Top Ten National Minimum Wage mistakes

The introduction of the National Minimum Wage (the NMW) and National Living Wage has been transformative for the UK labour market and increasing pay for the lower paid workers. Although compliance may appear simple, it’s much more complex than it seems. There are several factors that can have a significant impact on whether employers are paying NMW, and where accidental failures are surprisingly common.

HMRC enforces NMW, focusing on high-risk sectors to examine working practices and company records, as well as interviewing workers to verify the information given. Additionally, social media and advertising campaigns have significantly increased public knowledge of workers’ rights. In order to reduce the potential of financial and reputational damage, employers must be aware of their NMW position and ensure that they are compliant.

Where could things possibly go wrong, and what can employers do to strengthen their NMW compliance practices?

The remainder of this blog looks at ten common mistakes that employers make that lead to underpayment penalties and the public naming and shaming of numerous UK companies, including household names.

1. Insufficient time records

While the majority of employers pay the correct hourly rate, many are at risk of being challenged by HMRC because they cannot provide evidence of the actual hours worked for which workers should be paid. Within many sectors, rotas often record the number of shifts allocated but not the actual hours worked. In addition, unpaid breaks can lead to a challenge if they are not taken or recorded properly.

2. Unpaid hours worked

Workers can often be asked to carry out additional duties not strictly included within their day to day roles where NMW applies. Examples could include:

• Arriving before the start of the shift to change into a uniform/protective clothing or start machinery/computers
• Security checks
• Cleaning/tidying up after a shift
• Cashing up
• Working additional hours for which time off in lieu is not included immediately provided

3. Deductions from pay

While statutory deductions and a small number of deductions for payments to third parties will not impact NMW, any amount taken from pay that is deemed to be for the employer’s ‘own use or benefit’ or ‘in connection with employment’ can reduce pay for NMW purposes. Examples can include deductions for uniform, travel and tools/equipment etc.

4. Workers purchases or benefits

Care must be taken whenever workers can purchase a product or service or participate in a benefit scheme when it is deducted from pay (even when the employees enter into the arrangement voluntarily), such as: savings schemes, travel cards, car parking, meals etc.

5. Deposits and other ‘first day’ deductions

Any compulsory deposit items such as uniform and locker keys can reduce pay for NMW purposes, as would any deductions or payments for equipment or training costs etc.

6. Living accommodation

The provision of living accommodation is the only benefit in kind that counts towards NMW. Its value is currently capped at £60.90 per week (including all associated costs). Any deduction or payments above this level will reduce pay for NMW purposes.

7. Trial periods

Most employers will want to understand the level of skills possessed by a candidate, and some may reasonably require a demonstration. Considerations must be given on the timing on any trial periods, and where this turns into work, the NMW must be paid.

8. Uniform/Dress code

Any requirement to purchase a particular type of clothing to meet an employer’s dress code policy will reduce pay for NMW purposes. This can apply both to new starters, and also existing workers who are obligated to renew clothing to continue to meet an employer’s dress code. Examples include a requirement to wear a specific style or colour of clothing/shoes. HMRC can challenge even when the worker is not required to purchase the items directly from the employer.

9. Salaried Work

Specific rules apply to the calculation of pay for NMW purposes in respect of salaried workers. This is to ensure that all working hours are captured when pay levels are calculated. It is vital that employers track and monitor workers hours on an annual basis to ensure NMW compliance.

10. Salary Sacrifice Arrangements

Many employers provide benefits such as car schemes, cycle to work arrangements and pension contributions to be made via salary sacrifice. These arrangements are designed to benefit workers, and employers will naturally want to treat all their workers equally. However, any reduction in contractual pay will as a result of salary sacrifice decrease pay for NMW purposes. At no point should workers’ pay be brought below NMW due to salary sacrifice.

This list is not exhaustive but provides an insight of the type of challenges typically raised by HMRC. What is clear is that selecting the correct hourly rate is only the first step in ensuring compliance with the NMW. Moreover, whilst the level of underpayments identified continues to rise year on year, HMRC are unlikely to reduce their focus on this key area of the government’s social and economic policy.