John Lewis profits hit by £36m minimum wage error

John Lewis Oxford Street
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Tom Herbert
Business Editor
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John Lewis has restated its profits for last year after acknowledging that it had technically breached minimum wage rules.

In its annual report and accounts published yesterday the partnership announced it had made a £36m provision to cover the potential costs of complying with what the report described as “HMRC’s quite complex” national minimum wage (NMW) regulations.

The retailer said that the issue related to its use of pay averaging, which spreads worker pay evenly over the course of the year to provide its partners (John Lewis refers to its workers as partners due to its ownership structure) with a steady monthly income and to help with their financial planning.

John Lewis adopted pay averaging with the consent of its partners in 2006, but the report admitted that the partnership had broken the “strict timing requirements” outlined in the NMW regulations.

While its contractual rates of pay were never below NMW rates, those on hourly rates had sometimes seen their pay fall below the minimum wage level after working extra hours, technically breaking the rules.

The issue was discovered after a worker raised concerns about their monthly pay following the publication of the firm’s annual results in March.

Unexpected windfall

The payroll error could mean that thousands of John Lewis and Waitrose workers paid by the hour over the past six years could be in for an unexpected windfall, although the total amount due is not yet known.

Commenting on the announcement John Lewis chairman Charlie Mayfield commented that arrangements had already been made to “make good” the amounts that present and former workers affected may be due.

“HMRC are aware and we intend to work with them in order to resolve some of the key points regarding the way the NMW regulations apply to our pay arrangements and practices,” continued Mayfield.

“Clearly this is very disappointing, not least because the vast majority of payments to affected partners and former partners relate to technical underpayments rather than actual underpayments of their contractual pay”.

As a result of the £36m provision the retailer’s pre-tax profits (after partner bonus) stand at £452.2m for 2016, rather than the £488.2m previously reported in January.

The partnership’s annual report stated that it was looking to overhaul its payroll processes to ensure that they are “easy to administer in a fast changing market” and “reduce the risk of non-compliance”.

In 2013 the partnership paid £40m in back-pay following a seven-year holiday pay miscalculation.

Minimum wage penalties

John Lewis is the latest in a string of large businesses to be caught out by the NMW regulations. Firms such as Tesco, Debenhams and Sports Direct have all fallen foul of the rules due to payroll errors.

The hourly NMW rates are captured here:

For pay periods starting after

25 and over

21 to 24

18 to 20

Under 18

Apprentice

1 April 2017 £7.50 £7.05 £5.60 £4.05 £3.50

*Current rates at time of writing – source GOV.UK

Bonus waived

The report also revealed that chairman Charlie Mayfield had waived his annual bonus totalling £105,000 following a difficult financial year for the business, meaning his total pay fell 7.4% to £1.41m.

In March this year John Lewis announced that staff bonuses have been cut by 40% in order to prepare for a ‘tough’ 2017, warning that the weaker pound and consumer shift to online shopping will have a negative effect on the retailer’s bottom line.

Replies

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10th May 2017 13:57

This isn't small change (£36m) is it?

One would have thought that alongside; modern software, tip top HR advice and, all that goes with the John Lewis brand that this is embarrassing, to say the very least?

Never knowingly undersold, was the catch phrase, in my grandmother's day, when she was a china and glass buyer.

When she retired, the general manager of her store, used to telephone her, every Christmas Day.

Mike Ashley and, many other so called business moguls could learn a very salutary lesson on how to look after staff, from those seemingly much kinder days?

Generally, if you "invest" in your workforce, over the long term, you'll see a better "return".

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11th May 2017 10:09

What is the difference between a technical underpayment and an actual underpayment? If it is going to cost them £36 million to correct, is it really 'no big deal'? Can we have a bit more clarity in these articles please.

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to john hextall
11th May 2017 10:18

john hextall wrote:

What is the difference between a technical underpayment and an actual underpayment? If it is going to cost them £36 million to correct, is it really 'no big deal'? Can we have a bit more clarity in these articles please.

As I understand it they pay their staff the same each month, but some months they might work 6 days extra by working weekends, then next month take some of those days off.

the month they worked the extra when you add up the extra hours and divided their monthly pay it took them below the minimum wage for the month.

over the year it works out correct

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to john hextall
12th May 2017 10:28

@john hextall my apologies if you needed a bit more clarity in the write-up.

The point I was trying to make (as @facucvivas has already made far more eloquently) is that although the amounts paid work out over the course of the year to be above NMW levels, if an employee works overtime one month to make up any contracted hours missed in previous months the amount can look as if it dips below the require rate.

I'd call that a technicality, but perhaps others wouldn't?

All the best,

Tom

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11th May 2017 10:11

I love that paragraph:
"The issue was discovered after a worker raised concerns about their monthly pay following the publication of the firm’s annual results in March"

Is this another instance where the auditors are providing less than adequate competence

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11th May 2017 10:26

"HMRC's quite complex" national minimum wage regulations?

Hmm, the regs are not HMRC's but are those of the former trade and industry department (or whatever its name is today).

HMRC has the task of NMW enforcement.

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11th May 2017 11:26

Ok, I understand that in some months "partners" were underpaid (if they worked additional hours for no additional pay). However, surely in the months they worked less hours potentially they were overpaid. It states that the partners pay over a year was correct so why the additional provision/payment? Surely JL simply need to cease their policy of averaging ????

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to trekrider
11th May 2017 12:23

trekrider wrote:

Ok, I understand that in some months "partners" were underpaid (if they worked additional hours for no additional pay). However, surely in the months they worked less hours potentially they were overpaid. It states that the partners pay over a year was correct so why the additional provision/payment? Surely JL simply need to cease their policy of averaging ????

I assume it is because each payment is looked at in isolation.

Which, when you think about it, has to be the way it is done. If a person who has been underpaid leaves, then that underpayment will not be corrected. The only way to ensure that doesn't happen is to perform the check on a payment by payment basis.

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11th May 2017 23:07

The minimum pay requirements are simple. If you work an hour, you must be paid at or over minimum pay due for that hour (dependent on the start of the pay period being paid).

Confusion comes into play with: salary sacrifice, deductions for the benefit of the employer including statutory allowed court admin fees.

Spreading parts of pay into some future pay period is likely to not be an option.

Critical point in relation to averaging, 31 day months, and additional pay in April (when paid, not worked).

And some payments to employees don't count (such as overtime premiums) - simple.

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By Mallock
12th May 2017 09:41

Why can't NMW regulations be changed to allow averaging over a year with a strict calculation being done if someone starts or leaves in a year.

I have a lot of sympathy for JL and HMRC in the time they are having to waste on stupid red tape.

Employers have a lot to contend with these days and small employers in particular do not need the added expense and complication of trying to prepare payroll weekly when it is much cheaper and easier to calculate a salary based on the number of hours over a year and divide it by 12.

Someone with some common sense needs to change this massive waste of time.

The payments JL are now going to have to make will go to the employees to compensate them for the 31 day months when they only got paid for an averaged 30.4 days, with no compensatory redress for the months the staff got overpaid.

I will leave the morals and rights or wrongs of the NMW alone but this type of bureaucracy is just a waste of everyone's time and could easily be sorted.

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14th May 2017 18:53

I am astounded that a large supposedly 'caring' company such as John Lewis does not provide clear analysis of how their employees' pay is made up. If they are on a Salary and then sometimes add overtime at an hourly rate, then that is what should show on the payslip, as separate items. All good payroll software provides these options. Hourly paid workers should see the number of hours worked on their payslip. John Lewis deserves the fine, but this should not be taken out of employee bonuses.

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18th May 2017 11:32

In these circumstances the employees were technically and actually overpaid, then, by reference to their contracted hourly rates, in those months when they worked fewer hours. If the regs do not accommodate situations where the payments are not less than the NMW on an annual basis and thus create a technical breach on a monthly basis, their drafting is clearly unsatisfactory. This type of pay structure is not uncommon. The regs appear to need amending and it will be a pity if John Lewis and other employers may have to drop a pay averaging arrangement that their employees appear to want just to avoid falling foul of these regs.

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