The UK’s National Minimum Wage (NMW) is hardly new. In fact, it has been with us for nearly 20 years, although it was rebadged for workers over 25 as the “National Living Wage” in 2016 ( the same principles apply). So why is the NMW appearing in the news more and more these days?
We understand HM Revenue & Customs (HMRC) have an assigned budget of £25 million in 2018 for enforcement of NMW and currently have more than 2500 open investigations. There is also a NMW awareness campaign being run by the government. All employers are in scope, covering around 2 million workers in low-paid jobs. We are seeing an increasing number of businesses, across all industries, being audited for compliance. You will also have recognised increased press attention around the quarterly naming and shaming exercise, published by the Department for Business, Energy and Industrial Strategy (BEIS) where well-known businesses are “outed” as having been fined by HMRC as a result of breaching the NMW regulations.
The annually increasing NMW rate has been one of the reasons for this activity. We are now seeing more employers paying at or around the NMW rate than ever before. However, compliance is not simply a case of “do you pay the correct NMW rate for the correct age bracket, per hour of a shift?” In fact, company employment practices and policies could be causing employers to unconsciously breach the NMW regulations and leading to some employees being paid below the NMW.
It is estimated that 342,000 jobs were paid below the NMW in 2017. According to the Low Pay Commission, around one in five low-paid jobs for those aged 25 or above are in fact paid below NMW and the same statistic applies to apprentices.
The question of unintentionally paying below the NMW is not a factor when assessing compliance; employers are being penalised with both financial penalties (more of that below) and naming and shaming despite the errors being accidental. Ultimately, ignorance of the detail of the NMW regulations is not a defence.
Below are just some of the areas where employers, who thought they were NMW compliant, have learnt that in reality they were paying their employees below the NMW:
- Work uniform – Where employees have to supply their own uniforms (or any part of them) then the cost of purchasing should be deducted from their pay when calculating NMW. Employers should be aware that ‘uniform’ is defined very broadly with regards to NMW. If, for example, a company provides a branded T-shirt, but the employee has to provide their own black trousers and shoes, the cost of these will be considered a deduction for NMW purposes. What this means is that the employee must receive the NMW after that deduction.
- Working time – An employee’s ‘working time’ might seem a straightforward thing to calculate - the time spent on shift doing the job. But additional activities can also count toward working hours. If an employee has to go through any checks or undertake any mandatory steps before they can start or leave work, such as security searches, team briefings, getting changed for work on site or drug and alcohol tests, then the time spent going through these processes will also be working time and should be paid at the NMW rate. Further, if employees at any time work through an unpaid break, this becomes working time for which they should be paid NMW.
- Salary Sacrifice – where an employee is a member of a salary sacrifice scheme, including ones for the payment of pension or childcare vouchers, then they must receive the NMW rate after this deduction has been made.
- Annualised hours contracts – HMRC describe these as “salaried hours” contracts and they must contain an “ascertainable” number of hours that the employee is expected to work in the year; this should be expressed by the number of hours expected per month or year. It should not refer to hours per week, as there are 52.14 weeks in a year and therefore the yearly number in those contracts is not “ascertainable”. If the contract is not truly a salaried hours contract, then any pay must be above the NMW per hour worked in the relevant pay reference period; it cannot be averaged out over the year. So where someone works a high number of hours in any one pay reference period, for example to deal with seasonal demand, they would need to receive NMW pay for each hour.
- Record keeping – It is a criminal offence under the NMW regulations not to maintain proper records showing that the NMW has been paid by the business for at least the last three years. There is also 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.
Getting it wrong; setting it right
HMRC can approach and investigate any company at any time and have considerable investigative powers, including interviewing employees and removing records, sometimes without notice.
So what happens to a business that suddenly finds it is under investigation by HMRC over its handling of NMW pay? In the first instance there could be considerable embarrassment and damage to the brand’s reputation if BEIS adds them to the “naming and shaming” list.
Secondly, HMRC will order the business to make arrears payments to all employees and ex-employees who have been underpaid, going back six years, and a correction of any breaches going forwards.
Third, a penalty of up to 200% of the total underpayment to all workers could be imposed on the company. This penalty is subject to an overall cap of £20,000 per relevant employee but if the business is large and has a significant number of employees affected over years, this has the potential to become a major fine.
Compliance with the NMW regulations is with us to stay and has recently formed a key focus of investigations on behalf of the government by Sir David Metcalf (Director of Labour Market Enforcement). Sir David’s recommendations include; a significant increase in financial penalties; a shift in the naming and shaming scheme to detail more serious violations; and enforcement fees against non-compliant employers to fund the enforcement costs.
Another finding of Sir David’s report is there is a lack of clarity on guidance, particularly around technical aspects of the NMW regulations and a lack of support and education from HMRC to employers in this respect. It is sensible therefore to proactively look at business practices now so that they can address any potential problems before HMRC come knocking. An audit of working and pay practices is advisable to identify any issues, so steps can be taken to address problems sooner rather than later.