National minimum wage: where employers can fall down

Last month, the government’s ‘Naming Scheme’ publicly shamed some high-profile employers including WH Smith, Marks and Spencer and Argos for failing to comply with national minimum wage (NMW) legislation. The list comprised over 200 employers ranging from big high street retailers to smaller companies operating in a variety of sectors who were all found to have failed to pay the NMW. Collectively, the companies face penalties of nearly £7 million as well as being required to reimburse employees who were underpaid.

Often NMW wage breaches will be unintentional but the government hopes that the fear of social criticism and reputational damage arising from poor payment practices becoming public will encourage employers to review their practices and deter them from breaking the law. Any business, big and small, can be named if HMRC has issued a notice of underpayment. Although a company will be given 28 days to appeal, this is something that all employers need to avoid.

What are the rules?

The National Minimum Wage Act 1998 applies to most individuals who are working in the UK and who are over the compulsory school age. Examples of individuals who are not entitled to NMW would include most volunteers and those who are self-employed. Unlike other areas of employment law where only employers of a certain size will fall under the scope of certain areas legislation, all employers must adhere to the National Minimum Wage Act and make sure that their employees are paid fairly.

If a worker qualifies, they must be paid in respect of the work completed within a pay reference period, which should not be at a lower rate than the current NMW. Payment for NMW purposes relates to cash rather than any other benefit. The only non-cash benefit which is considered is the value of any accommodation provided to an employee, subject to applicable allowances. As of April 2023, the daily accommodation offset rate is £9.10 and the weekly is £63.70.

There are five different rates of NMW which are applied, according to a worker’s age. The government usually increases these rates every April. Workers are entitled to the rate which applies to them as at the start of a particular pay reference period. This remains the case when the rates change, or if a worker become entitled to a different rate during this period. The current rates are as follows:

Compliance with the NMW is calculated by dividing the total pay in a relevant pay reference period by the total number of hours worked. Some elements of a worker’s remuneration are discounted, such as employer pension contributions and loans by an employer. If these are mistakenly included, it may mean that the employer has not in fact complied with NMW pay scales.

Where are businesses going wrong?

Many businesses fall foul of the rules, sometimes unwittingly. For example, although employers are allowed to make deductions from wages for certain items of expenditure such as uniforms or purchasing tools, when these deductions push the actual pay received by workers below the NMW, employers will be found to be in breach. The recently published Naming Scheme highlights that expenditure deductions are the most common cause for breaches of the NMW regulations.

Another typical error includes failing to review NMW rates in March and ensuring that any increase due in April is implemented, to avoid an underpayment. Caution should also be taken with worker’s ages. These need to be regularly monitored and NMW adjusted promptly where a worker moves into a different age band.

It is evident that many employers are inadvertently breaking the rules, largely attributable to the failure of monitoring, keeping accurate records, and a lack of understanding around permissible pay deductions. Employers would therefore be well advised to have regular controls in place to ensure that they are meeting NMW legislation and to seek professional advice if necessary. For more information contact Michael Kerrigan at mk@debenhamsottaway.co.uk or 01727 738244.

This article was written by Michael Kerrigan, a partner in the employment team. It was first published in People Management in July 2023.