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National Minimum Wage: the bigger cost of non-compliance

Author: ICAEW Insights

Published: 14 Nov 2023

The national minimum wage is likely to go above £11 next April, Chancellor Jeremy Hunt told the Conservative Party conference last month. But many employers are already in breach of the rules, so how should accountants be helping them ensure compliance?

The UK’s National Minimum Wage (NMW) will always be a work in progress. It has to keep rising, particularly during periods of high inflation; and because of the way it interacts with other payroll processes there will always be the potential for employers to make mistakes in relation to it. 

However, breaching NMW rules can have multiple negative consequences. Failing to pay workers the money they are owed causes unnecessary and unacceptable financial hardship and stress. But breaches also mean financial penalties for employers, fined by the government for up to 200% of arrears owed to underpaid workers, with a maximum penalty of £20,000 per worker. 

Employers also suffer reputational damage, through being named publicly on the government’s Naming Scheme list. The most recent, published in June 2023, names 202 employers that breached NMW rules between 2017 and 2019. 

Almost all breaches were accidental: 39% resulted from incorrect deductions, a further 39% stemmed from failing to pay workers correctly for time worked, while in 21% of cases, employers underpaid apprentices. Collectively, these employers were fined almost £7m; and although most breaches were unintentional technical errors, this did not stop them being fined and named.

There may be many different aspects to this sort of reputational damage, suggests Iain Wright, Managing Director, Reputation and Influence, at ICAEW. “A failure to comply with the minimum wage rules may be taken to mean something else as well,” he cautions. “If a business is seen not to be paying the minimum wage, then people may ask: ‘What else are they doing? Are they cutting corners on health and safety?’”

Key steps to ensure compliance

Accountants have an important role to play to ensure NMW rules are understood and adhered to, says Lee Hellingsworth, Senior Payroll Services Manager at Bishop Fleming. “We make it very clear when there are changes in legislation affecting the NMW, to ensure they know when to apply them,” he says. “It’s down to the employer to adhere to the NMW, but it’s our role to support and advise. When we see something that doesn’t look right, we flag it.”

Charlie Barnes, Director and Head of Employment Legal Services at RSM, emphasises the need to see the basis of NMW compliance as being about much more than simply paying the minimum wage. “It’s a calculation, rather than a rate,” he says. The starting point for that calculation is the categorisation of each individual worker. “[Employers] need to review contracts in order to understand what category workers fit into, because the calculations are different for each category.” 

Indeed, the government’s Naming Scheme cites breaches caused by employers incorrectly treating workers as being on salaried hours, or as time-hours workers, or workers paid by output. In some cases, workers were incorrectly classified as self-employed, or as unpaid interns.

“Once you’ve done that categorisation exercise it’s about identifying what amount of time people are working,” says Barnes. The 39% of breaches identified in the Naming Scheme as the result of employers failing to pay workers for time worked included underpayments due to employers failing to take into account additional time worked before or after the start of a shift.

RSM Assistant Manager for Employment and Tax Chris Patefield cites the example of time taken to put on and take off protective clothing. Other examples might be time spent passing through security checks, employers rounding clock-in times to the nearest hour, failing to pay workers for time travelling between assignments within a working day, or failing to pay for time taken to complete mandatory training. 

Offering workers time off in lieu (TOIL) can also create problems. Barnes gives the example of a time worker, paid by the hour on a monthly basis, who works extra hours during a pay reference period and is offered TOIL. “You’re requiring that person to work more in the pay reference period, but you’re not paying them for it,” he explains.

The next question, Barnes suggests, is to consider the pay reference period for each worker – weekly, monthly or four-weekly, for example – as the NMW is based on compliance within that framework. 

Only then should the employer look at how much and how they are paying each worker. For example, if a worker is salaried but also paid commission each month, that commission cannot be classified as a performance bonus. 

The Naming Scheme also lists incorrect pay deductions that can lead to NMW breaches, including deductions for parking permits, protective equipment, uniforms or other clothing needed for work. “If employers are defining a dress code, that uniform should either be provided or accounted for when calculating minimum wage,” says Patefield. Workers should agree in writing to any regular deductions from pay – in some cases this may be a legal requirement.

Salary sacrifice schemes can cause problems, too, because the amount of salary a worker chooses to sacrifice in exchange for non-cash, fully or partially tax-exempt benefits such as childcare vouchers, are not included within remuneration for the purposes of NMW calculations. 

The government has announced it will implement measures to help employers avoid these problems, in part because some employers have been avoiding them by denying salary sacrifice benefits to workers paid at or just above NMW rates. There will now be a waiver of financial penalties for employers if provision of salary sacrifice benefits means a worker’s pay has fallen below the appropriate NMW rate, assuming certain criteria have been met, including the worker giving their consent. 

Doing right by employees and workers

One other aspect of the NMW upon which employers might reflect is just how low it is, particularly in the context of the cost-of-living crisis. Since April 2023 hourly NMW rates have been £10.42 per hour for people aged 23 and over, £10.18 for those aged 21 and 22, £7.49 for those 18, 19 or 20; and just £5.28 for under 18s and apprentices. The government has signalled an intention to lift the top rate above £11 in April, but this is still very low. 

One step some employers are taking to support existing staff and attract new recruits is to become an accredited Living Wage Employer: paying the Real Living Wage recommended by the Living Wage Foundation, based on the real costs of household goods and services. As of October 2023, this is £12 per hour, rising to £13.15 for workers in London. 

The Real Living Wage is more than £3,000 per year more than the NMW outside London and £5,000 more for those in London. More than 14,000 accredited Living Wage Employers include Aviva, British Gas, Ikea, KPMG, Nationwide and Visa. Research conducted by the Living Wage Foundation and Cardiff Business School shows that 87% of accredited Living Wage Employers say paying it has improved their reputation, 66% say it has helped differentiate them within their sector, and 62% say it has helped attract new recruits.

Employers may have many reasons for choosing to pay the Real Living Wage, but one happy side effect is that it makes accidental breaches of NMW rules less likely – although Barnes stresses that this should not be seen as a substitute for the checking and auditing processes needed to ensure NMW compliance. 

“It is a key compliance requirement,” Barnes says. “It’s about making sure you’ve got an end-to-end audit process in place: the contract, what happens day to day, payroll checks.” It is more complicated than it looks, but once compliance is assured, it is also good news for the employer and their current and future employees and workers. It is, in every sense, worth all the time and trouble it takes to get it right.

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