14 July 2023
Julie Moore, employment tax expert, highlights National Minimum Wage (NMW) risks in the recruitment sector and practical steps businesses can take to reduce their risk of non-compliance.
On 1 April 2023, NMW rates increased by c10%. This is the biggest increase in NMW since the legislation was introduced. We are seeing businesses being impacted both by the increased costs of these NMW rises and employee pay demands due to the cost-of-living crisis. Additionally, there is now more pressure than ever on employers to ensure that NMW risks are identified, and processes are introduced to mitigate these risks where possible.
In addition to the April uplift in NMW rates, HMRC published new guidance specifically in relation to NMW compliance in labour supply chains. This guidance reiterates that, where a recruitment company places a worker with one of their clients and then pays the worker via their payroll, the recruitment company is responsible for ensuring the worker is paid at least NMW. There are various risk areas for this sector to consider.
In 2021, 191 companies (including large, household names) were ‘named and shamed’ by the government for NMW breaches, or as many headlines stated, ‘failing to pay their employees correctly.’ This headline is an example of the reputational damage non-compliance with the regulations can have on the business and supply chain.
NMW risks relevant to the recruitment sector
It can often be difficult for a recruitment company to identify NMW risks when they often arise from the specific working practices in place at their clients’ businesses. However, recruitment companies should consider the controls they have in place to mitigate these risks.
We highlight below some of the risk areas which may be particularly relevant to recruitment businesses together with key questions to ask to assess your risk exposure.
- Time and attendance: do the working practices of a particular client give rise to any NMW risks? For example, are workers based on a construction site required to be on site in advance of their shift start time for safety briefings? It may be the case, in this example, that the timesheets supplied to the recruitment company do not include the time taken for the safety briefing to take place and this would give rise to unpaid working time. Similar risks arise around automatic lunch hour deductions and after work shift time.
- Deductions from pay: are any deductions made from pay for the employer’s own use and benefit? For example, a security guard placed by a recruitment company to work an overnight shift at an office building may lose a set of keys and the recruitment company is charged a set fine by their client for these lost keys. Should the recruitment company make a deduction from the worker’s pay for the cost of the lost keys (and they are not contractually permitted to do so) this could reduce the worker’s pay for the purposes of NMW. Similar risks apply to locker deposits, savings clubs, travel card deductions and attachment of earnings admin fees.
- Uniforms: are workers required to purchase uniforms or any specific items of clothing to enable them to perform their duties of employment? For example, care workers placed in a care home by a recruitment company may be required by the care home to wear black trousers and black shoes when working at a particular care home. As these workers may need to incur a cost on purchasing these items, purchasing these items will likely reduce their pay in the pay reference period that the items are purchased. In these circumstances, a recruitment company may not always be aware of this dress code requirement, specifically if it is not documented in a policy.
What is the impact of non-compliance with NMW?
Where a recruitment company is responsible for paying a worker via payroll, should a breach of NMW be identified by HMRC, the recruitment company will:
- be responsible for repaying all impacted workers (including both current employees and leavers) over the last 6 years at today’s NMW rates;
- be charged a penalty of 200% of the underpayment by HMRC (which can be mitigated to 100% where certain conditions are met); and
- be named by the Department of Business and Trade (previously BEIS) if an underpayment in excess of £500 over a 6-year period is identified.
What should recruitment businesses be doing?
Recruitment companies should be considering the NMW risks which could be relevant to workers paid directly by the recruitment company. Recruitment companies may wish to:
- complete due diligence before supplying workers to a client to understand working practices;
- interview workers who have been placed with a client, to understand potential risks;
- regularly review timesheet information supplied by clients; and
- consider policies and controls in place relating to deductions and any adjustments made to a worker’s pay.
To discuss the potential impact for your recruitment business, please contact Julie Moore, NMW lead at RSM UK, or your usual RSM contact.