they do not believe that low paid workers, in particular, would understand the scheme and/or that the distribution of benefit would, under competitive pressure, be equitable.

1. In any event, the Secretary of State has proceeded on the basis that competitive distortion, or the risk of distortion, is real, and that it is in the public interest to reduce such distortion through the amendment. It is accepted that the competitive distortion will not be eliminated, because the amendment will not of course reduce the incentive to offer such schemes to higher paid workers. Elimination could be achieved only by repealing, or substantially amending, section 338. However, HMRC consulted extensively on that very question and concluded, on balance, that for reasons of fiscal policy the repeal or substantial amendment of section 338 should not for the time being at least be pursued.

1. In these circumstances I find nothing irrational, perverse or unlawful in an amendment intended to align the applicable regulatory regimes and to reduce competitive distortion or risk of distortion, even if, for fiscal reasons, section 338 is to remain in place and, to the extent that salary sacrifice schemes are adopted and operated, would, other things being equal, tend to have in principle a distorting effect on the relevant market that was similar in character if not necessarily in degree.

1. A further element in the background to the challenged amendment was the concern on the part of the Secretary of State that workers who entered into salary sacrifice schemes might be putting at risk their entitlement to earnings-related benefits, such as state pension, because they might not be working sufficient weeks to achieve the QEF. The evidence as to whether that contingency was in fact occurring on a significant scale was difficult to evaluate and inconclusive because a number of variables were in play. However, the Secretary of State concluded that the identified risk remained, and that one beneficial result of reducing the incentive to offer salary sacrifice schemes to low paid workers was the removal of such risk.

1. The Claimant criticises that reasoning. The Claimant argues that, if the Secretary of State had any concern in the present context, the answer was to require employers to provide information to workers so that they could make an informed choice whether or not to enter into salary sacrifice schemes. The Secretary of State responds that such regulation would be likely to be relatively complex to formulate, relatively difficult for low paid workers to understand, and relatively difficult and costly to enforce effectively. Even if – which the Secretary of State does not accept – enforceable and cost effective regulation could ensure that low paid workers perfectly understood the trade off between current earnings under a salary sacrifice scheme and the potential loss of future earnings-related benefits, problems would remain.

1. Mr Fordham was also critical of the basis upon which the Secretary of State reached his conclusion on this matter. Miss Helen Mountfield QC, who also appeared for the Claimant and presented the second part of the challenge, enlarged on this criticism. In my view, there was some force in the contention that the Secretary of State did not appear to have collected relevant data as to the likely incidence, or extent of the relevant risk, or about the category of workers who might be most exposed to such risk, and that there was, therefore, no thorough and convincing analysis. If this justification for the amendment had stood alone, I might have had some doubts about its strength. However, in the final decision it is apparent that this ground of justification had lost its earlier prominence, and that the core objection to the present position arose from the first matter that I have set out above at some length. Notwithstanding the apparent absence of detailed data and analysis, the Secretary of State continued to have a concern that workers might well enter into salary sacrifice schemes, either not appreciating the potential consequences for future state benefits or, even if they did appreciate such consequences, making a sub-optimal choice in the trade off of present financial advantage against the prospect of future benefit. In my judgment, that remained a legitimate concern which gave some support to the need for the amendment, even in the absence of detailed data and a comprehensive analysis, and the Secretary of State did not act irrationally or unlawfully in giving (far from decisive) weight to that legitimate concern in the decision to adopt the challenged amendment.

1. A related theme was that under the regulation as presently formulated the net wage of low paid workers who entered into salary sacrifice schemes was depressed so that they became entitled to or increased their entitlement to certain state benefits, such as tax credits. Workers who did not enter into such schemes might well have the same gross remuneration but would not qualify for such benefits. Indeed the same worker might move himself into the benefit range simply by accepting a salary sacrifice offer. In economic terms the workers might well be in the same position, but one group qualified for state benefits and the other did not. The Secretary of State considered that the present position was anomalous and inequitable, and that one benefit of reducing the incentive for such schemes was to reduce the potential for such anomaly and inequity. Again, in my view, that was a material consideration to which the Secretary of State was entitled to attach weight.

1. The Secretary of State also maintained that the challenged amendment simplified the minimum wage regime. The Claimant criticises that assessment, contending that there is nothing complex about the present position in which two amounts (cash wages and section 338 expenses) need only be added together. However, as observed earlier (see paragraph 14 above), whether any amount truly represents the applicable "minimum wage" currently depends upon whether the amount paid by way of section 338 expenses does in fact and in law genuinely qualify under section 338; and the answer to that question turns upon the application and effective enforcement of relatively complex income tax rules. The amendment removes that element of complexity, for the minimum wage under the amendment now simply disregards any amount paid by way of section 338 expenses.

1. The Secretary of State also contended that it was not easy for employers and employees to understand how precisely the position under section 338 interacted with the minimum wage regulations. Mr Fordham responded to that point by referring to the helpful material that the Claimant provides to employees, and potential employees, so that they could better understand how salary sacrifice schemes worked and how they complied with minimum wage regulations. However, it appears to me that the obvious need for such material somewhat reinforces the basic point made by the Secretary of State. It must again be remembered that salary sacrifice schemes for low paid workers currently rest upon a regulatory mismatch, which is potentially confusing, and that both employer and employee need fully to grasp the (anomalous) distinction between net income for income tax and NIC purposes (which excludes section 338 expenses) and remuneration for the purposes of the statutory minimum wage (which currently includes the payment of section 338 expenses). It seems to me that not every employer or potential employer will find this distinction easy to grasp and to apply correctly, or that, in particular, low paid workers who are the focus of these proceedings will, even with the help of such material as the Claimant provides, readily appreciate the distinction and its significance for the calculation of the statutory minimum wage, and so with relative ease firmly grasp the basis upon which salary sacrifice schemes are constructed.

1. In short, I find nothing irrational, unlawful, or disproportionate, in the conclusion reached by the Secretary of State that the amendment will materially simplify the regulatory regime for the minimum wage, and, in particular, will materially enhance the ability of both employer and low paid employee to recognise whether or not they are paying and receiving at least the minimum wage prescribed by law.

The Ground Alleging Failure to comply with the Public Sector Equality Duty

1. The second part of the challenge rested upon alleged failures to comply with public sector equality duties, and with EU anti-discrimination law. As already noted, Miss Mountfield QC presented this part of the case at the hearing. With due respect to Miss Mountfield's impressive advocacy, she faced a very steep slope indeed in the light of my conclusions on the first part of the challenge. It is convenient to summarise those conclusions:

a) The amendment validly corrects a regulatory mismatch, and aligns the regimes applicable to income tax, NIC and the calculation of the statutory minimum wage;

b) The Secretary of State has solid and convincing reasons for concluding that employers, such as the Claimant, have 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, receive a disproportionate and inequitable part of the total financial benefit resulting from salary sacrifice schemes; and that there is no alternative mechanism for ensuring that such workers would receive a fair share of the benefit;

c) It is not an unavoidable consequence of the amendment that, to the extent that employers cease to offer salary sacrifice schemes to low paid workers, such workers will suffer a significant loss of income. On the contrary, the Secretary of State has good reason to believe that one feasible and by no means unrealistic response of at least some employers would be to pay their workers at least the minimum wage and also to pay, by way of section 338 expenses, a relatively modest increment to ensure that their workers were not significantly worse off than under current conditions of employment;

d) The Secretary of State has solid and convincing reasons for concluding that under the present regime salary sacrifice schemes distort, or have real potential for distorting, competition between enterprises competing in the same relevant market. Such competing enterprises who do not use such schemes are at a disadvantage. So, indirectly, are the employees, particularly the low paid employees, of such enterprises.

e) The Secretary of State has good reason to believe that a substantial number of low paid workers may not understand how entry into a salary sacrifice scheme may affect their eligibility for future state benefits or, even if they did, or could adequately be made to, understand, that nonetheless a significant number of them may not make an optimal choice in the trade off of present as against future advantage.

f) The Secretary of State has solid and convincing reasons for concluding that the present regulation creates unjustified discrimination, in respect of eligibility for state benefits such as tax credits, between low paid workers who enter into salary sacrifice schemes and those who do not. The net income of the former, for the purposes of eligibility, is reduced by the substituted payment of section 338 expenses, even though, for the purposes of calculating the minimum wage, the payment of section 338 expenses is taken into account as part of remuneration. The net income of the latter, for both eligibility and minimum wage purposes, is the total remuneration paid. The two groups are in economically similar circumstances but are treated differently without justification for the purposes of eligibility for the relevant state benefits.

g) The Secretary of State has solid and convincing reasons for concluding that the amendment will materially simplify understanding and application of, and compliance with, the regime relating to the statutory minimum wage.

1. Bringing these strands together, it can be seen that for workers most affected by the amendment:

1. They will not necessarily be significantly worse off in terms of net pay (see (c) above); but, on the contrary,

1. They will no longer be unfairly exploited (see (b) above); and

1. They will be likely to be better off in certain important material respects (see (e) and (g) above); and

1. Unjustified discrimination, or disadvantage, as between different groups of low paid workers, at or near the minimum wage, who are in materially similar economic circumstances, will be removed (see (d) and (f) above).

1. The amendment, therefore, in the reasoned, and indeed convincing, analysis of the Secretary of State either brings very substantial benefits to, or removes discrimination as between, low paid workers, without the certainty that they would suffer detriment by reason of the payment of significantly reduced wages. Even if they were to incur a fall in net income (by no means an inevitable result of the non-availability of salary sacrifice schemes to them) the Secretary of State has good reason for concluding that the benefits identified above, and the removal of the discrimination identified above, plainly outweigh the loss of such financial benefit as low paid workers currently enjoy through salary sacrifice schemes. Even if, therefore, the relevant low paid workers comprise a proportionately higher percentage of those intended to be protected by public sector equality duties, the Secretary of State has solid grounds for concluding that the amendment is in the real and substantial interests of those workers.

1. In written submissions and in oral argument I was referred to a number of authorities concerning the public sector equality duties and EU discrimination law. However, in all of the cases to which I was referred there was no doubt that those affected by the impugned measure, and who fell within a class protected by the relevant duties and law, had been adversely affected in comparison with others who did not fall within the protected class. That is not the case here. The Secretary of State intended to confer material benefit on, and to remove discrimination as between, workers who fell within the relevant group, namely, low paid workers at or near the minimum wage; and, in my judgment, the Secretary of State has solid and convincing reasons for his belief that he has achieved that objective. In those circumstances, I believe that my consideration of the challenge based on an alleged failure to comply with public sector duties or EU anti-discrimination law can be relatively succinct.

1. Section 71 of the RRA 1976 provides that:

"(1) Every body or other person specified in Schedule 1A or of a description falling within that Schedule shall, in carrying out its functions, have due regard to the need:

(a) to eliminate unlawful racial discrimination; and

(b) to promote equality of opportunity and good race relations between person of different racial groups."

1. Section 71C of the RRA 1976 provides that:

"(1) The Commission may issue codes of practice containing such practical guidance as the Commission thinks fit in relation to the performance by persons of duties imposed on them by virtue of subsections (1) and (2) of section 71.

….

(11) A failure on the part of any person to observe any provision of a code of practice shall not of itself render that person liable to any proceedings; but any code of practice issued under this section shall be admissible in evidence in any legal proceedings, and if any provision of such a code appears to the court or tribunal concerned to be relevant to any question arising in the proceedings it shall be taken into account in determining that question.

…."

1. In R (Baker) v Secretary of State for Communities & Local Government [2008] EWCA Civ 141, [2009] PTSR 809, Dyson LJ (as he then was) stated:

"In my judgment, it is important to emphasise that the section 71(1) duty is not a duty to achieve a result, namely to eliminate unlawful racial discrimination or to promote equality of opportunity and good relations between persons of different racial groups. It is a duty to have due regard to the need to achieve these goals. The distinction is vital. Thus the Inspector did not have a duty to promote equality of opportunity between the appellants and persons who were members of different racial groups; her duty was to have due regard to the need to promote such equality of opportunity. She had to take that need into account, and in deciding how much weight to accord to the need, she had to have due regard to it. What is due regard? In my view, it is the regard that is appropriate in all the circumstances. These include on the one hand the importance of the areas of life of the members of the disadvantaged racial group that are affected by the inequality of opportunity and the extent of the inequality; and on the other hand, such countervailing factors as are relevant to the function which the decision-maker is performing." (at paragraph 31)

1. Furthermore, it is for the decision maker to decide how the countervailing factors should be balanced: see Baker, by Dyson LJ at paragraph 34. Similarly, it is not necessary to make explicit reference to RRA 1976, section 71: see Baker, by Dyson LJ at paragraph 36:

"The question in every case is whether the decision-maker has in substance had due regard to the relevant statutory need. Just as the use of a mantra referring to the statutory provision does not of itself show that the duty has been performed, so too a failure to refer expressly to the statute does not of itself show that the duty has not been performed"

1. There is no statutory duty to carry out an equality impact assessment: see R (Brown) v Secretary of State for Work and Pensions [2008] EWHC 3158 (Admin) by Aikens LJ at 89.

1. A failure to comply with the statutory Code of Practice is not itself unlawful: see RRA 1976, section 71C (11); R (Equality and Human Rights Commission) v Secretary of State for Justice [2010] EWHC 147 (Admin), by Wyn Williams J at paragraph 34; Brown, by Aikens LJ at 111-121. Paragraph 3.16 of the Code is not prescriptive, using the words "public authorities could ask themselves….": see Baker, by Dyson LJ at paragraph 46. Additional duties beyond that under RRA 1976, section 71 cannot be imposed by a public authority's equality scheme or any "toolkit" produced under it: see Brown, by Aikens LJ at paragraphs 106 and 109-110.

1. The central question is whether in substance the Secretary of State had due regard to the aims identified in the RRA 1976 section 71(1).

1. An equality impact assessment was conducted as part of the Final Impact Assessment which formed an annex to the consultation response document. The impact assessment addressed race equality. Miss Mountfield contended that the impact assessment was a "post hoc rationalisation". However, according to the evidence the race impact assessment was conducted during the formulation of the policy and before the final decision was taken (and substantially before the draft 2010 Regulations were laid before Parliament). The assessment highlighted the fact that ethnic minority and migrant (including migrant EU) workers were more likely than the general population to be temporary workers and more likely still in the case of migrant and EU migrant workers to be temporary workers paid at or near the NMW. The impact assessment noted that the numbers specifically participating in salary sacrifice schemes were not observable but the proportion working as temporary workers paid at or near the national minimum wage was taken as a proxy. This seems to me a pragmatic and reasonable approach.

1. In dealing with the common law challenge, several points arise that are relevant to this challenge. First, the Secretary of State appreciated that the proposed amendment to the NMW Regulations might result in a small reduction in take home pay, but that that was not an unavoidable consequence of the amendment.

1. Secondly, the Secretary of State 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.

1. Thirdly, the Secretary of State recognised that –

"ethnic minority workers and migrant workers are likely to be amongst the most vulnerable and accordingly susceptible to exploitation."

1. Miss Mountfield criticises the consultation exercise because there is no evidence that the Secretary of State sought the views of individual low paid workers about the amendment. I have to say that I have considerable reservations about the efficacy, and cost effectiveness, of any such consultation. But in any event both the TUC and Unite did respond to the consultation document. Those representative bodies submitted that salary sacrifice schemes were not in the best interests of low paid workers and they strongly supported the proposed amendment to the regulations.

1. Miss Mountfield referred to the Code and other documents relating to the public sector equality duties. In that context it should be noted that the BIS Single Equality Scheme was not published until 3 June 2010. As the process of proposing the amendment to the NMW Regulations was a joint endeavour between HM Treasury, HMRC and BIS, the majority of the Final Impact Assessment was put together by HM Treasury and HMRC economists, with BIS economists producing the equality tests at section 7, including the race equality impact assessment. The equality assessment was completed on 26 July 2010. It was conducted under the three previous separate race, sex and disability equality schemes because these were in force at the time when the consultation took place and the consideration of the response to the consultation began. Similarly, the "Impact Assessment Toolkit" was published on 1 April 2010 and was not in place when the initial impact assessment was drafted and the consultation began. The consultation and the process of considering the response to it was, therefore, conducted on the basis of the policies in force when the process started.

1. In the circumstances of the present case I did not find the reference to the further documentation to be of material assistance.

1. In the light of the foregoing objective evidence, I hold that the Secretary of State did comply with his duty under Section 71, and I also reject the criticisms made of the process by which he carried out that duty.

The EU Discrimination Challenge

1. Article 45 of the TFEU provides (in material part) that:

"1. Freedom of movement for workers shall be secured within the Union.

1. Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment.

1. It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health:

(a) to accept offers of employment actually made;

(b) to move freely within the territory of Member States for his purpose;

(c) to stay in a Member State for the purpose of employment in accordance with the provisions governing the employment of nationals of that State laid down by law, regulation or administrative action;

(d) to remain in the territory of a Member State after having been employed in that State, subject to conditions which shall be embodied in regulations to be drawn up by the Commission.

…."

1. Article 7 of Regulation 1612/86 provides (in material part) that:

"1. A worker who is a national of a Member State may not, in the territory of another Member State, be treated differently from national workers by reason of his nationality in respect of any conditions of employment and work, in particular as regards remuneration, dismissal, and should he become unemployed reinstatement or re-employment;

1. He shall enjoy the same social and tax advantages as national workers

…."

1. Articles 2 and 14 of Directive 2000/43/EC provide (in material part):

"Article 2

Concept of discrimination

1. For the purposes of this Directive, the principle of equal treatment shall mean that there shall be no direct or indirect discrimination based on racial or ethnic origin

1. For the purposes of paragraph 1:

…

(b) indirect discrimination shall be taken to occur where an apparently neutral provision, criterion or practice would put persons of a racial or ethnic origin at a particular disadvantage compared with other persons, unless that provision, criterion or practice is objectively justified by a legitimate aim and the means of achieving that aim are appropriate and necessary.

….

Article 14

Compliance

Member States shall take the necessary measures to ensure that:

(a) Any laws, regulations and administrative provisions contrary to the principle of equal treatment are abolished;

…."

1. The REC and LFS data available to the Secretary of State suggest that ethnic minorities are twice as likely to work as temporary workers than others. The LFS data suggests that EU nationals form a higher proportion of the workforce employed in temporary work paid at or near the NMW level than they do of the general workforce (18% as against 4%). The Secretary of State accepts that if there is a provision that disadvantages temporary workers paid at or near the national minimum wage there would be disparate impact.

1. However, for reasons already stated and that I shall not repeat, the Secretary of State 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. Also for the reasons given earlier, the amendment is appropriate and necessary to achieve those aims. On that basis, the EU challenge cannot succeed.

1. In the event I reject all the grounds of challenge. Formally, because this is a "rolled up application" I grant permission to bring the application for judicial review but dismiss the substantive claim.

1. At the end of the hearing Mr Fordham invited me to deal in this judgment with ancillary matters, such as costs and permission to appeal. As to costs, both sides accept that the successful party, in the event, the Defendant, is entitled to a costs order, such costs to be assessed if not agreed.

1. As to permission to appeal, I have reached the firm conclusion at the end of the day that this challenge was an attack on the economic merits of regulatory reform affecting the labour market in the guise of a common law and legal equality case. Having formed that clear view, I am not prepared to grant permission to appeal, because I see no reasonable prospect of success on appeal and I find no other good reason to grant permission. I can discern no arguable basis why this amendment, which in what I have found to be the lawful conclusion of the Secretary of State brings substantial benefit to low paid workers, and is in the public interest, should not be implemented, as planned and announced, on 1 January 2011.

1 It should be noted that a worker who declined to accept a salary sacrifice agreement may himself deduct travel expenses under section 338, and, if he were to do, he would suffer no lost sacrifice. However, the worker would have to retain proper records, satisfy himself that the expenses met the qualifying criteria and submit a claim, which could be investigated and challenged by the Revenue.

2 It might be noted in passing that the alignment does not appear perfect. If the worker himself met the expenses out of total income, and properly deducted them under section 338, his income for income tax and NIC purposes would be the net amount after deduction, but it appears that the minimum wage would remain the amount of total income.