National Minimum Wage Enforcement – Six Traps to Avoid (UK)
Just before Christmas, somewhat lost perhaps amidst the Plan B vs the did-he, didn’t-he Christmas Party merry-go-round, the government released the latest list of employers being “named and shamed” for failing to pay the minimum wage. As you may recall, although the naming and shaming scheme has been around since 2011, it was paused in 2018 pending a governmental review. The government announced that the scheme would re-start (with some changes) in February 2019 and the first list of employers named under the new scheme was published in January 2021. This most recent list is therefore only the third under the new scheme.
The companies named range from multinational businesses and large high street names to SMEs and sole traders, in what the government has trumpeted stridently and probably unnecessarily as “a clear message that no employer is exempt from paying their workers the statutory minimum wage”. Assuming that the majority of these were inadvertent breaches, the immediate question is how a large employer with significant financial and administrative resources can pay below the NMW by accident. Really? What the government’s commentary on the list does not include, and in the interests of fairness probably should, is the reality that if you aim quite lawfully to pay at or just above the NMW, then however big you are, it is distressingly easy to find that you have inadvertently slipped below it.
The press release states that the employers in question had underpaid their workers in the following ways:
37% – making deductions that reduce minimum wage pay, for example leaving workers out of pocket to comply with the dress code
29% – unpaid working time such as mandatory training, trial shifts or travel time (NB, not commuting time)
16% – failing to pay the correct rate to apprentices
11% – not increasing NMW pay in line with government rises or paying the wrong minimum wage, for example paying a 23 year old the 21-22 year old rate
The reality is that there are numerous areas where employers may find themselves unwittingly paying below the NMW and on the naughty step after a visit from HMRC. This, combined with the double-whammy of HMRC having had its budget for NMW enforcement increased significantly over recent years and above-inflation increases in the NMW (the top rate will hit £9.50 come April), is eroding the cushion which many employers believed they had between what they pay and the minimum required. This means that employers not previously too concerned about the niceties of the NMW Regulations could find that their policies around pay and working time now actually take some of their employees below where they need to be – particularly bearing in mind that the higher rate now catches more people than before as it kicks in at 23, not 25.
Many a business has been caught out by a seemingly innocuous practice (see below for our top six Pitfalls to Avoid) which has dipped their employees under the minimum wage rates – and some of these have been highly publicised. This has been exacerbated by the recent Employment Appeal Tribunal Decision in Augustine v Data Cars Ltd (more on that here) which seems to mean that discretionary or technically even unnecessary costs incurred by the employee “in connection with their employment” may also reduce NMW pay (e.g. the purchase of an optional uniform, which was one of the issues in Augustine). The potential consequence of this decision for employers with staff close to the NMW cannot be understated. There is no reference in the case or the NMW Regulations to the purchase or expense undertaken by the employee having to be reasonable – all that appears to be required is the causal connection between the job and the expense, seemingly no matter how tangential.
Added to this, we know that companies are under increased pressure to be seen to treat their people well, whether because they need to boost their ESG ratings to attract/retain investors or because their staff and customers are voting with their feet and only choosing those companies that have good track records in this respect.
The real rub with the relaunched scheme is that even companies which are genuinely trying to get things right from a pay perspective and have fallen foul of the NMW regulations inadvertently have subsequently been named and shamed for it, all tarred with the same brush. This is less than ideal from a reputational perspective, and may have a negative impact on a company’s ESG rating. It is hard not to believe that a level of peripheral damage of this sort is seen by the government as an acceptable price to pay for keeping the majority of employers running scared,
In addition, getting it wrong can be an expensive exercise, something companies certainly do not need in the current economic climate. That cost grows with time because arrears payments are uplifted to current NLW/NMW rates (and penalty payments are calculated as a % of arrears). This is subject to an overall cap of £20,000 per affected employee; however, when dealing with substantial historic issues (HMRC will go back up to 6 years in its investigations) this has the potential to lead to significant fines.
This is a really tricky area and we recommend that any business with staff paid at or near the NLW/NMW rates should take some pre-emptive steps to see if this might be an issue. It is of course, much better to be on the front foot on these matters in order to spot any potential under-payments and take pro-active steps to rectify, rather than waiting for HMRC to knock on the door in a less than sympathetic manner early one morning.
To help you to assess whether your business might be exposed in this regard and avoid the need to see your name up in lights on the HMRC website, here are six popular Pitfalls to Avoid:
Working time – whether an employee has been paid the NLW/NMW will depend on the pay received and the hours worked. On the face of it, what is ‘working time’ might seem a straightforward question – simply time spent by an employee doing his job – but that is not necessarily the case. If an employee has to go through any checks or undertake any mandatory steps before he can start work or leave afterwards, such as security searches, handovers, getting changed for work on site or drug/alcohol/covid tests, then that time will also be working time. There can also be issues where employees work through unpaid breaks, as that is working time that they are not being paid for;
Salary sacrifice – where an employee is a member of a salary sacrifice scheme, such as for additional pension contributions, childcare vouchers etc., then this must not take their average hourly pay below NMW. You get no credit for the value of the pension benefit or the childcare vouchers which the salary has been exchanged for. On the basis that this denies the lowest-paid the benefit of the tax breaks brought by a salary sacrifice scheme, the government has previously re-visited this to see whether this was really right earlier in the year, but concluded that it was. The only concession is that an employer caught paying below the NMW on that basis alonewould not be subject to a penalty – underpayments would still be due and it could still be named and shamed.
Travel schemes – where an employer offers to provide discounted travel cards for its employees and deducts the cost of the card from employees’ pay over a period of time, such deductions are likely to reduce NMW pay. Again, you get no credit for the value of the travel card or the discount applied;
Uniform – If an employee has to supply any element of their own uniform then the cost of purchasing this will be deducted from an employee’s pay when calculating NMW pay. Employers should be aware that ‘uniform’ is defined very broadly in this context. The example given in the HMRC manual is of an employee working in a hairdressers who has to wear a plain white t-shirt and black trousers. If these are bought from the employer, even at a discount, the cost to the employees would be deemed deducted from their pay before determination of compliance with the NMW floor. Following Augustine, this will potentially apply even where the wearing of uniform by the employee is not mandatory, provided that the uniform is acquired “in connection with their employment”;
Salaried employees– many employers probably won’t worry about their salaried employees, providing that their annual salary is above NMW based on their contractual hours of work. However, a “salaried worker” for NMW purposes is one whose required annual working hours are “ascertainable from his contract”. This should be relatively straightforward, shouldn’t it? They work 40 hours a week, so you just multiply that by 52 and you’ve ascertained the hours for the year. Sadly not. HMRC say that as there are in fact 52.14 weeks in a year; an employee can’t therefore ascertain his hours for the year from the contract (although this is clearly arrant nonsense) and so is not a salaried worker for NMW purposes. So what? Well, with a salaried worker you look at the pay received over a whole year and the hours worked over the year and average them out to ensure NMW has been paid in each week or month. If an employee is not a salaried worker, however, the employer needs to ensure that he is being paid the correct amount for each individual pay period based on the actual hours he works in that week or month;
Record–keeping – there is a requirement on the employer under the NMW Regulations to maintain records sufficient to evidence that the NMW has been paid. It is a criminal offence not to do so. There is no particular format the records must take and it may be that payroll records are sufficient; however, this might not be the case where you have salaried employees whose hours of work you do not track and so you cannot evidence what hours they have actually worked. There is a presumption that an employee has not been paid the NMW unless an employer can prove to the contrary and so this is an added incentive to ensuring proper records are kept. These have to be retained for 6 years, raised from 3 in April 2021.