NMW failures: Prevention is better than cure

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Kate Upcraft wants to see HMRC spend more of its NMW compliance budget on educating employers to avoid NMW underpayments, rather than reap fines and shame more companies. 

We are now used to employers being publicly shamed for national minimum wage (NMW) failures that amount to more than £100. In the past the company names meant little, other than perhaps to the traders local to the miscreant, or to the tax agent who’d been trying to get the business owner to act legally. But this year household names appeared on the list: Argos, Debenhams, John Lewis.

Given the reputational damage of appearing on this list, and the fact that all of those large employers will have large teams of payroll specialists and sophisticated software, what has happened? I suspect that HMRC need to demonstrate they are spending their increased NMW compliance budget effectively, so they are looking for minor errors to highlight.

LPC report

In September, the Low Pay Commission ( LPC), who advise the government on the appropriate rates of national minimum wage, published a compliance report. The LPC had found that 13% of workers aged 25 and over were not being paid the new £7.50 rate that was introduced on 1 April 2017.

One of the most striking findings was that the number of underpaid workers was nearer 26% immediately after the rate increase. It’s clear that educating employers that the change is imminent is key, and payroll agents have a key role to play in this. It’s arguable that a tax agent shouldn’t continue to process the payroll where there is any non-compliance so they are not complicit in the offence.

Communication errors

The LPC acknowledges the value of the communication campaign ahead of the uprating of the rate, but I think it’s more important that the communication is accurate. The NMW rate now increases from the first pay period that begins “on or after 1 April”. All official communication (including HMRC’s recent webinar) tends to refer to the rate going up on 1 April which may or may not be correct if 1 April isn’t the start of a pay period.

There is also a gender pay issue here as the predominance of women in part-time and low paid jobs means that they are much more likely to suffer underpayment. Lack of knowledge of employment rights also assists the wilfully non-compliant employer, with the LPC finding that employees thought that they were legally able to opt out of the national minimum wage or that tips could be used to “top up” their wages.

I do worry that the LPC believe that it simple to get the national minimum wage right, by suggesting adding a tick box to the FPS for employers to certify that the rate is being paid. It is clear from the large-scale technical underpayments that it’s the complexity of the rules that make compliance difficult, it’s not just about the headline hourly rate. 

Examples

NMW underpayments appear to be caused by the following issues:

Salary or hourly rate

The employer assumes that employees were salaried, and allows their pay to be averaged each month. But the nature of their contract meant that they were ‘time based’ workers who must be paid the correct hourly rate for their age for every hour in each pay period.

Employment status

The employer fails to correctly identify the employment status of people who are being paid by the business, as all off-payroll workers, not just employees must receive NMW. This can also mean a failure to auto-enrol the correct people, not to mention an unwelcome visit to an employment tribunal now that the fees for tribunals have been abolished. Here tax agents can do little to help. We can only focus on paying the right rates to those who are subject to PAYE and our letters of engagement should make that crystal clear.

Working hours

A misunderstanding over which hours are classified as working hours. Where the employer expects employees to arrive early for training, stay late for security searches, or for a debriefing, means there are additional hours to be paid at national minimum wage rates.

Salary sacrifices

Salary sacrifices may eat into the NMW pay. This extends as far as the administration fee for operating a court order.  The employer is prohibited from deducting this fee if it would cause pay to drop below the statutory rates.

Bonuses

Some employers believe that all pay which is subject to tax and NI counts towards national minimum wage - it doesn’t.  Additional allowances, premiums, overtime and bonuses must all be ignored when calculating the NMW.

Education

HMRC ran a webinar recently on NMW issues, and whilst it was helpful, I feel there is much more education needed.

The table of employers named for NMW failures is arranged by value of arrears due, which means large employers will always be at the top, even if the amount per worker is relatively small and due to an unintentional technical failure rather than wilful non-compliance. The approach the Pension Regulator takes is very different. Whilst the non-compliant are named there is much more detail about the failure, the steps that TPR took and how the eventual penalty was calculated. This is a much more positive and educational deterrent. 

Clearly the LPC sees this as key, as they say: “For employers we recommend improved guidance around the technical errors that other employers have made, so they can learn from each other’s mistakes”. I’m sure the accountancy and employer representative bodies would be only too keen to work with the LPC and HMRC to develop this guidance, as prevention really is much better than cure.  

About Kate Upcraft

Kate is a technical writer, editor and lecturer on all aspects of employing people - primarily payroll and HR matters.

Replies

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25th Oct 2017 10:31

If an employee has childcare vouchers and it takes them below NMW then what happens? I can’t seem to find any guidance on how to treat it if you do have anyone. HMRC guidance is very confusing!

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to lynette.yeomans
25th Oct 2017 11:20

You cant deduct childcare vouchers if it takes them below NMW

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to facucvivas
25th Oct 2017 11:56

Thanks. Are we allowed to not deduct? Should we not top it up with an adjustment and then take the cost as an employer?

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to lynette.yeomans
25th Oct 2017 23:21

An employee can have as much as they like deducted from their pay even for Childcare as long as the deduction is not for the benefit of the employer. What cannot happen is a contractual pay cut via salary sacrifice arrangement to obtain tax and NI relief which contractually reduces pay below minimums allowed. Salary sacrifice arrangements are not deductions.

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By JHC
25th Oct 2017 11:47

We have an hourly paid payroll paid in arrears on 5th of each month, so hours worked March will be paid on 5th April, should this be at the new or old rate?

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to JHC
25th Oct 2017 11:57

I paid mine at the new rate just to be safe!

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to JHC
25th Oct 2017 23:25

The start of the pay reference period determines when the new rates apply. So in this instance if the start is 1st April or later, then the new rates apply as a minimum. However if the start of the pay reference is before 1st April, then the old rates apply as a minimum. So it's not when it's worked or the pay date, but relevant to the start of the pay period being paid. There is some allowance for payments in arrears. The rules are complex.

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By JHC
to psimonparsons
25th Oct 2017 23:36

What's the definition of a 'pay reference period' please? We were advised a couple.of years ago that we should pay at the old rate, but just wanted to check this is correct. Thanks

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to JHC
26th Oct 2017 10:27

Upon a NMW inspection at a clients, they are paid this week for last weeks work. When the NMW went up in April, the increased pay was not made until the next week as this was based on the work they did under the new rates. The Inspector specifically asked why the new rate was not used in week one, and once I mentioned they are paid a week in hand, he was satisfied.

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