The financial penalties for an inadvertent failure to pay staff at least the National Minimum Wage (NMW) are significant, and penalise employers in order to ensure compliance with the law. The National Minimum Wage Regulations are complex, and small businesses, in particular, can easily be caught out.
Non-compliance with the letter of the law in this area results in strict liability enforcement by HMRC. In addition to the need to reimburse the cost of any underpayment for existing staff and ex-employees who have been affected, going back up to six years, the employer faces a financial penalty of up to 200 per cent of the total underpayment – in addition to being ‘named and shamed’.
Common areas in relation to which employers may be in breach of NMW legislation include:
1. Failure to account for deductions or payments for uniforms or equipment needed for work. Employers need to account for the cost of uniform requirements when determining whether they are paying at least NMW pay (as any deductions from salary or payments due from workers for uniform is expenditure that reduces NMW pay). If staff are not required to purchase specific clothes for work but have the option to do so, or are simply required to wear ‘smart/business’ clothes, this does not reduce their pay for NMW purposes.
Even large employers have been caught out. For example, fashion retailer Monsoon was named and shamed for requiring its employees to wear Monsoon-branded clothes at their own cost. This brought their wages below NMW rates, even though the clothes were purchased at a discounted rate. Even where staff are required to wear clothes of a particular colour, such as black trousers/skirt and a white shirt, this will be treated by HMRC as a ‘uniform’ for NMW purposes and may bring wages below NMW rates. This is regardless of whether or not the charge for the uniform is taken directly by the employer from the employee’s wage, or purchased by the employee themselves.
2. Payments for benefits deducted from wages. Apart from accommodation up to the limit of the accommodation offset, which is currently set at £7 per day, no other benefits count towards the NMW. This means that a salary sacrifice arrangement or other deduction that reduces pay in exchange for the provision of a benefit, such as meals or utility bills, where the employer provides accommodation, will breach the NMW legislation if the worker’s reduced pay would fall below the relevant NMW rate.
For example, in the catering sector, some companies have deducted the cost of discounted meals provided by them to employees from employees’ wages. Where this deduction has brought their wages below the NMW, the provision of meals has been treated by HMRC as a ‘benefit in kind’ which does not count towards the NMW – even when employees are happy with this arrangement.
3. Failure to increase the hourly rate to reflect annual increase or change in age band. Employers should review pay rates in March each year to ensure increases to the rate of NMW in April do not result in their workers being underpaid.
The Government announced in October’s budget that NMW rates will increase in April 2019. This includes the National Living Wage, which applies to workers aged 25 and over and will increase from £7.83 to £8.21 per hour from April 2019. Employers should also keep an eye on the ages of their workers to ensure that their pay continues to comply with the NMW when they move into a different age band or complete the first year of their apprenticeship.
However, where the worker’s written contract permits deductions or requires the worker to make a payment in specific circumstances linked to the worker’s conduct (such as where the employer has suffered financial loss due to the employee’s proven negligence), such deductions/payments are not treated as taking pay below the NMW level.
Common examples of permitted deductions are where the worker’s contract permits a deduction for failure to return company property such as uniforms when their employment ends, or for training costs where the employee resigns before a specified period of employment.