National Minimum Wage – Common errors leading to non-compliance

By John L Harding, PwC | Partner Employment

In 2017 we saw unprecedented media attention around National Minimum Wage (NMW) compliance. HM Revenue & Customs (HMRC) which enforces the NMW regulations published the 13th list of NMW offenders in December, identifying 260 employers required to pay back £1.7 million to workers and £1.3 million in penalties. ‘Naming and shaming’ is automatic for any employer found to owe underpayments to workers of £100 or more in total.  

Historically, the list was made up mostly of micro employers. However, the significant rise in NMW rates and real intensification in proactive HMRC enforcement activity means that many large employers are now being caught out. We expect more household name employers to feature on forthcoming lists.

A large proportion of employers caught out do not intentionally pay below the minimum hourly rate and often assume that if workers are paid at or above NMW, they do not risk non-compliance. However, the NMW regulations are far more complex than this, and many employers fall foul of the regulations unintentionally due to technical breaches. The legal complexities are often compounded by payroll software unable to perform the extremely difficult calculations required.

Why are so many employers being caught out?

Some of the recent high profile cases relate to “pay averaging”, where staff are paid the same monthly salary regardless of fluctuations in hours worked. Pay averaging is extremely common and often favoured by workers as it provides certainty about their income. However, under the NMW regulations most types of worker must be paid at least the NMW rate for all hours actually worked each month, and this pay cannot be spread across the year. Unless employers operating pay averaging can show that their workers meet the strict requirements of salaried hours work under the regulations, lower paid workers are at risk of being paid less than the minimum wage in longer months and in months where there are peaks in workload.

Other large employers have been caught out because they have given workers the option to exchange part of their cash salary for non-cash benefits, such as childcare vouchers. These arrangements are voluntary and usually benefit workers by saving tax. However, because cash pay is reduced, NMW must be assessed after the salary sacrifice meaning lower paid workers participating in these arrangements are more at risk of a NMW underpayment.

Other common risk areas include prescriptive dress codes where items of clothing are not provided by the employer, security checks on workers when they arrive at or leave work, not capturing and paying for other working time e.g. travel time, informal overtime etc, and deductions from pay to recoup certain costs from workers. Difficulties can also arise for employers operating a Time Off In Lieu (TOIL) system where hours and pay can become out of sync.

Looking forward

With fines of up to 200% of total underpayments and reputational damage caused by naming and shaming, the cost of getting NMW compliance wrong can be huge. NMW will rise again on 1 April 2018 (the highest rate increases from £7.50 to £7.83, with Government anticipating it to reach £9 by 2020), meaning more workers will be paid at or close to the NMW than ever before. Coupled with record breaking amounts of government spend on NMW enforcement, NMW non-compliance is a significant risk for many employers. All employers should analyse their workforce to understand what their NMW obligations are and whether their approach to pay and/or operational practices creates any risk of non-compliance.

For more information on NMW regulations, with a focus on the retail industry, join our webinar on 28th February with the British Retail Consortium.