In recent months, a number of well-known organisations have found themselves in the spotlight for National Minimum Wage regulation failures, leading to large fines and undesirable publicity. In this article, we draw on evidence identifying the most common errors to offer guidance on how to avoid them.
The Department for Business, Energy and Industrial Strategy (BEIS) publishes a ‘naming and shaming’ list about twice a year of organisations that have fallen foul of 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 organisations that employ the largest number of workers head the list, even when the amounts that individual workers were underpaid may be quite small. As a result, Argos and Debenhams topped the two most recent lists, which were quickly picked up on by the media.
Fortunately, BEIS’s two most recent announcements also contain details of the most common reasons for failing to pay the correct rate of National Minimum Wage or National Living Wage, so by reminding ourselves about what employers ought to do in these scenarios, we should reduce the risk of making the same mistakes.
Deductions for uniforms
Making deductions from pay packets to pay for uniforms featured in both announcements, so clearly it is a widespread and persistent misunderstanding that such deductions are permissible.
BEIS guidance (see below) states that 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 reduce the employee’s pay below the relevant minimum wage rate.
This also applies if, rather than deducting from pay, the worker is required to make a payment for this type of expenditure to either the employer or to a third party. In this scenario, a simple minimum wage check by the payroll software would not pick up the risk of underpayment, so an employer would need 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 the 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 deductions are allowed
The NMW regulations specifically 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 various 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, for example, statutory deductions (income tax deductions, National Insurance contributions, attachment (court) orders 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.
Note that voluntary deductions that do benefit the employer will reduce minimum wage pay and therefore cannot be taken if doing so would reduce the worker’s pay below the relevant rate. This applies to the £1 administration fee that employers are permitted 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, for example, 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.
Deductions for the Christmas party
This common error 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.
Accounting for overtime hours
There are several ways to mishandle overtime hours. Employers might correctly include the overtime hours worked but incorrectly include the pay at the enhanced overtime rate, for example, 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 is reported to have 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 adequately 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 – it is a complicated area.
A further complexity concerns pay that is 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, then usually both the hours and pay count in the later pay period.
This means that 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 NMW regulations.
Paying apprentice rate
Another reported error is paying the apprentice rate to workers who are not apprentices.
BEIS guidance states that apprentices are either “those employed on certain apprenticeship schemes” (which it then lists), 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. Note also that apprentices older than 19 years of age must be moved onto the relevant age-related rate after the first year of their apprenticeship.
Employers using the apprenticeship rate should ensure that all workers on that rate are genuine apprentices and that procedures ensure older workers do not remain on that rate beyond the first year.
Including tips from customers
This comes under the ‘what counts as pay’ category: overtime and shift premia do not count, as noted above. BEIS guidance states that “tips, gratuities, service charges and cover charges for customers” specifically 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.
There are, of course, other pitfalls to watch 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 either automatically or by reports, but employers should ensure they understand exactly why and how their systems do it.
They should also ensure that they have procedures in place for collecting 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 adequate records is also a criminal offence.
Employers are advised to become familiar with the BEIS guidance, ‘Calculating the minimum wage’, as well as Acas guidance. It is also worth reviewing future ‘naming and shaming’ lists for other potential lessons to learn.
BEIS clearly means for employers to learn from others’ mistakes, and the media interest should help spread the word and highlight the financial and reputational risks of non-compliance.
However, the complexity of the rules makes it likely that the most diligent employers will make mistakes from time to time, and no doubt there are unscrupulous employers who are willing to take the risk of deliberately flouting the rules. It will be interesting to see how the ‘top errors’ change over time.
About Terri Bethel
Terri is lead technical material author for the Chartered Institute of Payroll Professionals.