Organisations looking after people with learning disabilities could collapse due to a £400 million bill for back pay for carers, the chairman of Mencap has warned.
Derek Lewis claimed the financial impact would be "devastating" for smaller care providers, and even a charity as established as the Royal Mencap Society would be "severely affected".
The situation is the result of a change in guidance on whether care staff who sleep at their workplace should be paid the minimum wage while they are asleep.
Mencap said HM Revenue and Customs' demand that organisations pay six years of back pay to workers to compensate them for sleep-in shifts has "brought the sector to the brink of disaster".
Mr Lewis, chairman of the Royal Mencap Society said: "Sleep-ins are widely used in the learning disability sector to provide care for some of our most vulnerable adults, in their own homes in the communities they live in.
"The carer is only there 'just in case' to provide safety and reassurance and is rarely disturbed. Recent research which looked at the last three years showed that 99.7% of carers slept peacefully."
He said when the national minimum wage (NMW) was introduced in 1999, the Government advised that time spent asleep did not count as "work time", so a flat-rate "on call" allowance has been the norm across the sector.
But following two employment tribunal decisions, the Department for Business, Energy and Industrial Strategy (BEIS) published new guidance in 2016 saying the NMW - and now the national living wage - should be paid for sleep time.
A Court of Appeal ruling on the interpretation of the law is expected on March 2018.
Mr Lewis said: "The unintended consequences have been disastrous as HMRC have begun enforcement action demanding six years' back pay.
"Estimates of the costs to the learning disability sector are in the region of £400 million and Royal Mencap Society will be severely affected.
"There will be a major impact on the 5,500 people we support and some may even end up losing that support all together.
"For many smaller care providers across the country the financial impact will be devastating."
He warned that the crisis could be worse than the collapse of the Southern Cross care home chain.
The Local Government Association (LGA), which represents the councils that fund much of the care provision, said HMRC should halt its demands.
Izzi Seccombe, chairman of the LGA's community well-being board, said: "The Government needs to make the law clear about whether the national living wage should apply for sleep-in shifts and stop HMRC's six-year retrospective action to seek costs and penalties from providers of social care until it does this."
She added that ministers would have to proved "genuinely new money" to councils to cover the cost if the back pay demand is enforced.
Unison union general secretary Dave Prentis said: "Charities and care companies have bid for contracts for years knowing they should be paying at least the national minimum wage for staff who do sleep-ins.
"Employers can't now plead poverty and ask for an exemption from the law based on their own poor planning. The staff have done the work - now they should be paid for it.
"It's the Government's failure to fund social care properly that is causing so many problems in the sector, not the staff who do such valuable work with vulnerable people."
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