National Minimum Wage: how do you know you’re getting it right?

The recent round of the naming scheme highlights common errors that led to NMW violations – have your procedures got these covered?

The recent round of the naming scheme highlights common errors that led to NMW violations.

On 5 August 2021 the Department for Business, Energy & Industrial Strategy (BEIS) named 191 employers, including some household names, who had failed to pay the National Minimum Wage (NMW). BEIS also published a summary of the main issues that caused those underpayments. Most NMW breaches are due to technicalities in the regulations or working practices that aren’t visible to payroll departments. This is in line with our experience: but means employers who fully intend to pay NMW are still being caught out. Employers should ensure their systems and processes can identify potential ‘technical’ breaches of the NMW regulations, so these are avoided and can be corrected outside of an HMRC review. Errors identified during an HMRC review are subject to penalties of up to 200 percent and naming.

Why NMW reviews matter

All employers have an obligation to pay their employees at least the relevant NMW.

Any failures must be corrected based on current NMW rates, rather than those that applied when the underpayment arose. Penalties of up to 200 percent of the arrears, capped at £20,000 per affected employee, can be applied. In addition, employers who underpay employees by £500 or more will be named.

The potential financial and reputational impact of an HMRC enquiry may quickly generate interest from the Board and other stakeholders (e.g. during a transaction).

What employers get wrong

The recent BEIS report highlights two key areas that resulted in employees receiving less than their statutory minimum entitlement:

  • Deductions or payments from wages that take pay below the relevant minimum rate; and
  • Unpaid working time.

Some examples BEIS give of deductions that can lead to NMW breaches have a clear rationale such as fees for processing attachments of earnings, and deductions for uniforms or for working equipment.

However, some are less clear – particularly those where the employee obtains a personal benefit from the deduction.

Examples include deductions for parking permits, the cost of onsite meals, employer Christmas savings schemes and deductions for benefits provided through salary sacrifice arrangements.

Unpaid working time that BEIS identified as causing NMW underpayments includes where employees are required to change or wait for work purposes (e.g. passing through security checks and getting changed into PPE pre and post shift), clocking in and out time being rounded, employees not being paid for mandatory training, time worked on a sleep in shift, or carrying out trial shifts.

The BEIS report also highlights NMW underpayment risks for apprentices, including failing to pay for time spent in training and failing to pay the correct age-related rate.

What should employers do?

The recent publication of named employers, and the most common reasons BEIS identified for those underpayments, is a reminder that even those who intend to pay their workers in full can still inadvertently breach the NMW rules.

All employers should therefore review their NMW systems and processes to ensure these are effective, and that compliance monitoring extends beyond the payroll and time and attendance systems and includes working practices that might lead to increased working time or reductions in pay.

Where underpayments are identified, these should be corrected and steps taken to prevent a reoccurrence.

BEIS recently confirmed plans for a new Single Enforcement Body (SEB) for workers’ rights, which will enforce holiday pay and Statutory Sick Pay as well as NMW.

When the SEB will be established has not yet been announced, but the clear signal is that employers should expect even greater scrutiny of NMW and other pay issues. We are also seeing the Pension Regulator stepping up enforcement activity in relation to pension auto-enrolment processes so employers should act now to ensure they are fully compliant.