There are several traps employers can fall into which mean employees do not receive the national minimum wage. Charlie Barnes and Susan Ball outline the five most common NMW mistakes.
All UK workers are entitled to the national minimum wage (NMW), but establishing whether a worker is being underpaid isn’t easy. It’s crucial to be aware of the most common mistakes employers don’t know they’re making.
HMRC has a dedicated NMW taskforce which inspects businesses at risk of underpaying NMW and follows up all workers’ complaints of not being paid NMW. If HMRC concludes the employer has underpaid staff, it issues a notice of underpayment requiring employers to repay all underpayments over the past six years. A penalty of up to 200% of the underpayment will also be imposed, and if the total underpayment over six years exceeds £500, the employer will be reported to the Department for Business and Trade for public naming and shaming, risking reputational damage.
We’ve seen an increase in interventions by HMRC, and this is likely to continue. We recommend employers remain vigilant to NMW weaknesses, and if unsure seek appropriate advice.
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Here are the five most common mistakes leading to NMW underpayment.
1. “All our workers are salaried”
It’s important to check workers’ contracts to ensure conditions for salaried work are being met. The first step is identifying the category of work – salaried, time work, piece work or unmeasured. This is crucial because the NMW rules and calculation methodology vary for each category. Time work is where the worker is paid on a time-spent basis; piece work is based on output; and unmeasured work is where the worker doesn’t fit any other category.
For a worker to be doing “salaried work”, their contract must satisfy specific conditions. These concern what pay components the worker is entitled to, what they relate to, how often they are paid, and whether their basic annual hours can be ascertained from the contract. If all those conditions are not met, the worker isn’t salaried.
The employer’s benefit of a worker being salaried is they can average the worker’s pay over the year, for example, paying in 12 equal monthly instalments. It doesn’t matter if the worker works more hours in one month than another – their pay can remain consistent so long as they don’t work more than their basic annual hours.
However, if the worker is not salaried, they will likely be categorised as unmeasured. This means they must be paid at least the NMW for all hours worked in the pay period. The employer must check this each pay period, otherwise there may be an underpayment.
2. Salary sacrifice
Employers need to prevent staff from sacrificing so much pay they drop below NMW. Many employers operate salary sacrifice schemes for pensions, childcare vouchers or cycle-to-work schemes. Salary sacrifice reduces the worker’s gross pay, because they are giving up a proportion of their salary in exchange for a non-cash benefit.
This has always been HMRC’s interpretation of salary sacrifice. The government consulted on this in 2019 and concluded that it is the post salary sacrifice pay which counts towards compliance with NMW. Employers must therefore look at post salary sacrifice pay when calculating whether the worker is being paid NMW. This can have a considerable impact on NMW compliance.
3. Insufficient records
Workers are entitled to be paid at least the NMW for all time they actually spend working. Rotas often record the number of shifts allocated, but not actual hours worked.
Employers need to prevent staff from sacrificing so much pay they drop below NMW. Many employers operate salary sacrifice schemes for pensions, childcare vouchers or cycle-to-work schemes.”
Where attendance recording systems round up to the next 15-minute interval if a worker clocks in late for work (eg clocking in at 9:01 but the system records it at 9:15), it means not all working time is being recorded, which may result in an underpayment.
Manual time and attendance records can also lead to underpayments. For example, a worker is scheduled to work a shift from 10am to 5pm, but they stay on for 10 minutes to handle a customer enquiry. This additional time must be recorded to ensure the worker is paid for all the time they spend working.
4. Ignoring deductions
Are you deducting via payroll for a savings scheme which pays out at Christmas; or to pay for items the worker has bought from you, such as uniform, tools or employee benefits; or applying a £1 administration charge to attachment of earnings orders? If so, these reduce pay for NMW purposes.
HMRC takes a wide view of what this means. For example, in the case of savings schemes, if money is deducted via payroll and paid into a bank account in the name of the employer, or an entity within the employer’s group, this is deemed “for the employer’s own use and benefit.” While they may not be using the funds for anything, they have the power to do so. It’s therefore advisable to review all possible deductions to establish whether they reduce pay for NMW purposes.
5. Not uplifting pay
Apprentices aged under 19, or who are 19 and over and in the first year of their apprenticeship, are only entitled to the apprenticeship rate for NMW – currently £5.28 per hour. Once the apprentice is aged 19 and in the second year of their apprenticeship, they move onto the normal rates of NMW. This can result in a significant underpayment, as the hourly rate of pay will rise to £10.42 for an apprentice who is aged 23 and over.
However, many employers forget this or age-related uplifts because their systems don’t always issue reminders.
It’s therefore important to ensure that apprenticeship start dates and ages are properly recorded, and reminders set, so that after the apprentice reaches 19 and moves into their second year of apprenticeship, the hourly rate of pay increases. This is also important for other employees as they move up an age band.
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By familiarising yourself with these common national minimum wage mistakes, employers can stay on the right side of the law.
