The recent ‘naming and shaming’ list released by the UK government highlights over 500 employers, including major high street brands, that have fallen foul of the National Minimum Wage (NMW) legislation and serves as a powerful reminder of the complexity of the rules.

With NMW rates increasing from 1 April 2024 to a maximum of £11.44 per hour, resulting for some workers in a pay increase of over 20%, the margin for error will significantly narrow in what is a very complex area of legislation.

Common causes of NMW breaches

Over 172,000 workers were affected by the breaches covered in the latest list, with nearly £16m in NMW underpayments being identified by HMRC. In addition, all employers named will have faced financial penalties of up to 200% of their underpayment.

The most common breaches identified related to the failure to capture all working time, not accounting for all types of deductions which reduce pay for NMW purposes, and issues relating to the use of apprentices.

Other areas of complexity include the following:

• Worker categorisation: There are four categories of worker for NMW purposes, each with slightly different rules for determining the working time of the employee during each pay period. This categorisation is based on the terms of the employment contract and is a step often not considered by many employers.
• Salary sacrifice arrangements: These arrangements often caused confusion until the government clarified how they impact NMW calculations in 2020, stating that it is the post salary sacrifice pay which should be considered when establishing whether NMW rules have been complied with. Compliance issues may arise where checks are not made by payroll teams on the aggregate amount of the salary sacrifice deduction.
• Expenditure which counts towards NMW: Where a worker incurs a cost which is a condition of their employment, this will reduce their pay for NMW compliance purposes. Uniforms are an obvious example, but there are other less immediately apparent types of expenditure, such as season ticket loans for travel that is a requirement of the role, which may also affect the calculation of the amount paid for each hour worked.

Wage compression/review of reward and incentivisation

The impending increase in the NMW rates may also create challenges for employers where such pay rises cannot be replicated across all grades due to the increased cost. It therefore means middle income earners may find themselves squeezed, with less attractive pay rises leading to challenging conversations for people teams. In some instances, this could prompt a strategic review of reward and incentivisation arrangements, whereby employers offer enhanced benefits as an alternative to pay rises, or drop some expensive reward initiatives altogether. For example, some employers have had to step away from their commitment to the London living wage (a voluntary pay rate) due to the increased costs they are facing as a consequence of NMW rate rises.

Targeted enforcement by HMRC

HMRC continues to take a targeted approach to enforcement of NMW compliance, focusing on particular geographic areas as well as sectors that are considered high risk in terms of compliance. This approach and HMRC’s stated commitment to follow up all complaints of alleged NMW breaches by workers, whether made via its own whistleblowing hotline or ACAS’s equivalent, means employers must be consistently on top of their NMW compliance procedures.

For more information, please get in touch with Charlie Barnes or your usual RSM contact.