The Low Pay Commission has published its fourth report looking at enforcement and compliance of the national minimum wage (NMW) legislation. What key things can be learned from it?
New challenges
With the economy opening up, the potential for national minimum wage (NMW) non-compliance is greater than ever. The furlough scheme is due to close at the end of September 2021, having tailed off from 1 July and yet many businesses are still not at full capacity so are looking to control costs, and that might be at the expense of wages. Whilst the current commentary is that hospitality workers are seeing pay rises in order to tempt them into the industry, this won’t be the case in all sectors.
Homeworkers. With many employees likely to work at home permanently at least some of the time, new record keeping regimes must be implemented to ensure that excessive hours haven’t led to an NMW breach. For example, a 23-year-old member of staff on £25,000 p.a. working through their commuting time and lunchtime may well work a 60-hour week which would make their hourly rate of pay £7.98, with the minimum rate being £8.91. When the new rates came into force in April 2021, the Department for Business, Energy and Industrial Strategy (BEIS) extended the record keeping requirement to six years from three.
Status. Recent case law will also bring new challenges. The Uber case means that many more individuals in the gig economy will need to be recategorised as workers and be paid the NMW or go to court to secure their rights.
Age old problems
The increase in rates in April 2021 and the reduction to ages 23 and 24 for the top rate has brought salary sacrifice back into focus again. Some younger staff will now have insufficient headroom to participate in salary sacrifice arrangements, particularly for pensions where the values are likely to be higher. Equally, where employees have not been receiving full contractual pay as they are flexi-furloughed, has the NMW legislation been breached as sacrifices have been applied in full? For employees who are leaving, they cannot sacrifice all their final pay into their pension as a one-off amount. They must be paid for hours worked – however senior they are – and can only then sacrifice any amounts over the relevant NMW.
Paperwork. HMRC will focus on the employee’s status when considering NMW compliance. Does your paperwork support that employees were fully or flexibly furloughed and for what hours?
Payslip duties
The report (see Follow up ) says that the Low Pay Commission (LPC) has evidence that the change of regulations in April 2019 that requires employers to show hours on payslips where “pay varies by hours worked” has not been adopted by some sectors. It applies not just to hourly paid workers, but to salaried staff too who are not working their normal hours (perhaps due to furlough) or have received a lump sum, for example in respect of a call-out.
Hourly rate
The report says that employers are less likely to make mistakes if they have a simple hourly rate model. This seems to ignore the fact that the issue many employers face is that they have incorrectly classified workers as salaried in order to allow them to be paid the same value for each month regardless of its length. Unless the individual has been informed of their annual hours, not weekly, HMRC will contend that they must be “unmeasured workers” so must have every hour recorded that is worked in each pay period so that this can be used to determine if pay is at least the relevant NMW for that pay period. Few employers have adequate records of hours for salaried workers so fail this test. Equally, it’s still common to come across salaries worked out over 52 weeks whereas there are, of course, 52 weeks and one day each year. Taking leap years into account the annual salary should be based on a multiplier of 52.18.
Traps for the unwary
The report summaries the areas that still catch out employers.
Uniforms. If there is a strict dress code this will be deemed to be a uniform even if for tax purposes it is not as it does not carry a logo. If the dress code requires certain clothes or shoes to be worn, e.g. white shirt, black trousers, sensible shoes, this will be deemed a uniform and if not provided by the employer will be treated as having a value that will be deducted from NMW pay and could cause a breach.
Court order fees. These fall under the category of “for the use or benefit of the employer” and must not reduce gross pay below the NMW. This also applies to deductions from net pay where the employer is recovering costs such as staff purchases.
Hours for NMW purposes. Staff who travel on business, for example from a site to the first client of the day and return to the site after the last client of the day, must have those travelling hours included in NMW hours. Also all training hours are hours for NMW purposes – this can pose a particular issue for apprentices.
Key dates. With HR and payroll teams working remotely, has the requisite notice of key birthdays reached payroll on time or when an individual has completed the first year of their apprenticeship or finished their studies and moved on to a permanent contract?
Previous request
It’s interesting to reflect on the LPC’s 2017 call to include a marker in payroll software that the NMW has been paid. Given that deductions taken outside the payroll, or not even taken at all, such as the failure to reimburse or provide uniforms must be considered, it is clearly not possible for payroll software to flag when the NMW has been paid. It is a much more complex activity than that, which many sectors who take their responsibilities to workers seriously, spend many hours on every month. Better guidance would be much more effective than flags in payroll software.
New enforcement body
Despite the absence of an Employment Bill from this year’s Queen’s Speech, the BEIS confirmed in early June 2021 that it plans to go ahead with the creation of the new Labour Market Enforcement Body which will take over NMW compliance. It’s not clear if the 450 HMRC staff who police the NMW will move to the new body, but the LPC clearly sees it as an opportunity to reset the compliance approach.
HMRC has a strike rate of 40%, i.e. 40% of the investigations it undertakes find evidence of arrears. Employers who have been on the receiving end of an NMW audit will be only too well aware that the regulations and the enforcement of them are not fit for 21st century working practices. For example, not allowing lower paid staff to have the chance to participate in salary sacrifice schemes for benefits in kind that would really help them, seems to achieve the opposite of what it sets out to do. With regulations in place and whistleblowing channels there to protect those who are underpaid, should the system mitigate against those workers who want to secure tax-efficient benefits that meet their lifestyle needs?
Staff who travel on business, for example from a site to the first client of the day and return to the site after the last client of the day, must have those travelling hours included in NMW hours. Focus on record keeping even for salaried staff. The regulations changed in April 2021 to require that six years of records are kept instead of three.
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