The National-Minimum-Wage Complexity

Since the introduction of the National Minimum Wage (NMW), 20 years ago, increased pay for low-paid workers has helped reduce poverty, however, for employers it has proven to be a minefield. So what are they struggling with?

Increasing popularity

When introduced, opinions were divided. While some people feared higher unemployment rates due to increased costs to businesses, most expected the NMW to incentivise low paid workers to accept jobs with improved income rates. Although there has been minimal negative impact on employment levels, the NMW rate increasing faster than other pay rates means those on NMW have caught up resulting in a significant growth in the number of workers receiving this level of pay.

On the rise

Every year the low pay commission reviews the NMW and recommends a specific increase. According to Chancellor Philip Hammond in the recent Spring Statement, the target for the NMW to reach 60% of median earning by 2020 is still on track.

For UK employees, the recent 5% increase in the NMW is good news. Employers however, are less likely to celebrate, with labour costs rising and many lacking the knowledge to fully understand the complex rules which apply to the NMW.

Deceptively complex

At first the NMW concept seems pretty straightforward: employers should ‘simply’ pay all workers at least a minimum hourly rate. For new apprentices this starts at £3.90 per hour and goes all the way up to £8.21 per hour for workers aged over 25, which is also called the National Living Wage. However, a closer look however, reveals the complexity of the specific rules which apply when paying workers the NMW, rules which many companies involuntarily breach, leaving them potentially exposed to claims and costly fines.

Several major employers, such as Argos, TGI Fridays and Marriott Hotels have recently been the subject of some high-profile court cases, as a result of HMRC’s increasingly strict enforcement of the NMW.

Understanding the different factors

To avoid common pitfalls when applying the NMW, it is important for employers to understand that NMW can apply to time the employer may not regard as working. Time spent travelling to and from different places of work can also be included, as can time spent waiting to start or finish work. A good example, is the retailer who was recently fined for not paying his factory staff for the time they spent queuing to clock off after their shift.

pound coin graphic

Other issues are often caused by underestimating the significance of the pay reference period. The conditions for ‘salaried hours work’ are remarkably complicated and if not met, this will result in a separate pay reference period every time an employee is paid. For every single one of those pay periods in isolation, the employer must ensure to meet the NMW conditions. Any ‘smoothing’ of pay, with seasonal demand for example, when an even salary is paid through the year, could potentially lead to a violation with expensive consequences.

Elements which reduce overall gross pay are also crucial and something employers should be wary of, as these could potentially lower a worker’s income under the NMW threshold. For instance, employers might be required to compensate low-paid workers when money is deducted from their pay for a uniform or if they need to purchase certain items in order to perform their job, regardless of the fact whether the worker benefits individually from the ownership or use of these items. Salary-sacrifice schemes are another area which employers should apply with care. In a recent case, an employer who ran a Christmas Club savings scheme, intended as an optional benefit, was penalised due to deductions being taken directly from staff’s pay.

Be sure to comply

Failure to comply with NMW rules could have a serious impact on the business. From public naming and shaming, which could cause long lasting damage to the firm, to sanctions such as supplementary payments to the individual and charges by HMRC up to 200% of the value of the error, capped at £20,000 per worker.

With the NMW complexity in mind, it is not surprising that businesses often make mistakes. More questionable, is the strict application of the rules when employers provide schemes which are clearly created to benefit their employees, but unwillingly commit a ‘technical breach’.

As a reaction to the increasing number of complaints, HMRC are now looking into improving and simplifying the NMW rules. However, until that happens, employers should ensure they understand the current rules and tread with care.

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