The National Minimum Wage (the 'NMW') was introduced in 1999 and applies to most workers aged 16 or over. The NMW is set by the government and increases each year.
See our recent article for details of the rates which will apply from 1 April 2017.
What are the consequences of non-compliance?
Employers who fail to pay the NMW will be required to repay any underpayment to the worker(s) and may also be ordered to pay a penalty to the Secretary of State of 200% of the underpayment (subject to a maximum penalty of £20,000 per worker).
The employer may also be named and shamed under the government's naming and shaming scheme which can result in brand and reputational damage.
It is not necessary for a worker to bring a claim for the employer to be held accountable for failing to pay NMW. HM Revenue & Customs is responsible for enforcement and can carry out on-site inspections of an employer's records at any time.
Are there any payments which won't count as pay for NMW purposes?
The legislation which deals with the NMW is complex. Many instances of non-compliance are as a result of ignorance or misunderstanding of the law. For example, there are various payments which employers may not count towards the calculation of NMW and this can lead to confusion over whether or not an employer is complying.
The most common payments which employers must exclude when checking whether their wage rates are compliant are:
- employer pension contributions
- tips, gratuities and service charges
- loans / advances of wages
- lump sums on retirement
- redundancy payments
In other words, employers cannot add these types of payments to the wages which the worker actually receives in order to claim compliance with the NMW.
Are there any deductions from pay that an employer can lawfully make which won't affect the calculation of NMW?
There are some deductions employers can make from pay which are ignored when calculating whether the worker has been paid NMW. Common examples are deductions:
- for PAYE tax and NI
- for employee pension contributions
- for trade union subscriptions
- in relation to the purchase of shares or share options
- for loans or advances on wages made to workers e.g. season ticket loans
- for the provision of living accommodation (including the provision of any services such as gas and electricity provided in connection with the accommodation) so long as the deduction does not exceed the accommodation allowance currently set at £6 per day (due to rise to £6.40 from 1 April 2017)
- which relate to specific misconduct by the worker
- for attachment of earnings orders (but excluding any admin. charge applied by the employer)
- payments made in respect of goods bought from the employer which are required for the employment.
What deductions cannot be made if they would take pay below NMW?
- deductions from pay for uniform, tools or training costs which are used by the worker in connection with the employment;
- deductions from pay for the employer's use or benefit such as payments for meals provided at work; and
- deductions from pay in respect of living accommodation which exceeds the accommodation allowance.
Employers should therefore ensure that the rate of pay received by the worker is still at least the relevant NMW after these deductions have been made. If the answer is no then the deductions should not be made.
Given the financial penalties at the Secretary of State's disposal and the risk of brand and reputational damage, it is important that employers are paying workers at least the NMW. To ensure compliance, regular audits should be carried out to identify those workers earning at or near NMW.
Employers need to diarise annual rate increases, which will now happen every April, and make sure they implement these without delay. Systems should be in place to ensure that workers moving from one wage band to another can be identified in advance.