John Lewis profits hit by £36m minimum wage error
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.
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
|1 April 2017||£7.50||£7.05||£5.60||£4.05||£3.50|
*Current rates at time of writing – source GOV.UK
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.