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The Department for Business, Energy and Industrial Strategy (“BEIS”) has recently named and shamed 191 businesses for breaching National Minimum Wage laws by underpaying employees. Between the period 2011 to 2018, the businesses on the list had collectively underpaid over 34,000 workers around £2.1million in total. Many household names were included in the ‘name and shame’ list including The Body Shop and Pret A Manger, however, the largest underpayment of nearly £1million came from John Lewis. The businesses were fined £3.2million between them and they have also paid back what they owed to their staff.
BEIS acknowledged that not all underpayments are intentional and many businesses breach National Minimum Wage regulations inadvertently through a number of common pitfalls such as failing to account for deductions or payments which reduce NMW pay, or failure to properly classify working time. Unhelpfully, the NMW legislation is complex, leading even the most well-intentioned employers to fall foul of it on occasion.
Failing to comply with NMW legislation will open up businesses to the possibility of Employment Tribunal claims from workers and/or action from HMRC. HMRC may choose to take action by serving notices of underpayment, imposing civil penalties, publicly naming and shaming the business, recovering the underpayments through tribunals or civil courts, and even criminally prosecuting the business.
Businesses can also face fines of up to 200% of the underpayment up to a maximum of £20,000 per underpaid worker. It is important to note that even where a business makes an underpayment by mistake, they will still be liable to face the penalties that HMRC may enforce.
As mentioned above, often underpayments are not made deliberately but come as a result of employers failing to factor in certain deduction and payments or simply calculating NMW compliance incorrectly.
Deductions for expenses connected with the job
Certain deductions from wages, or payments made by the worker, should be taken into account when calculating NMW compliance, whereas others can be ignored. Deductions which must be taken into account will reduce the amount of the worker’s total earnings for NMW purposes, meaning that employers need to ensure that the worker still receives the National Minimum Wage after these deductions have been factored in. For example, deductions made by the employer in the pay reference period as regards the worker’s expenditure in connection with their employment (for example, for the purchase of tools or equipment or the cleaning or purchase of uniforms) must be factored in and the worker must still be paid at least the National Minimum Wage after those deductions have been accounted for. Sometimes, it is not clear whether an item will be classed as “uniform” as this does not only cover branded workwear or clothing bought directly from the employer. For example, if a business requires workers to wear a pair of black trousers and a white t-shirt, even if the workers can purchase these from any shop, the cost of purchasing these items will reduce their National Minimum Wage pay, since it is a specific requirement imposed on the worker by the employer.
A potential pitfall which businesses can fall into when calculating National Minimum Wage is to pay the apprentice rate where it is not permissible to do so. The current apprentice rate is £4.30 and is only available to apprentices who are below the age of 19, or over 19 but only for the first year of their apprenticeship. Businesses which employ apprentices should ensure that they have a qualifying apprenticeship agreement in place in order to be able to validly pay the individual at the apprentice rate.
The current minimum wage rate for under 18s is £4.62. It rises to £6.56 for 18-20 year olds; £8.36 for 20-22 year olds; and £8.91 for people 23 and over. Sometimes businesses fail to take into account the fact that an employee has moved from one NMW age bracket to another, inadvertently resulting in a breach of the NMW Regulations, even if only for a few weeks.
Businesses sometimes fail to recognise time which is classified as working time for NMW purposes, leading to a miscalculation of National Minimum Wage. The rules in respect of working time are complex and can change depending on whether someone is a salaried hours worker, time worker, output worker or where they do unmeasured work. For example, if an employee attends any training which has been “approved by the employer”, this will generally count as working time for NMW purposes.
Further, travelling for the purposes of salaried hours work, time work and output work when the worker would otherwise be working, is treated as working time for NMW purposes, unless the travelling is between:
Employers should note that the classification of working time under the NMW Regulations is separate (and sometimes different) from the classification of working time under the Working Time Regulations 1998 (“WTR”), which can lead to odd situations where an individual is deemed to be working for the purposes of the WTR but they are not entitled to be paid for that time.
Whilst many umbrella companies will have sophisticated payroll software, this does not always guarantee compliance with NMW. In particular, whenever deductions are made from an employee’s pay, this should raise a red flag to the employer to check whether the particular type of deduction will reduce the employee’s wage for NMW purposes. Where businesses fall foul of the regulations, the impact of HMRC’s various penalising powers can be extremely harmful, both financially and reputationally, even where the underpayment is a result of a mistake. It is therefore crucial that businesses remain alive to this issue, that they keep accurate records and seek advice about any uncertainties.
This bulletin is for general guidance purposes only and should not be used for any other purpose. Brabners is a Limited Liability Partnership.