Ensuring compliance with the national minimum wage may have been a low priority in 2020 because of the pandemic. But HMRC is still enforcing the rules and there were changes you need to be aware of. Are you up to speed?

Furlough: a reminder

The national minimum wage (NMW) is only payable for worked hours so whilst an employee is either flexibly or fully furloughed, the NMW does not apply. The only caveat is that if your employees have been doing any training then those hours must be remunerated at the relevant NMW rate, but you can simply take all the furlough pay and divide it by the training hours which will almost certainly exceed the relevant NMW.

Nuances. It is quite correct that some employees who were eligible for the furlough scheme iterations one and two continue to have their furlough pay calculated on their February/March 2020 reference pay (or the relevant average/corresponding pay period) which will for some employees mean that their furlough pay from November onwards continues to be based on last year’s NMW rate. This is in contrast to employees who were recruited since 6 April 2020 whose furlough pay is based on the 2020/21 NMW so they will receive more than colleagues with longer service. Any hours that are worked during a flexi-furlough arrangement must be remunerated based on the current rates of NMW.

Salary sacrifice

In February 2020 the Department for Business, Energy and Industrial Strategy adopted a new approach to salary sacrifice that HMRC was asked to enforce. Whilst salary sacrifice and voluntary deductions for the benefit of the employer continue to reduce NMW pay, no financial penalties and no naming and shaming will now take place where these two offences are discovered – though of course employers will be asked to make changes to their processes to prevent future non-compliance. There are conditions attached to this relaxation of enforcement: the employer has not received an NMW enforcement notice in the last six years (as they should already know the rules) and the only offence that has been discovered is in respect to salary sacrifice or a deduction for the benefit of the employer.

Example. If there was a salary sacrifice issue across several hundred employees and additionally just one of those people also had an underpayment of NMW because a key birthday had not been identified, the employer still will be named and shamed and enforcement activity will be levied in respect of all the workforce’s underpayments.

Pay reduction. It is still the case that many employers have not implemented salary sacrifice correctly and so are operating a voluntary deduction rather than a reduction in contractual pay. Whilst both situations can lead to a NMW breach, if HMRC finds that a salary sacrifice has not been correctly implemented whilst undertaking an investigation, this can lead to a further PAYE compliance investigation. This is because if taxable and NIable pay has been reduced but without the appropriate contractual change this will have been a failure to operate PAYE.

Pro advice. It’s vital that if you want to display the salary sacrifice on payslips it is shown as a reduction, i.e. a negative addition on the gross pay side of the payslip, not a deduction on the net pay side.

Pro advice. HMRC is also now asking for evidence that the sacrifice has been implemented correctly, for example proof that the contract has been varied before the pay day that the reduction is shown on the payslip.

New regulations April 2020

The National Minimum Wage (Amendment) (No. 2) Regulations 2020 were effective from 6 April 2020 to include two additional pay frequencies in the definition of salaried worker, remedying an issue that has existed for many years that meant a worker couldn’t be truly treated as a salaried worker for NMW purposes unless they are weekly or monthly paid. They can now also be treated as a salaried worker if they are fortnightly or four-weekly paid. Being a salaried worker allows them to be paid their annual salary in equal instalments regardless of the actual hours worked in the pay period.

Pro advice. Make sure that anyone whose pay frequency is anything other than weekly has their number of annual hours shown in their contract or in another supporting document. HMRC will insist that compliance with an hourly NMW cannot be deduced from an annual salary as there are not simply 52 weeks in a calendar year.

Shift allowances. Another change that took effect in April was to allow those who receive premium rates at any time in the year, such as overtime or shift allowances, to be still classed as salaried as previously only those receiving basic pay and bonuses could be “salaried”.

Pro advice. Be aware that this is only a change to the definition of who can be a salaried worker. Premium rates are still ignored when calculating if NMW has been paid in a pay period.

Transition period

The sting in the tail of the widened definition of who can be classed as salaried is that unless the employer takes action the new definition does not come into effect until the first “worker calculation year” that begins after 6 April 2022. So, what is a worker calculation year? It is used to check that the employee hasn’t worked more than the annual hours specified in their contract. It is based on the start date of their employment, so an employee who began work on 1 March has a worker calculation year of 1 March to 28/29 February. You can see that in this example that the employer would not be able to move the employee to be legally treated as salaried until 1 March 2023. To avoid this long transitional period the employer needs to take proactive action to recategorise the worker.

They must:

  • write to each worker to explain why the calculation year is changing
  • provide the date the new year takes effect which must be three months from the date of the notice (and three months from the employee’s start date); and
  • that this will take effect unless the worker objects in writing; and
  • ensure no change of hours or deduction from pay occurs as result of the change.

Pro advice. It’s wise to recategorise to avoid leaving employees as open to the risk that HMRC will classify them as “unmeasured”. This means, for example, that all hours worked, particularly at peak times, must be captured to ensure the NMW has been paid or a top up payment made when there is a longer 31-day month.

Current risk areas

HMRC has not relaxed its compliance work in respect of the NMW, and of course is duty-bound to investigate all whistleblowing reports by employees that they have been underpaid. These are the areas to focus on particularly:

Working time: is this being recorded correctly and cannot be proven from internal systems? Do employees regularly work through breaks or send emails out of hours? These are all classed as working time if this is the case. Time travelling to training courses is also classed as NMW time.

Deductions for the benefit of the employer: even though these may be taken from net pay, they reduce gross pay for NMW purposes and there is a wide range of deductions that would fall foul of the rules including for PPE, accommodation, admin fees for failing to return locker keys or uniforms on leaving, staff purchases or parking charges.

Pro advice. HMRC will also deem something to be an employer deduction if the employee has to fund it themselves; this will include having strict dress codes or a uniform policy where the clothing is not provided by the employer.

Make sure that anyone whose pay frequency is anything other than weekly has their number of annual hours shown in their contract or in another supporting document. HMRC will insist that compliance with an hourly NMW cannot be deduced from an annual salary as there are not simply 52 weeks in a calendar year.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.