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26 May 2019
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NATIONAL MINIMUM WAGE REQUIRES CAREFUL HANDLING

The National Minimum Wage will increase to £8.21 from April 2019, but many businesses fail to understand the complexity of compliance, says James Pike.

Living wage
© Alamy

07 January 2019  | James Pike

As the National Minimum Wage (NMW) top rate steadily increases towards the government’s stated £9 an hour target, more employers find themselves now paying the minimum rate of pay to their employees, unable to maintain any differential that was once in place. 


This is problematic in terms of potential employee engagement and retention, but it also increases the risk of more employers falling foul of the NMW. For those who have not had to grapple with this issue, it may seem straightforward to manage: you simply pay your employees at least the relevant NMW rate for each hour they work and you won’t have a problem. Sadly, that is not true.


As the regular government ‘naming and shaming’ of businesses found to be in breach of the NMW shows, many employers are being caught out. This includes large employers who, owing to the size of their workforce and the magnified effect that has on any issues uncovered, can face significant penalties as a result.


This is not happening because these businesses are flagrantly breaching the NMW. Compliance with the NMW Regulations is a complicated matter and businesses are being caught out because they were unaware of the way HMRC interprets and applies them. 


This has become a more pressing issue because HMRC has had its budget for NMW enforcement increased and is pursuing a rigorous policy of investigating businesses in certain target sectors. Initially, this was retail and hospitality, but it is expected soon to move to other areas such as logistics and warehousing.  


Typical areas where confusion arises:


Working hours:  This can include more than just the time an employee spends doing his or her job. If an employee has to go through any mandatory steps (security checks, drug or alcohol tests, or changing for work on-site) before they can start or leave work, the time spent going through these processes will also be considered as working time for NMW calculations. 


Staff uniform: FM employers should note that ‘uniform’ is defined very broadly in the work context, and so when an employee has to supply any part of their own work uniform, the cost of purchasing this must be deducted from the employee’s pay when calculating NMW. (Treat this as a deduction from their pay when you calculate NMW compliance, rather than an actual deduction.)


Salary sacrifice: Where an employee is a member of a salary sacrifice scheme (including pension, childcare vouchers and other benefits), it must not take their average hourly pay below the NMW. The relevant wage rate is the post-salary sacrifice rate.


Record keeping: It is a criminal offence for employers not to keep sufficient records proving the NMW has been paid for at least the past three years to relevant staff in their business. There is a further incentive to ensure that proper records are kept through the presumption that an employee has not been paid the NMW unless the employer can prove otherwise.


Businesses ‘named and shamed’ for not complying with NMW rules could suffer reputational damage. But there are also important financial consequences to deal with. 


Added to the immediate obligation to make payments to employees for any underpayment against the NMW, HMRC can also issue a penalty to a business of up to 200 per cent of the total underpayment to all its employees. 


While subject to an overall cap of £20,000 per affected employee, these fines can be considerable. HMRC can go back up to six years in its investigations and for large businesses that have failed to comply over time the implications are significant.


Compliance with the NMW regulations is firmly on HMRC’s agenda. A detailed internal audit of working and pay practices is advisable for businesses to be able to address potential problems and avoid unnecessary external investigation.


James Pike, labour & employment practice at Squire Patton Boggs