The recent press reports that big brands like Argos, WH Smith and M&S are among companies who have been issued with penalties for failing to pay National Minimum/Living Wage (NM/LW) to staff will no doubt shock and appal many.  Sustained high inflation (which shows no sign of abating) and increases in interest rates means that pressure on wages is greater than ever. 

The very idea that such large and, ostensibly, wealthy companies have potentially bolstered their profits by underpaying their workforces, is anathema in a society which prides itself on having some of the most comprehensive employment protection rights in the world. 

After all, making sure workers are paid at least NMW/LW is the first rule of employment in the UK.  At face value at least, it is a pretty elementary concept – as long as the staff are paid at least £X per hour, job done! 

Except…is it? 

The problem is, ensuring workers’ wages don’t fall below NM/LW – particularly in industries such as retail where pay is low and hours may fluctuate depending on the time of year – is far harder than one might think.  When you then couple this with significant yearly increases in NM/LW rates (as we have seen recently), and leaving aside those employers who are intentionally unscrupulous, it is easy to see how mistakes can happen. 

In this article, Sheilah Cummins examines the problems and pitfalls which can catch out businesses and provides some useful tips to prevent employers inadvertently falling foul of the law.

The law

Pretty much all workers, save for the self-employed, are entitled to receive a minimum hourly rate of pay for work done. The applicable National Minimum/Living wage rate varies according to the age of the worker but, at present, for workers who are aged 23 and over the National Living Wage rate is set at  £10.42 an hour. 

NM/LW is then calculated by dividing the total remuneration received by the worker in the relevant pay reference period (being the intervals at which the worker is paid) by the total number of hours worked over that period. 

The number of hours that a worker has worked during the pay reference period is calculated differently depending on whether the work they do is classified as “salaried hours work”, “time work”, “output work” or “unmeasured work”. 

There are also rules around what counts as “remuneration” under the National Minimum Wage Regulations.  For instance, all basic salary, bonuses and incentive payments and the accommodation offset is included in the calculation.  However, things like premium payments for overtime and shift work, benefits in kind, tips and pension payments do not. 

Likewise, any deductions from a workers’ wages on account of the worker’s expenditure “in connection with their employment” must not take their pay below NM/LW rates. 

Furthermore, there are specific provisions around what counts as “working time”.  The definition under National Minimum Wage legislation is, rather unhelpfully, different from the definition of “working time” under the Working Time Regulations.  All time spent travelling (save for commuting from home to the office, unless the worker’s normal place of work is their home), time spent training and time spent on call (and potentially sleeping-in whilst on call) should be counted as “working time” when calculating NM/LW. 

Issues and difficulties

The rules and regulations around the calculation of the NM/LW are complicated and can be difficult to navigate.  If an employer incorrectly identifies the type of work the worker is doing (see the four types referred to above) incorrectly, they may fall at the first hurdle by applying the wrong calculation to determine hourly pay.  

Other pitfalls include: 

• Using the wrong pay reference periods for calculating pay

Performance-related remuneration, such as commission, that is earned in one pay reference period but paid to workers in another pay reference period runs the risk of being included in the calculation for NM/LW twice. 

The rule is that this type of remuneration should be included for NM/LW purposes in the pay reference period in which it is earned, rather than in the pay reference period when the worker receives it. 

• Salary sacrifice schemes

Whilst the tax benefits of salary sacrifice schemes are often attractive for employees and employers alike, they should be used with caution where workers are low earners. 

NM/LW is calculated using the worker’s actual (post-sacrificed) gross salary rather than notional (pre-sacrificed) gross salary.  This means that salary sacrifice arrangements should not be permitted where the post-sacrificed, gross pay received by the worker would take them below the National Minimum Wage.  This might be difficult to identify and/or administer, particularly if an employee’s hours fluctuate from month to month and week to week. 

•    Failing to pay the appropriate apprenticeship rate

The apprenticeship rate only applies to those who are under 19 years of age or to those who are 19 years or over and in the first year of their apprenticeship. With many apprenticeships lasting over a year, and with more and more adults undertaking apprenticeships as an alternative to University, employers will need to ensure that they do not assume the same rate will apply for the lifetime of the apprenticeship. 

• Failing to implement NMW rate rises

Annual changes to NM/LW rates are now commonplace and usually take effect each April to correspond with the new financial year. Most employers, therefore, are alive to the issue and have systems in place to ensure the rate rises are appropriately implemented. 

What may get missed, however, is when an employee reaches their birthday and attains an age which moves them into a different NM/LW bracket. For employers who, in particular, employ a younger workforce (e.g. hospitality, retail sectors), this risk could be significant. 

• Failing to reimburse workers for, or making deductions on account of, work-related expenditure

As was the case with WH Smith, if an employer requires a worker to wear ether branded work clothes or another type of uniform (e.g. black trousers and white shirt)  any sums paid by the worker for those items would reduce overall NM/LW.

Tips for Employers

In addition to reimbursing workers for arrears of pay, HMRC can also impose penalties representing up to 200% of the underpayment, or a maximum of £20,000 per underpaid worker.  For business with large numbers of underpaid employees, these penalties can be hugely financially damaging. 

Tips for avoiding falling foul of NM/LW legislation include: 

• carrying out annual pay reviews;

• regularly auditing the workforce – their age, working hours, type of work being done;

• keeping appropriate records of working hours, pay and overtime;

• being clear as to what does, and does not, constitute pensionable pay;

• being aware of the employment status of staff – anyone who falls, or could fall, within the legal definition of “worker” should be checked to ensure they are being paid the appropriate rate; and

• if in doubt, seek legal advice. 

Our employment lawyers are here to help. Please contact us on employmentexpert@prettys.co.uk to speak to someone in the team.