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National minimum wage – the devil is in the detail

National minimum wage – the devil is in the detail

With the recent national minimum wage increase, employers need to make sure they anticipate any potential issues.

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With the national minimum wage having increased from £7.50 to £7.83 on 1 April 2018, employers need to make sure that they have anticipated any issues arising from the increase appropriately, so that all their employees receive the pay they are entitled to. This may not be as easy as it seems. Many reputable employers have made the headlines having been caught out by the intricacies and detail of minimum wage compliance, control and implementation. Even with the best intentions employers have been found to not be compliant in how they paid their employees. 

As the national minimum wage rises, a growing number of sectors will need to ensure that they stay compliant with national minimum wage legislation. Consumer-facing businesses across various sectors, in particular, may have been paying well over the national minimum wage for several years, but are now coming closer to this threshold. Employers will need to ensure that the way they pay their employees, including how they treat and process benefits and pension, is compliant with the rules. The devil is in the detail. These questions are already top of mind for industries such as retail and hospitality – but it will become increasingly important for a growing number of sectors. 

Better safe than sorry

Accidental and inadvertent breaches by employers due to a misinterpretation of the rules still result in large fines from HMRC, as well as ‘naming and shaming’ by the Department for Business, Energy and Industrial Strategy (BEIS). The cause of the underpayment is not relevant to either sanction. Further, whilst it is possible for an employer to identify a mistake and correct it by paying the underpayment to its employees, this is difficult in practice. If there is any contact from HMRC about national minimum wage compliance before an employer corrects it, a fine is almost inevitable. These fines can hit a business hard, especially ones with a large workforce where even small breaches per employee become significant in monetary terms and reputation is key to brand.

The rules on national minimum wage are strict and the penalties have severe consequences not only for employers, but also potentially the employees these rules are meant to protect. Reputational damage and a significant cost added to an employer’s bottom line mean employers may have to resort to cost saving measures, such as employing fewer people, a decreasing number of flexible roles they can offer, fewer benefits for its employees and even redundancies. 

Applying the rules

Common areas of confusion relate to matters such as which pay code and deductions ‘count’ for national minimum wage purposes; the implementation and controls relating to salary sacrifice schemes, categorising workers, the treatment of time off in-lieu and other ‘saved hours’ schemes, the treatment of breaks, the time taken to carry out staff searches, and perhaps most notoriously, uniform requirements. For example, if an employer requires its employees to wear black shoes or trousers, the cost of purchasing these will count as a deduction to pay. If the employer has not taken this into account, they may find that they are effectively paying below the national minimum wage and subject to fines and ‘naming and shaming’.

With confusion existing around the legal process to follow if a breach is identified internally, employers may not feel equipped to approach the issue without risking a fine and reputation damage. Employers with employees on or near the new national minimum wage levels need to make sure their systems are equipped to deal with all rules surrounding payment of the national minimum wage – including being able to adapt to changes in employee circumstances as well as having the expertise and means to investigate complaints or pay arrears.

What can employers do?

While employers with employees on the national minimum wage need to comply with the rules set by HMRC, there is always a risk of misinterpretation of a rule or a mistake in the way that annualised pay is calculated and interpreted to hourly pay. National minimum wage is an issue that requires expertise in several fields, including employment law and payroll – not just to fix the problem when a breach has been identified, but also to ensure ongoing compliance. 

 

For more information contact Donna Sharp, Director, Employment Legal Services, KPMG in the UK. 

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