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The UK National Minimum Wage legislation (the National Minimum Wage Act 1998 and the National Minimum Wage Regulations 2015) is designed to protect employees from unscrupulous employers, taking advantage of its workforce principally in low-skill, menial jobs.

However, in our experience of advising companies investigated by HMRC for potential issues arising from the legislation, more often than not, it appears that companies are not intentionally paying less than they should, but are “caught out” by technical breaches caused by the complexity of the rules or the way HMRC interpret them.

So, what do employers need to know to ensure compliance?

Key obligations

In summary, the key obligations are:

  1. Pay at least the National Minimum Wage (NMW) or National Living Wage (NLW);
  2. To keep adequate records for 6 years, to show you are paying the relevant minimum wage;
  3. Co-operate with any investigations by HMRC;
  4. Resolve any backdated non-payment of wages, even if the employee no longer works for the employer;
  5. Not to subject a worker to a detriment in relation to any NMW enforcement.

What trips employers up?

In our experience, there are two main areas that require careful consideration: counting something as part of the wages that shouldn’t be included and deductions from wages.

At first glance, the calculation to work out whether someone is paid enough appears simple: Remuneration in a pay reference period, divided by the hours worked.

In order to calculate whether you are paying at least the minimum, you need to know what counts as part of the remuneration. 

Basic salary, bonus, commission, and piecework payments (where relevant) all count as part of the “wages”, but it is not always clear whether other types of incentive payments should be included. Incentive payments based on performance will count as remuneration, but overtime premiums (any extra rate paid when a worker is engaged in overtime work) are not, for example.

Regulation 10 of the National Minimum Wage Regulations 2015 sets out a list of payments and benefits in kind that do not form part of a worker’s remuneration for the purposes of this calculation.

Generally speaking, benefits in kind do not form part of the remuneration package, but there is an exception for when accommodation is provided, up to a specific “offset allowance”.

Working out the remuneration package can be complicated, then. 

Additionally, the true basic wage can be affected by certain deductions from the worker’s pay or by payments made by the worker to the employer, and it is this area where many big-name employers have been investigated and issued a Notice of Underpayment by HMRC.

Minimum Wage Body Copy

Deductions

Regulations 11 to 15 deal with which deductions do and don’t affect the remuneration for the purposes of NMW assessment. However, there is a great deal of nuance to be found in how the legislation has been applied by HMRC and how the Tribunals and Courts have interpreted specific scenarios.

Essentially, any deduction which is either for expenditure in connection with work or which is for the employer’s use or benefit (even if only partly benefitting the employer) will reduce the remuneration part of the equation.

What if you ask your employee to wear a uniform? If you provide it, no problem, the worker hasn’t had any expense. But if you deduct the value of the uniform from their salary, then clearly it will affect their remuneration.

But what if you simply ask your employee or worker to wear smart black trousers, or a certain type of footwear like work boots? If the employer has a mandatory policy on a particular item of clothing or uniform that they do not provide then this will still be seen as a reduction of the worker’s remuneration.

HMRC will typically work out an average of the cost of a pair of black trousers, for example, and take this sum from the remuneration in the relevant pay reference period. For a worker in a minimum wage role, the cost of buying a pair of black trousers for work could push their remuneration below the NMW and HMRC will enforce this. Famously, both Wagamama and TGI Friday’s fell foul of this rule, and Karen Millen similarly required their staff to wear the store’s own branded clothing.

Accommodation, transport costs and even Christmas savings schemes are all also areas where deductions or payments have been treated as reducing the workers’ remuneration, so this is an area that should be examined very carefully.

Hours

Once you know the remuneration, you still need to be sure of the hours someone works, particularly in roles with irregular hours.

One particular area that can cause a great deal of confusion, and has been through the courts a number of times is whether “on call” hours or whether “sleep-in” night shifts should be included. On call hours, when someone is supposed to be actively available to answer a call and pick up work, is generally included. Sleeping shifts are not included for any hours where the worker is not “awake for the purposes of working”. 

This has been confirmed by the Supreme Court in Royal Mencap Society v Tomlinson-Blake, but even so there are nuances to be considered.

Enforcement and penalties

HMRC is the body that regulates and enforces NMW. They have a dedicated team of enforcement officers, and pro-actively investigate potential offenders.

If an employee thinks they may have been underpaid, they can bring their own Employment Tribunal claim and they can also notify HMRC. HMRC will generally contact an employer, hold an initial meeting with them to fact-find more about how workers are paid, and then expect the employer to conduct its own self-review on any issues identified and provide relevant information and documents.

HMRC follows its own internal guidance on many of the issues raised above, in order to determine whether an underpayment has been made and if so, can then issue a Notice of Underpayment in respect of any arrears going back 6 years.

If an employer receives a notice it will have to:

  1. Pay the workers identified arrears of pay;
  2. Pay a penalty to HMRC, currently at 200% of the total underpayment identified;
  3. Be identified on HMRC’s “naming and shaming” list, which is then publicly available on gov.uk

A Notice of Underpayment can be appealed, either in whole or in part, within 28 days of its issue, to the Employment Tribunal.

For many employers, the reputational risk of being publicly named and shamed is a major concern, over and above any fine.

Legal advice

NMW legislation can be complex and there is a significant financial and reputational risk if an employer does not get it right. The issues set out above are an example of only some of the more nuanced problems that can beset an employer if HMRC start an investigation and the employer will undoubtedly benefit from some sound legal advice if they are contacted by HMRC.

Additionally, it is prudent to audit and consider how your workers’ remuneration is structured, what would count as remuneration under the NMW legislation and what deductions or payments may affect things.

Contact our employment solicitors

If you need help considering these issues, or have any questions in relation to NMW or HMRC enforcement, please contact Michael Redston or the employment team for support.

Key Contacts

Helen Watson

Helen Watson

Partner | Head of Employment Law

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Michael Redston

Michael Redston

Employment Law Associate Solicitor

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