Andrew Brookes – Employer Tax Specialist
DD: +44 (0)1252 541244
National Minimum Wage (NMW) and the more recently introduced National Living Wage (NLW) should be simple to understand and to apply, so when it comes to compliance why do so many employers fall foul of the rules?
A simple system?
On the face of it the regulations would seem straightforward:
The Government publishes the minimum rates of hourly pay that employees must be paid for each hour of work they do.
Businesses know the hours worked by employees, the rate of NMW applicable and they pay at least the relevant NMW rate for all worked hours.
While the premise behind the legislation is simple, the legislation and application of this is far from simple.
There are two main reasons for this complexity:
The rules need to apply to all the wide-ranging arrangements that employers have for engaging their employees;
There is anti-avoidance protection built in to prevent businesses from manipulating the arrangements to reduce pay to the employee.
If you get it wrong what are the consequences?
The consequences for an employer can be both extremely expensive and damaging for a business.
Typical sanctions can include:
- Making good underpayments to employees at the current NMW rate;
- Penalties of 200% of the unpaid wages (cap of £20,000 per employee but no overall limit);
- Public naming and shaming.
The sum and seriousness of any of the above settlements can have a significant effect on adviser / client relationships as well as having knock-on implications for audit reporting.
Where do businesses go wrong?
There are seven main areas for non-compliance – these are:
Identifying the pay period
This is a crucial step that is often overlooked because NMW payments apply to each pay period in isolation. As such the rules covering payments considered for the test differ based on the category of employee. You must be clear on the pay period to ensure that the pay for that period is at least equal to the NMW obligation for that period. A pay period is defined as being a maximum of up to one month.
Why do businesses fall foul of this?
Businesses wrongly assume that the employee is classified as a salaried employee; with the assumption that if NMW is satisfied over the whole year on average then this is all that is required. For an employee to be classed as a salaried worker, for NMW purposes, certain conditions must be satisfied and if they are not, the employee is not treated as salaried.
If not salaried workers, the employee will either be a:
- ‘time work’;
- ‘output (or piece) work’ or;
- ‘unmeasured work’ worker.
What is ‘salaried work’?
To be treated as performing salaried hours work for the purpose of the national minimum wage, all the following conditions must apply:
- The worker is paid under their contract for an ascertainable basic number of hours per year (the basic hours);
- The worker is entitled to an annual salary for those hours;
- The worker is entitled to no other payment for the ascertainable basic hours except a performance bonus and/or, from 6 April 2020 a salary premium;
The worker is paid in equal instalments which could include:
- Two-weekly (from 6 April 2020);
- Four-weekly (from 6 April 2020);
- Other equal periods between a week and a month (from 6 April 2020); or
- Varying monthly instalments resulting in the worker being entitled to be paid in equal amounts each quarter (from 6 April 2020).
If the conditions for salaried hours work are satisfied it does not matter:
- How many hours the worker works in a week, month or other period;
- Whether all the basic annual hours are working hours;
- Whether the worker works extra hours in addition to the basic annual hours for which he gets his annual salary.
Salaried hours work can include workers who only work part of the year, (e.g. term time workers) if they are paid in equal payments throughout the year and all other conditions are satisfied. This recent change is likely to benefit those workers in the retail industry, where many have varying pay between periods.
What is ‘time work’?
This is work (other than salaried hours work) for which a worker is entitled under their contract to be paid. There are three circumstances when work is classified as ‘time work’:
- Where the worker is paid under their contract solely according to the length of time they have worked;
- Where the worker is paid under a contract according to the level of output, for example over an hour, and the worker is required to work for a set period e.g. a piece worker in a factory. While paid according to output per hour, for national minimum wage purposes they are regarded as doing “time work” because of their requirement to work is for a set period each day;
- Where a worker in the second circumstance (above) works and is paid by the hour because they fail to reach the level of output per hour set by their contract. For example, a piece worker in a factor may be required to work for 7 hours per day and produce 5 widgets per hour would normally be paid per widget. However, if they produce less than 35 widgets in a day, they must still be paid for the full 7 hours work at NMW rate.
A worker will be regarded as doing time work if:
- Pay relates to the amount of time worked, but they do not meet all the conditions to be regarded as salaried;
- They perform piece work with set hours;
- They are commission based only with set hours;
- They are simply paid for set hours;
While the employer can pay based on productivity for time workers they must ensure that they either agree a fair piece rate, using the rated output work system, or that the pay also meets the NMW for the time worked.
What is ‘output work’?
This is simply described in the regulations as not ‘time work’. Pay is based on the number of widgets, or another measure (e.g. for telesales staff this could be value of transactions) without set hours. The key difference unlike ‘time work’, ‘output work’ has set number of hours.
What is ‘unmeasured work’?
This is classified as a “catch all” for anyone not falling within the first three categories of ‘salaried’, ‘time’ or ‘output work’. These workers have no fixed hours but could still be paid based on the actual hours worked.
Determining the working hours for NMW purposes
For some employees this can be very straight forward, they work fixed hours at a single location and thus there should be no excuses for employers that make errors (which should be rare) . The problems that do arise are linked to either a change in working location, or the employer imposes obligations on the employees outside of the core time.
For those employees that travel e.g. sales representatives, these circumstances are key to determining the working hours, but it will often be the case that these types of employees will require payment for all time i.e. from when they start to when they finish, with the possible exception of a lunch break. This period could include travel, waiting and break time, as well as actual work time. There can be exceptions to this, but the starting point should be to consider the total length of the working day and then to consider what time, if any, the regulations will allow to be excluded from the calculations.
Employer-imposed obligations at the start or end of the day.
Where these obligations take place outside of normal working hours (e.g. clocking in systems or security checks), the time spent waiting for and undertaking these tasks is – for the purposes of NMW – is classed as “working time”. For example, a 5-hour shift which then requires an employee to undertake a further 30 minutes of activity including clocking on and security check time, would – for NWM purposes – make the shift length 5 ½ hours.
Paying the right rate based on the employees age (not including apprentices here)
As there are set NMW rates that apply based on the age of the employee, employers must take care to ensure that the higher rates are applied as soon as applicable. For all employees, rate changes (which are widely publicised) take place annually on 1st April (previously 1st October). Employers should take extra care and consider whether they have adequate systems to alert them of birthdays, which can (but do not always) trigger a change to a worker’s NMW. If missed this could result in non-compliance.
In our experience a significant percentage of the NMW defaults and non-compliance issues relate to apprentices. This is because apprentices add an extra layer of complication specifically to the working hour and rate of pay.
Trap 1 – Applying the reduced apprentice rate inappropriately.
This reduced rate only applies to apprentices while aged under 19 and those aged over 19 but still in the first year of their apprenticeship. All other apprentices must be paid the full NMW rate based on their age.
The reduced apprentice rate is only applicable for those on approved apprenticeships, but some employers mistakenly apply it to apprentices that are not on an approved scheme who are entitled to the normal NMW rates.
Trap 2 – Training time is working time
The other common issue for employers is failing to appreciate that training time is working time and the apprentice must be paid at their NMW rate while training or attending college, in addition to working time.
Provision of accommodation
Employers who provide their employees with accommodation are entitled to charge them a capped rate (based on the NMW calculation) of £57.40 per week or £8.20 per day from April 2020 for the accommodation. This charge should include services such as gas, electricity, laundry, etc and any furniture provided by the employer. The potential to recharge costs to employees is extremely limited and the cost to the employer of providing accommodation will often exceed the permitted reduction in pay. Consequently, in addition to increasing the possibility of NMW default, providing accommodation is often commercially undesirable.
Clothing and equipment charges
The NMW problems caused by clothing can be both direct and indirect. A direct clothing charge applies where the employer supplies the employee with clothing for work and applies a charge to the employee for this. If the pay was at NMW level before the clothing charge, the charge will cause a default.
Where the business imposes a dress code or a specific requirement on the employee, e.g. to wear black shoes, this is an indirect cost that needs to be considered when calculating NMW. Again, paying at NMW level before considering the cost of the shoes will result in an NMW default.
Other charges to employees
Care should be taken with any other compulsory costs charged to employees that are likely to cause an NMW default i.e. those paid at or close to NMW before the charge is imposed. For example, an employee who is charged for the provision of a company mobile phone so they can perform their employment responsibilities.
Summary of recent NMW changes
Changes to NMW rates
The 1 April 2020 saw NMW rates increase significantly, achieving the target of the NMW top rate being equivalent to 60% of median earnings.
The new rates are:
|Previous rate||Current rate from 1 April 2020||Increase|
|National Living Wage||£8.21||£8.72||6.2%|
|21-24 Year Old Rate||£7.70||£8.20||6.5%|
|18-20 Year Old Rate||£6.15||£6.45||4.9%|
|16-17 Year Old Rate||£4.35||£4.55||4.6%|
Salaried workers and NMW
As mentioned earlier, this category has been widened to include additional pay periods and will be welcome news to businesses discovering that their previous arrangements did not meet the conditions of salaried workers for NMW purposes.
Salary premium and NMW
With effect from 6 April 2020, employers must ignore some premium payments for basic hours to workers performing salaried hours work for minimum wage purposes.
These are payments for working:
- At certain times of the day;
- On a particular day (e.g. enhanced pay for public holidays);
- At a location;
- Within a particular environment;
- On a particular task;
- Subject to a particular responsibility.
This change will enable employees to receive incentive or enhancement payments for some hours without falling outside of the salaried worker category.
Salary sacrifice and NMW
Having long been criticised for denying lower paid workers the opportunity of benefitting from salary sacrifice arrangements, the Government has decided that employers offering salary sacrifice schemes will no longer be subject to financial penalties if the scheme brings payment below the NMW rate. This is on the proviso that strict conditions are met, including a requirement for the employee to willingly opt into the scheme. Please not that charges for the provision of work clothing, equipment, etc are outside of this concession.
Public naming and shaming
This is to be reintroduced with a small concession in that the default limit to trigger naming and shaming is increased from £100 to £500. That said it is unlikely that defaults will be below the new limit and all offenders are likely to be publicly identified as defaulters.
Additional NMW support from HMRC
HMRC are to provide additional resources to help businesses comply with the regulations.
So what should employers being doing now?
With HMRC’s budget for tackling NMW compliance being more than doubled, this shows how seriously they are taking their enforcement responsibilities. The above demonstrates how easy it is to fall the wrong side of the NMW line. Employers should therefore take special care to ensure a full understanding of the hours that must be paid for, the category of worker, the pay that can be considered and the reductions that must be made to pay in determining whether NMW compliance is achieved. Caution is especially recommended before any conditions are imposed on, or charges are made to, employees.
If you’d like to discuss any of the above in more detail and to understand your employer responsibilities for the National Minimum and/or National Living Wage, please get in touch with our Employment Tax Specialist Andrew Brookes.