Tax

Common pitfalls of the national minimum wage

Dec 03, 2018
The UK Government is carrying out inspections and imposing fines on companies found to be non-compliant with the national minimum wage. Geraldine Browne highlights the common mistakes that organisations sometimes make.

Her Majesty’s Revenue and Customs (HMRC) achieved record enforcement results this year, identifying £15.6 million of underpayments. The number of workers identified as underpaid was more than double that in 2016/17 and the highest number since the national minimum wage (NMW) came into force. There is no doubt that the Government’s commitment to this clampdown is working; we are seeing an increase in NMW reviews.

There has also been a significant rise in whistleblowing over the NMW. HMRC received a record 5,053 reports of suspected underpayments in 2017, which had doubled from the year before. We expect that this will continue to increase with new payslip rules, which are due to come into force in April 2019. The main change will mean that any worker paid on an hourly basis will be due a payslip showing the number of hours worked. The aim is to help workers establish if they have been paid the correct amount under the NMW. 

When we look beyond the headline figures, we see that most businesses take NMW compliance very seriously. In fact, of the 239 employers named and shamed, 85 were found to be underpaying just one employee, indicating that mistakes are being made, not malicious intent.

Public naming and shaming has a huge impact on the reputation of a business. Employers tend to focus on ensuring that they are paying the correct rates to the correct categories of employee. They understand the rates but do not always understand the principles of what constitutes time for pay. It is a complex area and worth reviewing some of the common pitfalls.

What is work time?

There are periods of travelling time when the minimum wage must be paid to a salaried worker. When they are travelling in connection with their work, any rest periods taken during the time they are working counts as time worked, as does waiting for a train, waiting to collect goods, meeting someone in connection with work and travelling to a training venue. Employers need to address how they record and pay for this time.
Contrast this to the recent Court of Appeal case on “sleep-ins”. The Court of Appeal decided that sleep-in workers were not entitled to national minimum wage for time spent asleep during a sleep-in shift. This case, Royal Mencap Society v Tomlinson-Blake again focused on time worked with the employee arguing that time asleep was time worked. The outcome left the care sector in limbo as we await to hear if the Supreme Court will hear this appeal. In the meantime, this sector continues to pay employees for sleep-ins until a decision is reached.

Many employers have systems whereby their workers clock in and out and this data is passed to a payroll department to process hourly paid workers. This area will be reviewed in detail by a NMW inspector. If they do come across a case where an employee has not been paid for time worked, this will form part of non-compliance with the NMW. This can easily happen. For example, the employee has clocked in at 8.10am, but has been paid from 8.15am. It is worth having your own internal review of this data to ensure compliance. One slip-up can be costly.

Deductions

It is not just what employers pay that requires review, but also what deductions they make from pay. There are deductions that will not reduce the employee’s pay for minimum wage purposes. These include deduction for income tax, national insurance and accidental overpayment of wages.

Deductions can cause unintentional error. The employer may deduct something from the employee’s salary, which may take their pay below the NMW. For example, an employer may deduct the cost of the uniforms from staff salaries, bringing the employee below the NMW. Employers may wish, instead, to provide uniforms free of charge or, alternatively, spread the deductions over several pay periods.
Review your pay practices

In summary, the Government continues to put measures in place to protect employees from NMW exploitation. This is how it should be, even when it raises additional challenges for business.

To safeguard against non-compliance, employers should conduct a thorough review of their pay practices in all areas of NMW. Substantial fines accompany NMW offences and the damage to the employer’s reputation can be significant. It can impact on business sales and on businesses’ ability to attract key talent in the future. You may think you are complying, but one error can lead to the naming and shaming. It’s worth moving this topic further up your organisation’s agenda and investing the time in a thorough review.
 
Geraldine Browne is Tax Director at BDO Northern Ireland.