Risk & Economy » Audit » Mismanaging the national minimum wage can be risky business

Mismanaging the national minimum wage can be risky business

The National Minimum Wage is a direct concern to finance directors, writes James Pike.

This year marks the 20th anniversary of the introduction of the National Minimum Wage (NMW). Hence, it may seem odd for there to be such an increased focus in on a set of regulations that have been around for a while.

This is partly due to HMRC having had a significant increase in its budget for NMW enforcement and so more businesses are being audited for compliance. That still doesn’t address the issue of why so many businesses are getting the implementation of NMW wrong and are being fined and ‘named and shamed’ as a result.

Why the apparent increase in NMW offenders?

The increasing NMW rate is certainly a significant factor. As the rate creeps towards the government’s £9 per hour target, the increases have been eroding the cushion many employers had between what they pay employees and the minimum wage. In what are already challenging trading conditions, many companies are not able to increase employee pay at the same rate to maintain that cushion with employers now paying, at or around, the NMW than ever before. This means many employers who might previously not have had to be concerned about NMW regulations, are now faced with employees who earn below NMW.

A lot comes down to ignoring the NMW regulations and of how HMRC will approach calculating whether an employer is paying below NMW.  For many, the assumption is that if you schedule someone to work 9am – 5pm and pay him £7.83 per hour for that work, then he is getting paid the NMW but it is not quite as straightforward.

Areas of risk

We have seen some areas where employers, who thought they were NMW compliant, actually paid employees below the NMW. These include:

  • Working time

Whether an employee has been paid NMW will depend on the pay received and the hours worked. On the face of it, what is ‘working time’ might seem a straightforward question,the time spent by an employee working, but that isn’t always the case. When an employee has to go through any checks or undertake any mandatory steps before he can start work or leave afterwards; such as security searches, getting changed for work on site or drug and alcohol tests, then the time spent going through these processes will also be working time. There can also be issues where employees work through unpaid breaks as that is working time that they are not being paid for.


  • Salary sacrifice

Where an employee is a member of a salary sacrifice scheme, such as pension, childcare vouchers, then this must not take their average hourly pay below NMW. You get no credit for the value of the pension benefit or the childcare vouchers which salary has been exchanged for.


  • Uniform

If an employee has to supply any element of their own work uniform, then the cost of purchasing this will be deducted from an employee’s pay when calculating NMW pay. Employers should be aware that ‘uniform’ is defined very broadly in this context. The example given in the HMRC manual is of an employee working in a hairdresser’s for which the uniform consists of a white t-shirt and black trousers. Both of these items are considered uniform and the cost of purchasing them would be deducted from their pay.


  • Salaried employees

Many employers probably won’t worry about their salaried employees, providing that their annual salary is above NMW based on their contractual hours of work. However, a ‘salaried worker’ for NMW purposes is one whose required annual working hours are “ascertainable from his contract”. HMRC says that there are in fact 52.14 weeks in a year, an employee can’t therefore ascertain his hours for the year from the contract and so is not a salaried worker for NMW purposes.

If an employee is not a salaried worker, the employer needs to ensure that the employee is being paid the correct amount each individual pay period based on the actual hours he works. In our experience, HMRC usually looks at salaried employees being paid below £20,000 and explore what type of worker they are and whether they are being paid appropriately.


  • Record keeping

Law requires under the NMW regulations to maintain records with evidence that the NMW has been paid for at least the last three years. However, there are no real guidelines in which format this should be. For instance, payroll evidence could suffice but there are also examples when salaried employees working hours are not tracked. HRMC assumes that an employee has not been paid the NMW unless an employer can prove to the contrary.

Risk of getting it wrong

Apart from the reputation damage following a HMRC notification of an employer failing to pay the NMW, there are also financial consequences to deal with. Firstly, there is the obligation to make payments to the affected employees to account for any underpayment against the NMW. In addition to this, HMRC can also issue a penalty of up to 200% of the total underpayment to all workers. This is subject to an overall cap of £20,000 per affected employee. However, when dealing with large employers who have historic issues (HMRC will go back up to six years in its investigations) this has the potential to lead to significant fines.

Recommended action

Compliance with the NMW regulations is going to come on the agenda for more and more employers as the NMW rate increases and finance directors see their financial buffer above this eroded. It is therefore something boards should be proactively looking at in greater detail so that they can address any potential problems now before HMRC come knocking. An audit of working and pay practices is advisable to identify any issues and so steps can be taken to address problems sooner rather than later.

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