On the eve of a reasonable increase to the National Living Wage (NLW) rates (4.9%) and National Minimum Wage (NMW) (up to 4.3%) and following widespread interest in the mistakes that employers can inadvertently make when trying to comply with the associated Regulations, I thought it would be helpful to blog on this topic.
In my experience, employers do not go out of their way to pay staff wrongly or to not pay them the national minimum wage applicable to their age; rather employers get things wrong by just not being aware of some of the pitfalls they can fall into.
By way of background, the national minimum wage was introduced in April 1999 and the national living wage was introduced in 2016 for workers aged 25 and over. The rates are advised upon by an independent body called the Low Pay Commission who advise government on the increases to be applied each year.
From 1 April 2019, the rates will be:
NLW: will increase 4.9% from £7.83 to £8.21.
• the rate for 21 to 24 year olds will increase by 4.3% from £7.38 to £7.70 per hour;
• the rate for 18 to 20 year olds will increase by 4.2% from £5.90 to £6.15 per hour;
• the rate for 16 to 17 year olds will increase by 3.6% from £4.20 to £4.35 per hour;
There is a special rate of NMW for apprentices where they are aged under 19, or when they are aged 19 and over but are in the first year of their apprenticeship and this will increase by 5.4% from £3.70 to £3.90 per hour.
The NMW/NLW must be paid for each hour, on average, that a worker is carrying out work and is calculated in a pay reference period. The pay reference period cannot be longer than one month and is usually one month for workers paid monthly; and one week if a worker is paid weekly. To ensure the correct wage, you simply divide the gross pay by the number of hours worked (under the Working Time Regulations (WTR) definition) in the reference period.
If you don’t already, it is sensible to inform staff, in writing, when they move wage bands and/or when the pay increases are applied each year.
Some of the more common errors reported include:
1. Simple administrative errors such as the wrong date of birth for a worker or failing to account for NMW / NLW rate rises every April. So, check your payroll system is applying the new rates and review any internal documents to see whether they need updating.
2. Tips - Despite the law changing 10 years ago, tips and gratuities cannot count towards the NMW/NLW.
3. Salary sacrifice - Those who are on or near the NMW who wish to join a salary sacrifice scheme should not be allowed to join the scheme (for example, for cycle to work schemes) if it would mean their pay would be reduced below the NMW after the salary sacrifice amount has been deducted.
4. Uniforms/equipment – if a worker must provide uniform or certain clothing to meet either contractual obligations or a uniform policy/dress code, the cost incurred must be deducted from their pay to establish whether the NMW is being paid. The HMRC employment income manual EIM 32475 gives further guidance.
5. Sleep-in shifts – there is much confusion surrounding this in the social care sector. It usually occurs when a care worker is required to be on a premises providing care at all times albeit that they are able to sleep when not actually required to provide care. As a result of two recent cases – one of which is being considered by the Court of Appeal with a judgement expected this summer – there has been even more confusion brought to bear although the Government introduced a scheme to allow employers affected to settle arrears with workers. If this is an area in which you work or have any concerns, please contact me.
6. Trial shifts/training – time spent by a worker either undertaking training for their job or undertaking a trial shift, would be regarded as working under the WTR and therefore should receive the appropriate pay rate for the time working.
7. Team debriefs/end of shift processes – if a worker needs to start before the beginning of their shift for either a debrief or a security check for example, should include this time as working time and should be included in the NMW/NLW calculations.
8. Accommodation – if an employer provides accommodation to a worker, then the employer can account for this in the NMW calculation – it is called the accommodation offset allowance and is currently £7 a day.
9. Recently, Iceland challenged HMRC’s ruling that their Christmas savings scheme breached the NMW rules and this has brought further confusion around payments which an employee has voluntarily entered in to and where they are made aware of the subsequent impact on their take home pay; the payments being towards a Christmas savings scheme.
These are just a few errors which have been highlighted as causing problems for employers trying to navigate their way through the NMW/NLW regulations – and there are increasing ways to have NMW/NLW investigations carried out and errors having to be made good.
How is the NMW/NLW enforced?
There are several ways in which the NMW/NLW are being enforced.
Firstly, workers who believe they have been under paid can complete a simple online complaint form on the gov.uk website which will automatically trigger an investigation. HMRC carry out 100% investigations in to these complaints or pass them on to the relevant department such as Agricultural Wages Team for queries about agricultural wages.
Secondly, HMRC are now carrying out proactive minimum wage investigations. As an example, they have recently targeted hairdressing companies to ensure compliance with NMW/NLW Regulations. HMRC can review the previous 6 years of pay records including staff who have left and if the inspection reveals an underpayment, a Notice of Underpayment can be issued, and all arrears owed to staff must be repaid. In addition, a penalty fine can be issued which can be up to 200% of arrears owed (capped at £20k per worker).
Finally, the Department for Business, Energy & Industrial Strategy (DBEIS) published a “name and shame” list of nearly 180 employers (albeit that the last list published was March 2018) which will clearly have an impact on business reputation. This week, pressure has been brought upon Waterstones to pay all staff the Real Living Wage of £9 an hour (calculated by the Living Wage Foundation charity), by an appeal from over 1300 authors who are openly supporting a campaign driven by Waterstones staff.
To conclude, employers need to be aware of the NMW/NLW regulations and the ease with which they can inadvertently fall foul of the rules. If you need further information about your pay rates/admin systems/contracts of any other pay queries please contact me.