HM Revenue & Customs (HMRC) is responsible for enforcing the National Minimum Wage (NMW).

Press and anecdotal reports suggest it is particularly focusing its compliance investigations on the retail and leisure sectors, where employers who get it wrong risk being 'named and shamed'.

Numerous household names have recently been publicly 'named and shamed' by HMRC, often for very innocent mistakes in applying the legislation to their working environment. Given the potential brand damage such negative publicity can cause, employers need to learn the lessons identified by these cases.


The NMW was introduced in 1999 by the National Minimum Wage Act 1998 (the 'Act'). The original rate was £3.60 per hour for adult workers. It has risen every year, often in excess of inflation, and with effect from 1 April 2017, the adult rate (for workers 25 and over) increased to £7.50. The government has stated its ambition for the rate to be £9 per hour by 2020 and during the recent election campaign the figure of £10 per hour was proposed.

The NMW is not just payable to employees employed under a contract of employment but, to the wider category of workers who perform their work personally. The NMW does not apply to those who are genuinely self-employed, hence the recent spate of tribunal cases about employment status. If an individual can establish that they are an employee or a worker they will be entitled to be paid the NMW.

The National Minimum Wage Regulations 2015 (the 'Regulations') came into force in April 2015 and consolidated and restructured all the previous regulations governing the NMW with the aim of making the legislation in this area easier to understand.

However, navigating the methods of calculation can still be a minefield for the unwary and getting it wrong, even if this is totally unintentional, is still a breach of the Regulations, resulting in significant back pay and fines having to be paid and a business being labelled as 'non-compliant' - with associated damage to reputation and, potentially, adversely impacting on the ability to recruit good quality staff.

HMRC has the power to conduct audits of employers' records and to investigate generally whether workers are being paid the NMW.

How does the calculation work?

The Act provides that:

'a person who qualifies for the national minimum wage shall be remunerated by his employer in respect of his work in any pay reference period at a rate which is not less than the national minimum wage.' (section 1(1)).

What is therefore required is to establish an average hourly rate of pay for the worker during the relevant pay reference period (typically the normal pay period, be that a month, a week etc.) that can be compared to the prescribed rate.

Where workers are paid an hourly rate which equates to the current applicable rate of the NMW, an employer can still be in breach if working hours are considered by HMRC to be longer than the contract provides because the average hourly rate of pay will be reduced. In addition, the employer may not realise that certain deductions made reduce the NMW calculation.

Payments used to calculate the NMW include:

  • gross salary
  • bonus
  • commission and other incentive payments based on performance
  • piecework payments
  • accommodation payments (subject to specific requirements)
  • Overtime pay at basic pay rate

Various payments received by employees do not count towards the NMW calculation:

  • benefits in kind
  • loans by the employer
  • advances in wages
  • overtime premiums
  • pension payments
  • lump sum payments on retirement
  • redundancy payments
  • tribunal or settlement payments.


Premium rates paid for overtime are not to be included in the calculation and cannot be relied upon to 'top up' an hourly rate that would otherwise contravene the NMW.

For example: an adult (over 25) worker receives an hourly rate of £7.00 per hour and works 35 hours per week. The same employee also completes 10 hours of overtime for which they receive an additional overtime premium of £3.50 per hour. The total amount paid to the employee in the reference period is £350 for 45 hours of work. A rough average is therefore £7.77 and above the NMW. However, when discounting the overtime premium, the hourly rate is an average of £7.00 for NMW purposes and is in breach of the current £7.50 minimum.

What is on the HMRC 'watch list'?

As part of its investigations, HMRC has previously ruled that employers have been non-compliant in the following ways:

Security checks: The requirement for employees to submit to bag searches and any other security checks once they have finished their shift is considered working time and should be paid. A failure to do so will result in a breach of the NMW if the additional time generates an average pay that falls below the required threshold.

Team briefings: Time spent conducting a daily or shift briefing will also be considered working time. A failure to compensate for this period will be a breach if the employee is paid the NMW.

Induction process: The onboarding process is likely to be assessed as working time and should be appropriately remunerated.

'Clocking' issues: Discrepancies between the end of an allocated shift and the time shown on the clocking machine could result in a breach of the NMW.

Uniform deductions: Any charges made to hire uniform will be deducted from salary before the calculations are made. Consequently an employee who receives £7.50 per hour but has a £10 per week deducted from their wages as uniform hire will be paid below the NMW for the relevant reference period.

Similarly, an employer who deducts a payment for damage or the non-return of a uniform on termination runs the risk of a breach unless there is a clear contractual entitlement to make the deduction i.e. the failure to return uniform is expressly identified in the contract as incurring the charge.

Clothing allowance: It is broadly understood that any requirements for employees to purchase their work clothes from their employer (even at a discount) will be counted as a deduction that reduces the average rate of pay. However, HMRC is reportedly now targeting businesses that require only a simple uniform (e.g. black trousers and white shirt) which can be purchased from any retailer and is applying notional deductions from salary. For example, on commencement it may be said that the employee will need to purchase appropriate clothing at a cost of £X. For the purposes of calculating the NMW, those theoretical clothing costs would be deducted from the wages received during the first reference period and, if the average rate falls below the prescribed minimum, a breach may be said to have occurred.


The obvious solution for many of these issues would be to ensure that staff receive a rate of pay slightly higher than the NMW so as to build in a 'buffer' for any unexpected eventualities. However, the commercial reality is that margins, particularly in the leisure and retail sectors, do not allow for such luxuries. Employers therefore have little choice but to keep a vigilant eye on all employment practices to ensure that staff are compensated for all their working time. Rigorous processes should be put in place to avoid unnecessary administrative oversights which could result in a breach for example, failing to realise workers have moved from one age band to another. Organisations should pay close attention to HMRC guidelines to ensure compliance with any policy changes.