National minimum wage: don’t fall into non-compliance

Every year, the government publishes a list of businesses that have failed to comply with national minimum wage rules, exposing them to reputational damage and fines. Many businesses end up on the list because of misconceptions about what counts as compliance and what doesn’t, explains Vickie Graham.

The Department for Business and Trade recently named and shamed more than 200 employers for National Minimum Wage (NMW) violations, with each business having to pay back what they owed to employees and embarrassingly face potential government penalties.

This latest round, once again, highlights the importance of minimum wage compliance and raises questions about the adequacy of payroll and HR systems, the repercussions for companies failing to comply and how it can be prevented from happening in the future. So, where do we go from here?

Of the 202 employers on the list, including high street retailers WH Smith, Marks and Spencer and Argos, 79 made deductions to employees pay that took payments made below minimum wage.

This scenario was the most common error among employers and could be as simple as an employee on the national minimum wage rate being required to buy a uniform. This deduction is likely to cause a breach and is easily done; however, it highlights a wider issue of company communication.

Small change, big problem

A simple change of contract can have huge consequences so the relationship between HR, line managers and payroll departments cannot be underestimated. The responsibility is firmly on payroll professionals, yet quite often an individual who could have flagged an issue, is not even aware of the change.

The second most common error was unpaid working time, with 78 of the 202 organisations failing to comply. Some common examples include additional work before and after a worker’s shift, rounding clock-in time to the nearest hour, unpaid travel time, trial shifts and overtime.

So why isn’t it as easy as paying people for the hours they work? The answer is because not all employees’ working time is being recorded. A small delay leaving work should be included as working hours and over a period of time, this can add up. Any of these gaps in processes fall on the shoulders of payroll professionals so again, communication between departments is key in order to comply.

The third largest error recorded was failure to pay the correct rates to apprentices. This could either be a worker being incorrectly classified as an apprentice after they have completed their first year, or if an individual has finished their apprenticeship and not had their rate changed. This error made up a surprisingly significant 42 out of 202 employers.

Fine margins

One of the top offenders on the named and shamed list was WH Smith with a whopping £1m in arrears. Although this figure looks and sounds a lot (and it is), when it’s broken down the story is a little different.

These arrears were split across 17,607 workers, averaging £57.80 per worker. Assuming this was evenly spread for each worker across the over five-year arrears period, this could work out to as little as 84p per month.

This doesn’t make it acceptable but what it does do is highlight the extremely fine margins we’re dealing with. We’re not talking about huge sums of money that would be easy to notice during payroll processing, it’s little and often, but these seemingly small mistakes add up to make a huge difference.

National minimum wage compliance is very important, whether it’s WH Smith or a small startup company. Even if a company spots something before HMRC does, they could still end up on the list which is one more reason to get things right the first time, every time.

Calculating arrears

The payroll team at WH Smith will have had to track down each underpayment for the 17,607 workers, calculated the arrears due and made individual payments. The cost of administration for this will be huge, and is in addition to the fines payable to HMRC.

If this doesn’t make you think twice about your payroll processes, then I don’t know what will. At the Chartered Institute of Payroll Professionals, we encourage businesses to engage with a third party to review payroll processes and identify blind spots within their organisation. Plenty already do this, and with a lot at stake, it could be a worthwhile investment.

There are many reasons why national minimum wage rules are broken but the main one is a breakdown in communications between those who make payments and those who implement policy. A strong two-way communication is needed to ensure you don’t end up on the ‘named and shamed’ list in future.

It all boils down to the responsibility of payroll professionals to be aware of the issues and advise of the impacts, which is why we believe payroll is such a key strategic department in any business.

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