Beware the pitfalls of the UK’s National Minimum Wage Beware the pitfalls of the UK’s National Minimum Wage

Beware the pitfalls of the UK’s National Minimum Wage
09 Mar 2018

As we count down to the start of the UK’s new financial year in April and the introduction of the 2018 rates for the National Minimum Wage (NMW), it is worth reminding ourselves just how important it is for payroll, HR and finance functions to cooperate together to get things right.

The Department for Business, Energy and Industrial Strategy (BEIS) has just published its second public list of organisations - the most prominent of which are football clubs, retailers and leisure companies - that had failed to meet their NMW obligations and so had been pursued by Her Majesty’s Revenue & Customs (HMRC). HMRC is ultimately responsible for enforcing NMW rules and recently introduced a new compliance scheme for social care providers.

But the document also included common reasons why organisations had not paid their staff the correct rate. These include the fact that:

  • The number of individuals claiming ’worker’ status has increased;
  • It is not just about how much employees earn over the course of a year but also on a weekly or monthly basis, depending on their pay period;
  • Some employers failed to understand what the NMW can include;
  • If HMRC undertakes a review, it wants to meet a sample of an employer’s workers.

Who constitutes a worker under NMW rules?

The NMW Act 1998 applies to most workers who work, or usually work, in the UK and who are over compulsory school age of 16. Under section 54 of the Act, workers are individuals who work under a:

  • Contract of employment;
  • Contract, which may be express, implied, oral or in writing, to personally perform work or services for someone else, as long as the other person is not a customer or client of a profession or business providing work undertaken by that individual.

There are special rules in the NMW Act 1998 and NMW Regulations 2015 relating to certain categories of worker such as agency or agricultural.

How to determine whether the NMW has been paid

Whether a worker has received the NMW will depend on their average hourly pay rate. This is calculated on the basis of the total remuneration earned over the relevant pay reference period, divided by the total number of hours worked over that same period (Regulation 7, NMW Regulations 2015).

Unfortunately, this calculation is not always straightforward as not all remuneration earned in the relevant pay reference period counts towards the NMW. Furthermore, some payments reduce the level of wage that is taken into account when calculating the NMW. Similarly, certain deductions reduce how much of a worker's total pay can be used to calculate it.

What pay and benefits do not count towards the NMW?

The following pay elements do not count towards the NMW and should therefore be ignored when calculating total remuneration:

  • Benefits in kind, whether or not they have a monetary value (regulation 10(f), NMW Regulations 2015), with the exception of the accommodation allowance under regulation 16;
  • Employer loans (regulation 10(a));
  • Wage advances (regulation 10(a));
  • Pension payments (regulation 10(b));
  • Lump sum payments on retirement (regulation 10(b));
  • Redundancy payments (regulation 10(d));
  • Tribunal or settlement awards (regulation 10(c));
  • Any premium paid for overtime or shift work. The amount by which the overtime or shift payment exceeds the lowest rate normally payable is not taken into account (regulation 10(j), NMW Regulations 2015). This means that if a worker normally receives £3 (US$4.06) an hour but is paid £5 (US$6.77) an hour for any overtime worked, it may be that only the £3 an hour is taken into account;
  • Any allowances or payments not attributable to an employee's performance such as London weighting or an on-call allowance (regulation 10(k)). But if such payments are consolidated into standard pay, they will count towards the NMW;
  • Expenses for travel to a temporary workplace and related subsistence allowance that are eligible for tax relief under section 338 of the Income Tax (Earnings and Pensions) Act 2003 (regulation 10(n));
  • Since 1 October 2009, tips and gratuities paid by employers through their payroll (regulation 10(m));
  • Some payments in respect of absences (regulation 10(h) and 10(i)).

Record-keeping

Employers must keep certain records in relation to the hours worked by, and the payments made to, workers (regulation 59(1) National Minimum Wage Regulations SI 2015/621). Because it is presumed under the legislation that a worker has not been paid the NMW unless their employer can prove to the contrary (section 28, NMWA 1998), it is very important that employers keep adequate records.

What are the consequences of failing to meet NMW obligations?

It should be noted that failing to pay the NMW has serious consequences for employers in terms of:

  • Penalties of up to £20,000 (US$27,067) per underpaid worker;
  • An order for underpayment of the NMW that must be paid to affected workers;
  • Public naming and shaming.

What are the most common non-payment errors?

HMRC has indicated that the most common errors relate to:

  • Failing to account for overtime;
  • Not paying apprentices correctly;
  • Making deductions for uniform costs from pay;
  • Not providing sufficient rest breaks;
  • Making excessive deductions for accommodation;
  • Not paying the right rate, perhaps as a result of missing an employee's birthday;
  • Making deductions such as coffee or Christmas club payments from wages, which therefore reduce an employee's pay below the NMW/NLW rate;
  • Including top-ups to pay that do not qualify for inclusion in the NMW/NLW;
  • Failure to classify workers correctly and treating them as interns, volunteers or self- employed individuals instead;
  • Not including the full amount of time an individual actually works, for example, time spent on:
  • Shutting up shop;
  • Waiting to clear security;
  • Extra training courses;
  • The induction process.

What should employers do?

While apparently simple on the surface, NMW regulations can prove to be a potential minefield. Employers should start by considering their employee and worker lifecycle and identify where errors or risks might arise.

They should also consider introducing a rolling programme of:

  • Identifying risk areas;
  • Sample-auditing records;
  • Reviewing and maintaining accurate information;
  • Seeking advice from specialists if there is any uncertainty.

Where can employers find further guidance?

The government guidance for employers on calculating the NMW can be found at BEIS - Calculating the minimum wage.

There is also a regularly updated National Minimum Wage calculator, which employees can use to check whether they are being paid the correct amount.

The conciliation service Acas has likewise published its own NMW guidance on its website (see Acas: National Minimum Wage and National Living Wage).

Susan Ball

Susan Ball is partner at Crowe Clark Whitehill LLP and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards.  Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.

As we count down to the start of the UK’s new financial year in April and the introduction of the 2018 rates for the National Minimum Wage (NMW), it is worth reminding ourselves just how important it is for payroll, HR and finance functions to cooperate together to get things right.

The Department for Business, Energy and Industrial Strategy (BEIS) has just published its second public list of organisations - the most prominent of which are football clubs, retailers and leisure companies - that had failed to meet their NMW obligations and so had been pursued by Her Majesty’s Revenue & Customs (HMRC). HMRC is ultimately responsible for enforcing NMW rules and recently introduced a new compliance scheme for social care providers.

But the document also included common reasons why organisations had not paid their staff the correct rate. These include the fact that:

  • The number of individuals claiming ’worker’ status has increased;
  • It is not just about how much employees earn over the course of a year but also on a weekly or monthly basis, depending on their pay period;
  • Some employers failed to understand what the NMW can include;
  • If HMRC undertakes a review, it wants to meet a sample of an employer’s workers.

Who constitutes a worker under NMW rules?

The NMW Act 1998 applies to most workers who work, or usually work, in the UK and who are over compulsory school age of 16. Under section 54 of the Act, workers are individuals who work under a:

  • Contract of employment;
  • Contract, which may be express, implied, oral or in writing, to personally perform work or services for someone else, as long as the other person is not a customer or client of a profession or business providing work undertaken by that individual.

There are special rules in the NMW Act 1998 and NMW Regulations 2015 relating to certain categories of worker such as agency or agricultural.

How to determine whether the NMW has been paid

Whether a worker has received the NMW will depend on their average hourly pay rate. This is calculated on the basis of the total remuneration earned over the relevant pay reference period, divided by the total number of hours worked over that same period (Regulation 7, NMW Regulations 2015).

Unfortunately, this calculation is not always straightforward as not all remuneration earned in the relevant pay reference period counts towards the NMW. Furthermore, some payments reduce the level of wage that is taken into account when calculating the NMW. Similarly, certain deductions reduce how much of a worker's total pay can be used to calculate it.

What pay and benefits do not count towards the NMW?

The following pay elements do not count towards the NMW and should therefore be ignored when calculating total remuneration:

  • Benefits in kind, whether or not they have a monetary value (regulation 10(f), NMW Regulations 2015), with the exception of the accommodation allowance under regulation 16;
  • Employer loans (regulation 10(a));
  • Wage advances (regulation 10(a));
  • Pension payments (regulation 10(b));
  • Lump sum payments on retirement (regulation 10(b));
  • Redundancy payments (regulation 10(d));
  • Tribunal or settlement awards (regulation 10(c));
  • Any premium paid for overtime or shift work. The amount by which the overtime or shift payment exceeds the lowest rate normally payable is not taken into account (regulation 10(j), NMW Regulations 2015). This means that if a worker normally receives £3 (US$4.06) an hour but is paid £5 (US$6.77) an hour for any overtime worked, it may be that only the £3 an hour is taken into account;
  • Any allowances or payments not attributable to an employee's performance such as London weighting or an on-call allowance (regulation 10(k)). But if such payments are consolidated into standard pay, they will count towards the NMW;
  • Expenses for travel to a temporary workplace and related subsistence allowance that are eligible for tax relief under section 338 of the Income Tax (Earnings and Pensions) Act 2003 (regulation 10(n));
  • Since 1 October 2009, tips and gratuities paid by employers through their payroll (regulation 10(m));
  • Some payments in respect of absences (regulation 10(h) and 10(i)).

Record-keeping

Employers must keep certain records in relation to the hours worked by, and the payments made to, workers (regulation 59(1) National Minimum Wage Regulations SI 2015/621). Because it is presumed under the legislation that a worker has not been paid the NMW unless their employer can prove to the contrary (section 28, NMWA 1998), it is very important that employers keep adequate records.

What are the consequences of failing to meet NMW obligations?

It should be noted that failing to pay the NMW has serious consequences for employers in terms of:

  • Penalties of up to £20,000 (US$27,067) per underpaid worker;
  • An order for underpayment of the NMW that must be paid to affected workers;
  • Public naming and shaming.

What are the most common non-payment errors?

HMRC has indicated that the most common errors relate to:

  • Failing to account for overtime;
  • Not paying apprentices correctly;
  • Making deductions for uniform costs from pay;
  • Not providing sufficient rest breaks;
  • Making excessive deductions for accommodation;
  • Not paying the right rate, perhaps as a result of missing an employee's birthday;
  • Making deductions such as coffee or Christmas club payments from wages, which therefore reduce an employee's pay below the NMW/NLW rate;
  • Including top-ups to pay that do not qualify for inclusion in the NMW/NLW;
  • Failure to classify workers correctly and treating them as interns, volunteers or self- employed individuals instead;
  • Not including the full amount of time an individual actually works, for example, time spent on:
  • Shutting up shop;
  • Waiting to clear security;
  • Extra training courses;
  • The induction process.

What should employers do?

While apparently simple on the surface, NMW regulations can prove to be a potential minefield. Employers should start by considering their employee and worker lifecycle and identify where errors or risks might arise.

They should also consider introducing a rolling programme of:

  • Identifying risk areas;
  • Sample-auditing records;
  • Reviewing and maintaining accurate information;
  • Seeking advice from specialists if there is any uncertainty.

Where can employers find further guidance?

The government guidance for employers on calculating the NMW can be found at BEIS - Calculating the minimum wage.

There is also a regularly updated National Minimum Wage calculator, which employees can use to check whether they are being paid the correct amount.

The conciliation service Acas has likewise published its own NMW guidance on its website (see Acas: National Minimum Wage and National Living Wage).

Susan Ball

Susan Ball is partner at Crowe Clark Whitehill LLP and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards.  Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.

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