HM Revenue and Customs (HMRC) have invested heavily in enforcing National Minimum Wage (NMW) and National Living Wage (NLW) compliance, and this has resulted in many employers, including some large household names as reported in ‘National Minimum Wage – Complex rules can lead to expensive errors’, being found to be in breach of NMW and NLW regulations.
How can it go wrong?
There are several ways in which employers can inadvertently reduce workers’ pay below NMW and NLW levels. Per HMRC, the reasons cited by employers include using tips to top up pay, reducing workers’ wages to pay for their Christmas party, and requiring workers to pay for their own work uniforms out of their salary.
The problems we see on a regular basis are often unintentional and typically relate to innocent mistakes being made by the employer. These include:
- Providing employees with living accommodation and then reducing the employee’s salary below NMW or NLW rates as a contribution towards the cost.
- Not recording all working time. Common examples include not recording time when workers are travelling, on call, training or where they are required to be on site before the start or end of a shift.
- Salary sacrifice arrangements which bring a worker’s earnings below the required NMW and NLW levels.
- Failing to track workers’ ages properly. The rate of NMW and NLW payable depends on the age of the worker, and failing to pay the rate appropriate to an employee’s age will lead to the employer being in breach.
- Pay averaging. If an employer chooses to spread pay evenly over the course of the year, but at certain times of the year workers work more hours than at other times, their hourly rates for those pay periods when extra hours are worked could fall below NMW and NLW levels. This can be the case even where, over the course of a year, the employees are paid the correct amounts.
What are the implications of getting it wrong?
HMRC’s penalties for breach of NMW and NLW regulations can be harsh, with penalties of up to 200 per cent of any arrears, or a maximum of £20,000 per employee.
In addition, HMRC can ‘name and shame’ the employer by including its name on a published list of other employers in breach, alongside the amount of underpaid salary and the number of workers involved. These lists are in the public domain and the adverse publicity can be harmful to the reputation of a business.
What should you do?
Employers have a legal duty to comply with NMW and NLW regulations.
If you are concerned that you might have made a mistake and paid workers at a level below NMW and NLW rates, the best course of action is to review the position and, if there is an issue, to pay the arrears to workers at the earliest opportunity. The outstanding income tax and Class 1 NIC due under PAYE must also be paid to HMRC. In our experience, harsh HMRC penalties and naming and shaming can often be avoided if the arrears of pay are settled, and the issue is voluntarily disclosed to HMRC, before HMRC identify the issue themselves.
If you have any concerns about whether you are complying with NMW/NLW legislation, or you would like to check that the treatment is being applied, please contact Lee Knight and we can support you with reviewing and regularising the position.