The minimum wage should be easy, right? You pay at least the legal minimum (currently £8.21 for those aged 25 and over) gross for every hour worked and, hey presto, you're compliant.
Except it’s not all that easy. Dozens of employers have been named and shamed by HMRC for failing to pay the minimum wage, in many cases due to technical breaches which are hard to spot for all but the most expert. The combination of what are seen by many as technicalities which do little to protect the most vulnerable, and a heightened level of enforcement activity by HMRC, has caused widespread concern among employers. HMRC has rejected concerns raised over its enforcement policy, emphasising its legal duty to recover arrears.
A recent consultation paper issued by the government, to which the Employment Lawyers Association (ELA) has responded, highlights some of the key pitfalls.
There are many aspects of compliance with minimum wage legislation that are complex, but some of the key issues identified in the consultation and the ELA's response to it include the following:
When is a salaried employee a salaried employee?
The legislation provides for a different approach to calculation of minimum wage depending on whether employees are salaried, paid for the time they work, paid based on their output, or working unmeasured hours.
The salaried hours calculation can be helpful to employers, since in a sense it allows employers to ‘average’ pay across the year, notwithstanding fluctuations in working hours from one week or month to the next, without falling foul of minimum wage legislation. However, many employers who considered their employees were salaried have found that HMRC takes a different view, with the result they find themselves in breach because a different form of calculation should have been used in calculating minimum wage.
In particular, those who pay employees a fixed salary for working a fixed number of hours per week have been surprised in some cases to be told those employees are not ‘salaried’, because (in the view of some at HMRC) the number of basic hours the employee is required to work in a year cannot be determined if the contract only refers to weekly hours.
Similarly, employers who reward employees with shift premia often find that is sufficient to mean the employees are not salaried.
Does salary sacrifice cause you a problem?
In some cases, salary sacrifice has the unfortunate effect of reducing pay below minimum wage levels, despite the fact employees receive a benefit in return for the salary they have voluntarily agreed to forego. The minimum wage laws do not allow employers to obtain ‘credit’ for the value of those benefits, with the result that some employers find minimum wage compliance requires them to withdraw or restrict access to salary sacrifice arrangements from some of their lowest paid staff.
What about overtime?
For some employees, overtime premia can make up a large proportion of their take-home pay. Unfortunately, in many cases the calculation of minimum wage compliance excludes overtime premia from consideration, with the result that an employee who ostensibly appears to be being paid at or above minimum wage levels will not be.
What does the future hold?
For the time being, as HMRC enforcement activity continues apace, employers who may have one of the challenges noted above should take advice on their compliance with minimum wage legislation.
The ELA has called for guidance to clarify some of the complexities in the minimum wage legislation, and the tone of the government's consultation paper suggests it is open to considering adapting minimum wage rules to address some of the challenges employers face in ensuring compliance. The response to that consultation is awaited.
Stephen Ratcliffe is co-chair of the ELA’s working party and a partner at Baker McKenzie