National Minimum Wage - beware the pitfalls

HMRC has named and shamed over 200 companies for National Minimum Wage breaches, including household names like WH Smith (with the highest underpayment of over £1million), Marks & Spencer and Argos.

The number one reason for breach was deductions made from pay, closely followed by failures to pay for all working time, with the third main reason being incorrect apprenticeship rates being paid. Other reasons for breaches included:

• Failure to pay new rate when a worker gets older or the NMW rates increase in April
• Incorrect application of the accommodation offset
• Incorrect classification of work type, for example, incorrectly treating a worker as a salaried hours worker
• Worker status error, for example, where someone is incorrectly treated as self-employed or as an unpaid intern

In total, HMRC has ordered almost £5m be paid to around 63,000 workers, plus fines totalling around £7m.

Understanding and adhering to NMW legislation is crucial to ensure fair compensation for your workers and to avoid potential pitfalls that can lead claims and/or HMRC fines. 

Overview

It is essential to understand how the NMW is calculated to avoid unintentional violations. There are different minimum wage rates for various age brackets, including apprentices. As an employer, you must be aware of these rates and ensure you are paying your employees according to their age and employment status, including updating these as changes occur.

To calculate the NMW, it is important to understand the elements that can be included in the calculation. Basic pay, bonuses, commissions, and even some allowances count towards the NMW, whereas tips, service charges, and premium payments do not. By accurately accounting for these factors, you can ensure compliance with the NMW legislation.

The calculation

Compliance is determined by pay period – i.e. has the worker been paid the NMW for the hours worked over the pay period in question. To determine if the NMW has been paid, divided their total pay for the pay period by the number of hours they worked in the same period to find the hourly rate. If that amount is equal to or higher than the NMW rate which applies to them, then you have paid the NMW. 

For example, let's say the NMW rate for a worker is £10.18 per hour, they are paid weekly, and they worked 40 hours in a week. If their total pay for that week is at least £10.18 multiplied by 40 hours (which equals £407.20), then you have met the NMW requirements.

It sounds straight-forward enough, but where most employers fall foul is not in the conducting of the calculation, but applying the principles correctly, for example, determining in the first place what is included in pay and working time.

Pitfalls

There are several pitfalls that can catch employers unaware, and can lead to inadvertent breaches of the NMW requirements. A technical breach is a breach nonetheless and will attract enforcement action from HMRC.

Deductions or mandated payments

One common pitfall is when employers charge employees for uniforms or deduct uniform costs from their wages. It is crucial to note that such deductions cannot bring an employee's pay below the NMW. If the cost of uniforms or any other required workwear pushes the employee's earnings below the NMW, you must bear the cost yourself. As well as uniform, other deductions, or payments (i.e. requiring the worker to make a payment) that reduce pay for the purposes of calculating NMW include:

• Food/meals
• Parking permits and travel costs
• Work equipment including PPE
• Stock or till shortages
• Training costs
• Christmas saving schemes
• Childcare costs
• Salary sacrifice schemes
• Clothing the worker is required to purchase to adhere to a dress code 

Unpaid working time

As evidenced by the recent name and shame, a number of employers also inadvertently fail to include the time spent on certain activities, such as training or mandatory meetings, when calculating the NMW. It is vital to consider these factors and ensure that all hours worked, including non-standard hours or additional tasks related to employment, are accounted for correctly. Unpaid working time which reduces pay for the purposes of calculating NMW includes:

• Additional work before and after a shift
• Rounding clock-in time to the nearest hour
• Unpaid travel time
• Delayed or under payments due to cashflow
• Paid for regular hours but worker has worked more time
• Salaried worker works in excess of basic hours
• Time taken for attending mandatory training
• Sleep in and trial shifts
• Overtime

Apprentices

HMRC revealed that 21% of employers failed to pay the correct apprenticeship rate, with the key problems arising where the apprentice:

• is aged over 19, has completed their first year of apprenticeship and is still paid the apprentice rate
• is incorrectly classified as an apprentice
• has finished their apprenticeship but has not had their pay increased to reflect the new NMW rate they are entitled to

Compliance with National Minimum Wage can become particularly complex when you have a number of factors at play – young age, provision of uniform, accommodation, training. 

Employers must be very careful anytime they are making a deduction, or requiring a worker to pay an amount for anything, particularly where that worker is paid at or close to the NMW. It is all too easy to inadvertently breach the legislation, and no one wants to find themselves on HMRC’s next naughty list!