National Minimum Wage – Avoiding a breach of the Regulations

13th September 2017

Employers will be more than familiar with the importance of paying their employees (and workers) at least the National Minimum Wage (NMW) – not only to ensure compliance with the law, but also from the perspective of ensuring that employees are valued and remunerated for their hard work.  For the most part, employers are complying with the law relating to NMW, or at least they think they are.

There have been a number of recent high profile cases which demonstrate that even employers with the best intentions can fall foul of the NMW Regulations – not because they have been deliberately paying their employees less than the NMW, but instead because the way in which they have paid wages has resulted in a technical breach of the law.

John Lewis announced in May that it was revising its annual profit for last year down by £36 million, after an internal investigation uncovered that its practice of averaging employees’ monthly pay over the year had led to a breach of the NMW Regulations. The company, which is known for its employee-friendly policies, implemented the pay averaging practice with good intentions in order to give staff a “steady and reliable monthly income.”

However, an employee’s rate of pay for the purposes of the NMW Regulations must be calculated by reference to the sums received during each “pay reference period” (which will be monthly if an employee is paid monthly) and divided by the total number of hours worked over that same period. Therefore, although John Lewis’ employees received the correct pay over the year, the fact that they received the same pay each month, regardless of the hours that they had worked in that month, resulted in a breach of the Regulations.

And it’s not just John Lewis. The largest ever list of NMW offenders was published by Government in February 2017, naming 359 businesses who had underpaid their staff by a total of £994,685.

Earlier this year Tesco self-identified a breach of the Regulations following a full audit of its payroll system, whereby employees’ base salaries fell below the prescribed NMW rate due to deductions by way of salary sacrifice in respect of benefits which staff had voluntarily opted into such as childcare voucher and cycle to work schemes.

Previous high profile examples include Sports Direct, where it was uncovered that workers were being searched at the end of their shifts and were not paid for this time, in addition to suffering deductions from wages if they clocked in late, and Monsoon, where the practice of deducting the price of Monsoon clothes (which employees were required to wear at work) from wages led to a £28,000 fine and repayment to staff of over £100,000.

As can be seen, this is not a straightforward area of law and even a non-intentional breach of the Regulations can come at a high cost. On top of repaying arrears of wages and incurring a fine of up to 200% of those arrears, employers will no doubt be keen to avoid the stigma of their name being included on the offenders list.  It is therefore important that employers continually review their pay practices to ensure compliance.

Problem areas – top tips to ensure compliance with the NMW

• Be aware of who you have working in your business – those people who fall under the definition of “workers” are entitled to NMW as well as employees.
• Make sure you keep an effective record of the age of each of your employees, as different rates of NMW apply to different age categories, with the new “National Living Wage” being triggered when a person reaches the age of 25.
• Check the applicable NMW rates each year as they usually increase every April.
• Make sure that your employees’ rate of pay, when calculated by reference to the correct pay reference period (monthly if paid monthly, weekly if paid weekly – but note that the pay reference period cannot exceed 31 days) and divided by the amount of hours worked in that period, is not less than the NMW.
• The number of hours worked by an employee should not be calculated by reference to the number of hours the employee is contractually obliged to work but, rather, the amount of hours actually worked. Analyse carefully what counts as working time – for example, time spent travelling to and from work assignments counts as working time and recent case law has determined that, in certain circumstances, sleep-in shifts count as working time.
• Be aware of the elements which will be included in determining the employees’ remuneration – not all remuneration earned counts towards NMW, for example premiums paid for overtime or shift work do not count as remuneration.
• Remuneration is based on gross pay (before income tax and NI deductions) for the purposes of determining whether NMW has been paid. However, certain deductions from an employee’s salary, such as money deducted for work uniform, or even deductions for things such as childcare vouchers or cycle to work schemes will reduce the employee’s pay for the purposes of calculating remuneration.

If you would like advice as to whether your business is fully compliant, whether that be advice on undertaking a full audit or a specific payroll query, please contact Charlotte Smith.