You will not have missed the press reports at the tail end of last week following the thirteenth round of naming (and shaming) employers (a significant proportion of whom are retailers) who have failed to pay the national minimum wage (NMW).

As well as the bad press, the associated financial liability for the 260 employers on the list (£1.7 million in back pay and £1.3 million in fines) is not to be underestimated.

The retail sector featured prominently on the most recent list. It is notable that not only large employers feature; small employers where the underpayment involved only a handful of workers (or even one worker) are also named.

The effect of the recent line of worker status cases (e.g. Uber) is to bring many more businesses within the remit of the NMW legislation. Now more than ever businesses must ensure that they are paying the right rates or face the wrath of HMRC enforcement action.

In this article, we summarise the process that non-compliant employers will face and consider whether naming and shaming really works.

NMW enforcement process

The BEIS scheme to name employers who do not pay the NMW is one of a range of tools used by the government to encourage compliance with the law. It has been operating since 1 October 2013. In the four years since the scheme came into effect, £8 million in back pay has been identified and 1,500 employers have been fined a total of £5 million.

The BEIS scheme works in tandem with civil penalties issued by HMRC. The process is triggered by a complaint from a worker or a third party, such as a trade union, or where HMRC targets a particular low-paying sector.

This leads to an inspection by HMRC. The inspections can be carried out at any time and without reason and, as such, are something that most employers would want to avoid. Over the last few years we have seen HMRC specifically target their inspections on the retail sector.

Notice of underpayment

Regardless of whether the underpayment was accidental or has partly been repaid, in all cases where arrears of the NMW are found, a notice of underpayment will be issued.

The notice sets out the wages owed and HMRC can enforce underpayments going back up to 6 years. To compensate workers for the delay in payment, the arrears have to be repaid at the current NMW rate if this has increased since the underpayment.

In addition to the arrears that must be paid, the notice also imposes a penalty for not complying with the law.

The penalty has been increased significantly in recent years. In 2014, it was set at 50% of the total underpayment subject to a maximum of £5,000 per notice of underpayment (each notice could cover several workers).

Since April 2016, it has been upped to 200% of the total underpayment (reduced by 50% if paid within 14 days), subject to a maximum of £20,000 per underpaid worker. This represents a significant liability for offending employers in addition to the arrears that must be paid.

If civil enforcement has not worked, criminal prosecution is also available for the worst NMW offenders.

Naming and shaming

If there is no appeal against the notice of underpayment or any appeal is unsuccessful, HMRC refers the case to BEIS to consider naming the employer.

The policy is for all employers issued with a notice to be named unless they meet exceptional criteria (e.g. risk of personal harm or to national security) or the arrears were £100 or less.

The effect of the scheme is that even if an employer has made a genuine mistake which has led to the underpayment of the NMW, that employer, once issued with a notice of underpayment, will end up on the list of employers named by BEIS. Such an employer will not only have the financial liability of the arrears and penalty to contend with, but will also have to deal with the unwanted publicity and the associated risks to reputation which comes with being on the publicised list.

These risks are particularly significant for retailers whose brand names tend to be the most well-known and therefore are highlighted in press headlines when the "naming and shaming" lists are released. For example, on 8 December all of the major newspapers chose Sports Direct and Primark out of the lists of 260 employers as their headlines to highlight the most recent "naming and shaming" list published by BEIS.

Does naming work?

The intention behind the naming scheme is to enable workers and businesses to make informed choices about who they work and do business with. The Low Pay Commission has recently reported that it’s conversations with employers suggest that the risk of being named is encouraging businesses to focus on compliance, so it seems to be an effective method in HMRC's toolkit.

It was suggested that a similar naming and shaming scheme would be brought in for employers that do not comply with the new obligations to report on their gender pay gaps. However, this has not happened, with the government instead planning to run periodic checks to assess for non-compliance (with it being kept under review what they will do with that data) and produce tables by sector of employers' reported gender pay gaps. It will therefore be for workers and candidates to check for themselves whether a particular employer has complied. Depending on the levels of compliance with the gender pay reporting obligations, the success of the NMW naming and shaming scheme may encourage a similar scheme to be adopted for gender pay in due course.

NMW compliance

Retailers may feel that if they pay the headline hourly rate of NMW (currently £7.50 for those aged 25 and over, rising to £7.83 from 1 April 2018) then they will not be risking prosecutions. However, the errors made by the employers featured in the most recent list include failing to pay workers for time spent travelling between jobs, deducting money from pay for uniforms and not paying for overtime. Retailers therefore need to make sure that they are fully up to speed with what does and does not count for NMW purposes to avoid falling into the trap that the listed employers did – mistake is not an excuse when it comes to NMW compliance.