National Minimum Wage – have you got your letter yet?

Whilst the prospect of a visit from HMRC might prompt the same feeling as that experienced in the presence of He Who Must Not Be Named, that is perhaps unfortunately where the Harry Potter metaphor ends. An enquiring letter from HMRC is (unlike the eagerly anticipated Hogwarts acceptance letter) one which all businesses hope to avoid. HMRC’s enforcement of the National Minimum Wage Regulations starts with a simple letter but can then magically turn itself into a widescale investigation of your business.

 

There is no denying that enforcement of the National Minimum Wage Regulations by HMRC is on the rise. The figures speak for themselves; HMRC have an assigned budget of £25 million in 2018 for enforcement of NMW and currently have more than 2500 open investigations. As confirmed by Sir David Metcalf (Director of Labour Market Enforcement) in his recent Executive Summary, there has been an active shift by HMRC toward more proactive enforcement, rather than purely in response to employee complaints.

 

Why the sudden crack-down? The annually increasing NMW rate has resulted in more employers than ever before paying at or around the NMW rate. It is estimated that 342,000 jobs were paid below the NMW in 2017. According to the Low Pay Commission around one in five low-paid jobs for those aged 25 or above are in fact paid below NMW and the same statistic applies to apprentices. 

 

You will no doubt have seen the considerable press attention that this topic has generated in recent months which may prompt you to ask; how are so many employers getting it wrong? Unfortunately, compliance with the NMW Regulations is not simply a case of paying your workers the headline NMW rate for their age bracket, per hour. 

 

There are a number of common “industry practices” which could be causing you to breach the NMW Regulations entirely inadvertently, and which could be taking some of your employees below the NMW. Ultimately, ignorance of the detail of the NMW regulations is not a defence. 

 

Below are just some of the areas where employers which thought they were NMW compliant have learnt that in reality they were paying their employees below the NMW:

 

· Work uniform – if employees are required to supply their own uniform items for work, then the cost of purchasing these items will reduce their pay when calculating compliance with NMW. Employers should be aware that ‘uniform’ is defined very broadly with regards to NMW. If, for example, you provide a branded T-shirt, but your employee has to provide their own black trousers and shoes (and even if you are not at all fussy about exact cut or style), the cost of these will be considered a deduction for NMW purposes. What this means is that the employee must receive the NMW after that deduction.

 

· Working time – An employee’s ‘working time’ might seem a straightforward thing to calculate – surely, it is just the time spent on shift doing the job? However, additional activities can also count toward working time. For example, if an employee has to go through any checks or undertake any mandatory steps before they can start or leave work, such as security searches, team briefings, getting changed for work on site or drug and alcohol tests, then the time spent going through these processes will also be working time and should be paid at the NMW rate. Further, if employees at any time work through an unpaid break, this becomes working time for which they should be paid NMW (unless it can be demonstrated that the employee did so voluntarily, rather than because it was necessary or required, but that is a difficult hurdle for employers to surmount).

 

· Salary Sacrifice – where an employee is a member of a salary sacrifice scheme, including for the payment of pension or childcare vouchers, then they must receive the NMW rate after the salary sacrifice.  Remember that a salary sacrifice is a reduction, not a deduction, so the NMW rules apply to the lower figure.

 

· Annualised hours contracts – HMRC describe these as “salaried hours” contracts and they must contain an “ascertainable” number of hours that the employee is expected to work in the year. Specifically, these contracts must refer to the number of hours expected per month or year, rather than hours per week. HMRC say that if the contract refers to a weekly number of hours, then the annual number of hours is not “ascertainable” as there are 52.14 weeks in a year (rather than simply 52 weeks). If the contract is not truly a salaried hours contract, then any pay should be per hour worked in the relevant pay reference period and cannot be averaged out over the year. So, where someone works a high number of hours in any one pay reference period, for example to deal with seasonal demand, they would need to receive NMW pay for each hour.  No one has yet explained why employees on such contracts would not be able to ascertain what hours would be worked in 0.14 x a week if they know the number for a full week.  

 

· Record keeping – It is a criminal offence under the NMW regulations not to maintain proper records showing that the NMW has been paid in your business for at least the last three years. There is also a presumption that an employee has not been paid the NMW unless an employer can prove to the contrary and so this is an added incentive to ensuring proper records are kept.

 

If, following an investigation, HMRC conclude that there has been a breach of the Regulations, the financial penalties for a business can be severe. Arrears payments can be demanded as far back as 6 years for both current and former employees. The current level of penalty stands at 200% of the arrears payment. This penalty is subject to an overall cap of £20,000 per relevant employee but if your business in the UK is large and you have a significant number of employees affected over years this has the potential to become a major fine.

 

In addition to this is the negative reputational impact as details of offending companies are handed over to Department for Business, Energy and Industrial Strategy (BEIS) for inclusion in a “naming and shaming” list which is made available on the government website. 

 

The consequences of getting it wrong are only set to increase for employers. Sir David Metcalf’s recommendations include a significant increase in financial penalties; a shift in the naming and shaming scheme to detail more serious violations; and enforcement fees against non-compliant employers to fund the enforcement costs. 

 

An audit of working and pay practices is advisable to identify any issues so steps can be taken to address problems sooner rather than later…and before you get your letter.

 

 

Fiona Campbell
Associate
Squire Patton Boggs (UK) LLP
T  +44 113 284 7308
E: [email protected] 
www. squirepattonboggs.com