Complying with the national minimum wage: key pitfalls to avoid

Financial spreadsheet with pencil and calculator

In January 2014, the Government announced its intentions to crack down on rogue employers that do not comply with national minimum wage obligations. Erica Humphrey of IBB Solicitors highlights some tricky areas where even employers that are trying to be responsible can come unstuck.

Fines for an employer that is found not to have paid the national minimum wage are set to increase from 50% to up to 100% of the unpaid wages, and the upper limit will quadruple from £5,000 to £20,000. The exact date for the increase is not yet known, but it is expected to come into force soon. However, employers do not just face the prospect of financial penalties.

The Government already has an armoury of other weapons to deter non-compliance. The “name and shame” scheme provides a publicly available list of non-compliant employers, which can have damning reputational consequences. At worst, directors or managers can face criminal conviction. With the national minimum wage firmly in the spotlight, it is more important than ever for employers to fully understand their obligations. The following are just a few issues of which employers should be mindful.

Employer pension contributions

Auto-enrolment has already kicked in for some employers, and will be just round the corner for others. So, can the employer’s pension contribution be included within the employee’s wage calculation for the purpose of complying with the national minimum wage?

In short, the answer is no – so for those employers that pay only the national minimum wage, employee overheads will increase when auto-enrolment kicks in.

Benefits in kind

Generally speaking, the value of benefits in kind cannot be taken into account when calculating an employee’s total earnings. The rationale behind this policy is to ensure that workers receive money for the work they have done, rather than receiving the entirety of their pay in alternative benefits in kind. The only exception to this is where an employer provides accommodation.

Accommodation allowances

Where accommodation is provided free of charge to an employee, employers can apply a fixed amount (£4.91 per day or £34.37 per week in 2013/14) onto the worker’s total gross pay for the purpose of calculating their total earnings. If an employer charges rent that is greater than £4.91 per day, the excess is taken into account for the purpose of calculating whether or not the worker is in receipt of the national minimum wage. Effectively, the higher the rental charge, the lower a worker’s pay will be when calculating national minimum wage.

Bonuses and commission

Any bonus, commission or other incentive payment based on performance can be included for calculating the national minimum wage.

In order to count towards the total earnings calculation, the payment has to be made for rewarding good performance. Therefore, payments such as tips and gratuities cannot be taken into account because these are discretionary payments. Similarly, premium payments for overtime or shift work cannot be taken into account.

Working time

The calculation of the national minimum wage is of course intrinsically linked with the number of hours that the worker is deemed to have “worked”.

A big problem area for employers is determining what constitutes “working time”. This is particularly problematic in certain sectors, such as care work and the leisure industry. It is not unusual for certain workers in those sectors to do overnight shift work where they may be entitled to breaks to sleep while remaining on duty – generally speaking, this is likely to count as working time.

Workers may also be “on call” for periods of time, albeit during which they may not be called upon and can be at home for the whole “on call” period. This might be included in working time, particularly if the worker is at or near a place of work and is required to be available for such work.

Employers should be alert to the fact that calculating working time is complex. Where employers have workers doing atypical work, they should seek legal advice to avoid falling foul of their national minimum wage obligations.

Demonstrating compliance

Employers are responsible for demonstrating that they have complied with their obligations – this makes accurate record-keeping an absolute priority. As a minimum, an employer should keep records of its pay and deductions to show that it has complied with the national minimum wage. Employers may enter into agreements with their workers as to how pay is calculated, especially in industries where pay calculations may be complicated. Those agreements should be retained, together with any relevant correspondence or other associated documentation.

Rates for the national minimum wage change annually and different rates apply for different workers, depending on their age and sometimes the work that they do. Employers should keep abreast of changes so that they can be implemented in the workplace as soon as they come into effect.

Erica Humphrey

About Erica Humphrey

Erica Humphrey is a solicitor at IBB Solicitors.
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