1 October 2014 saw the latest annual hike in the National Minimum Wage (“NMW”), with the rate for adult workers (21 years old +) hitting the £6.50 mark (2013: £6.31).

Despite not quite living up to the £7 hourly figure proposed by Chancellor George Osborne back in January the uplift represents a 2% increase on last year’s figure.

Furthermore the NMW for adult workers is 12% higher than it was five years ago and up more than 30% on the 2004 rate - although it still falls some way short of the £7.65 estimated UK living wage.

The benefit of the new rate was felt by the approximately 1.2 million adult workers currently in receipt of NMW.

It should also have had positive repercussions for a decent chunk of the 2 million or so workers paid within 50 pence of the 2013 adult rate. 

And the upward is only set to continue; Labour leader Ed Miliband signalling his intention to secure a NMW of £8 should his party triumph at this year’s general election.

But with the number of workers paid NMW doubling since 1999, and roughly a quarter of workers in the hospitality industry estimated to be receiving NMW, employers need to have their wits about them when it comes to the regulations. 

Couple this with HMRC’s new found mandate to impose weighty penalties – including a four fold rise of the maximum fine for non-compliance and the ability to name and shame those in breach of the regulations – and it becomes startlingly obvious that NMW should be at the forefront of the minds of all hospitality employers.

Failure to do so could mean leaving themselves in hot water and liable to pay a hefty price - both financially and in terms of damage to reputation. 

This note will detail the background to the NMW, outline the current rates for employers to be aware of and explain why it is vital for employers to track any changes both to the rates and the surrounding legislation.

History

After decades of deliberating the NNW was formally introduced by Tony Blair’s Labour Government.

The National Minimum Wage Act 1998 (“1998 Act”) came into force on 1 April 1999 and has since been amended by the Employment Act 2008.

When first introduced there were just two rates - £3.60 for adults, classified then as those aged 22 and over, and a development rate of £3 for those aged between 18 and 21.

2004 saw the introduction of a third rate for 16 and 17 year olds, while a fourth rate applicable to apprentices was introduced in 2010.

That same year the age limit for those falling within the adult category was dropped to include those aged 21.  

The Department for Business, Innovation and Skills (“BIS”) is primarily responsible for NMW policy and they work alongside HM Revenue and Customs (“HMRC”) who are tasked with the enforcing the regulations. 

Eligibility and the Current Rates

The majority of workers in the UK are entitled to receive NMW.

In short the definition of a worker, found within Section 53(3) of the 1998 Act, clearly catches the majority of hospitality workers. 

As of the 1 October this year the four rates are:

  • Adult (21 +) = £6.50
  • Development  (18-20) = £5.03
  • 16 – 17 = £3.79
  • Apprentice = £2.73

Recent Changes in the Enforcement of NMW

In a combined recent report the Centre for London and Trust for London found that over 300,000 people in the UK were earning less than NMW.

Over the past five years the Government have made a concerted effort to proactively combat the underpaying of workers. 

Such measures should be properly understood by all employers in the hospitality industry so as to avoid falling foul of the law and being subjected to some fairly hefty sanctions.

As well as a worker being able to give rise to a complaint themselves, the HMRC itself carries out risk profiling, focussing in on some of its key low paying sectors. 

Once a matter has been brought to the attention of HMRC a dedicated NMW Risk Unit will then carry out a thorough investigation and, if necessary, a Notice of Underpayment (“Notice”) will be issued to the employer.

There are a number of important points to note for employers that crop up in relation to the Notice;

1.  A worker found to be paid below NMW is entitled to be paid in arrears the difference between the pay they actually received and the NMW.

However, as of 6 April 2009 if the NMW rate at the “relevant date”, that is a day where payment for one or more pay reference periods is due, is higher than it was at the time of some of the pay reference periods, the worker is entitled to the arrears at the higher rate for the entire period owed.

So for example if a complaint is made later this year and there is pay due after 1 October 2014, an adult worker would be entitled to be paid the difference between what they actually received and  the current NMW of £6.50. This would be the case irrespective of whether the majority of the period they had actually been underpaid fell pre 1 October 2014. 

Therefore if as an employer you discovered you were unwittingly paying less than the prescribed NMW the sensible option would be to address the issue head on. Brushing it under the carpet may well mean that the shortfall goes undiscovered for a period of time, but if and when it eventually rears its head the consequences are likely to be more costly. 

2.  In the vast majority of instances a penalty will also be attached to the Notice. The penalty sum goes to the Government rather than the worker.

It’s at this stage things really start to get onerous for the employer. Previously the maximum penalty amount was capped at 50% of the arrears owed to the worker and in any case not more than £5,000 in total. This amount was then reduced by 50% again for prompt payment.

Now however the rules have changed dramatically. Any penalty relating to a pay reference period on or after 7 March 2014 will be equivalent to 100% of arrears* and with a limit of £20,000. What’s more, as of 1 October 2014 the employer is liable to pay a penalty per worker underpaid (as opposed to the amount being capped at £20,000 for each employer). 

Clearly these new penalties are financially much tougher. For smaller businesses in particular not keeping a close eye on the latest rates could have catastrophic consequences. 

3.  On top of all this there is the BIS ‘name and shame’ scheme, which now has significantly more teeth than previously.

In theory employers were supposed  to fear the consequences of social and economic sanctions more than a mere financial penalty,  but initially at least the scheme failed to make the desired impact.

However, in a huge shakeup to the rules, any HMRC investigation commenced on or after 1 October 2013 that results in the issue of a Notice will automatically contain information on the BIS Naming Scheme.

The infringing employer has 28 days to appeal against the Notice before the HMRC refer the employer automatically to the BIS for naming.

The BIS then allow a further 14 days for the employer to make written representations as to why they are exempt from naming. 

Such representations will only be successful if the employer falls under one of the very limited exceptional circumstances prescribed, namely:

  • There is a risk of personal harm to an individual or their family
  • There are national security risks associated with the naming
  • There are other factors making it not in the public interest to name the employer

If an employer is not able to show that they fall under one of these three categories, and in the majority of cases they won’t be able to, then the naming and shaming will take place. 

Recent research by National Minimum Low Pay Commission found low paid workers are the most unproductive.

Further the study found that 80% of people surveyed would not use a business if they were aware of it underpaying its staff. 

Last year more than 25 employers have been publicly named and shamed, with at least five of those in the spotlight belonging to the Hotel and Pub industry.

Clearly the sanctions incurred as a result of falling up short when it comes to paying NMW as outlined above are not to be shrugged off lightly.

At their worst they could have a potentially crippling impact on any business.

It is for this reason that the importance of inadvertently failing to keep up with the latest set of rules – and at the very least the latest rates – cannot be stressed enough. 

*Penalty amount calculated in relation to the actual NMW rate applicable at the time of the underpayment (as opposed to the using to current NMW when calculating the arrears due to the employee).