National Minimum Wage: How to Avoid Common Mistakes

A number of well-known organisations have found themselves receiving some unwanted publicity for National Minimum Wage failures, leading to large and unwelcome fines and publicity they could have done without.

We offer some guidance on how to get it right.

Twice a year the Department for Business, Energy and Industrial Strategy (BEIS) publishes a naming and shaming list of businesses that have failed to meet the National Minimum Wage (NMW) regulations and have been pursued by HMRC, the organisation responsible for enforcing the rules.

The list begins with the largest underpayments, which often means companies that employ the largest number of workers sit at the top, even though the amounts individual staff have been underpaid may be quite small. As a result, Argos and Debenhams topped the two most recent lists - as you can imagine, the media had a field day with that.

BEIS also publish details of the most common reasons for failing to pay the National Minimum Wage or National Living Wage. At Accountants etc., we thought it would be quite timely to remind employers what they should do in this scenario, and reduce the risk of making the same mistakes.

Deductions for uniforms

Making deductions from wages to pay for staff uniforms featured in both announcements, so clearly it is a widespread and persistent misunderstanding that such deductions are permissible.

BEIS guidance says deductions for “expenditure connected with the job”, such as uniforms, tools and safety clothing, will reduce pay for minimum wage purposes. This means that such deductions cannot be taken if doing so would take the employee’s pay below the relevant minimum wage rate.

This also applies if, rather than deducting from pay, the worker is expected to make a payment for this type of expenditure to the employer or to a third party. In this situation, a minimum wage check by payroll software would not pick up the risk of underpayment, so employers need to find a different way to ensure compliance.

Employers who require their workers to pay for work-related equipment must ensure that their procedures identify the workers who are at risk of being paid below relevant rates. If payments are not made through payroll, a check or report run by the software might not pick up those workers. Employers must also ensure, where the relevant rate would be breached, that the deduction or payment is not taken from the worker in that pay period.

What is allowed

National Minimum Wage regulations allow employers to deduct from pay or to charge an amount up to the ‘accommodation offset’ for payments towards the provision of accommodation, or to provide accommodation without charge as part of the reward package, with a lower rate of basic pay to begin with.

There are other deductions that can be made from pay without affecting the minimum wage pay (meaning that the comparison to the relevant minimum wage rate occurs before these deductions are made). They include statutory deductions (income tax, National Insurance contributions and Student Loan Deductions), repayments of an agreed advance or loan, recovery of an accidental overpayment of wages, and contractual deductions or penalties for specific misconduct or penalties.

Voluntary deductions that are not connected to the worker’s employment and do not benefit the employer, such as pension contributions and trade union subscriptions, do not affect minimum wage pay.

Voluntary deductions that do benefit the employer will reduce minimum wage pay and cannot be taken if doing so would reduce the worker’s pay below the relevant rate. This applies to the £1 administration fee employers are allowed to take when processing attachment orders because, although it is a statutory requirement to process the order, the administration fee is voluntary and benefits the employer. This also applies to payroll deductions for meals or transport provided by the employer, regardless of whether they are voluntary.

Apart from accommodation (not exceeding the offset limit), no other benefits count towards minimum wage pay, regardless of whether they are taxable. This means that a salary sacrifice arrangement that reduces pay in exchange for the provision of a benefit cannot be agreed with a worker if the worker’s reduced pay would be below the relevant minimum wage rate.

Christmas party deductions

This is another example of failing to understand which deductions affect minimum wage pay and which do not. Contributions towards the cost of the Christmas party are not statutory, nor are they work-related; they are also for the benefit of the employer. Therefore, the deductions affect minimum wage pay and cannot be taken if doing so would reduce the workers’ pay below the relevant rate.

Overtime

Employers might correctly include the overtime hours worked but incorrectly include the pay at the enhanced overtime rate, rather than excluding the premium and including pay at only the basic rate. A similar rule applies to shift work where any premium for unsocial hours must be ignored.

Argos failed to account for extra hours in a different way when it required staff to attend briefings before shifts started and to go through security searches after their shifts, without pay. Ignoring these hours led to underpayments for which it was penalised.

Employers must ensure that extra hours worked are properly recorded, whether they are contractual or voluntary, paid or unpaid. This can include time spent travelling between work locations, attending training and being on call. Rest breaks and time spent sleeping between duties can also count in some circumstances

A further issue relates to wages paid in arrears, which is typical for overtime but which can also apply to pay based on timesheets. Both hours and pay must be included in the pay period in which the hours are worked when the pay is given in the following pay period. But if the pay is given in a later pay period than that, the hours and pay usually count in the later pay period.

This means it is not always possible for employers or workers to confirm from the figures on a single payslip that pay in that pay period meets the National Minimum Wage regulations.

Apprentice rates

Another reported error is paying the apprentice rate to workers who are not apprentices. BEIS guidance states that apprentices are “those employed on certain apprenticeship schemes” or “workers engaged under a contract of apprenticeship”. Workers who are not apprentices by this definition must be paid the relevant age-related rate rather than the apprentice rate. Apprentices who are older than 19 must be moved onto the relevant age-related rate after the first year of their apprenticeship.

Employers using the apprenticeship rate should ensure all staff on that rate are genuine apprentices and that procedures ensure older workers do not remain on that rate beyond the first year.

Including tips

This comes under the ‘what counts as pay’ category. BEIS guidance says “tips, gratuities, service charges and cover charges for customers” do not count, regardless of how they are paid to workers.

This rule was introduced in October 2009, so some employers might believe they are acting correctly when adding tips to minimum wage pay, but they are not.

Conclusion

There are other pitfalls to look out for, such as handling the annual rate increases incorrectly and failing to apply the correct age-related rates as younger workers reach key birthdays. Payroll software will often handle this and other situations automatically, but employers need to understand why and how their systems do it.

They should also ensure that they have procedures in place to collect any relevant data that the payroll system does not, such as unpaid extra hours worked, including for staff on higher salaries who are not much at risk of being underpaid. Calculation checks may not be necessary, but failure to keep proper records is a criminal offence.

Employers are advised to become familiar with the BEIS guidance, 'Calculating the minimum wage', along with Acas guidance. It is also worth reviewing future ‘naming and shaming’ lists for other potential lessons to learn.

BEIS wants businesses to learn from the mistakes of other companies, and the media interest when they get it wrong should help spread the word and highlight the risks of non-compliance.

The complexity of the rules makes it probable that even the most diligent employers will make mistakes, and no doubt there are unscrupulous employers who are willing to take the risk of deliberately breaking the rules.

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