Legal

National minimum wage enforcement update

18 Mar 2020 By Sarah Ozanne

The government has announced a more measured approach to penalties for NMW non-compliance. Sarah Ozanne reports

Employers that pay workers less than the national minimum wage (NMW) must pay arrears of wages to the worker at current minimum wage rates and face financial penalties of up to 200 per cent of arrears, capped at £20,000 per worker. In the last few years they have also been ‘named and shamed’ by the government.

The public naming of employers was suspended in 2018 while a review of the NMW rules was undertaken. In December 2018, the Department for Business, Energy and Industrial Strategy opened a formal consultation process in relation to changes to the current regime, with a focus on the NMW rules relating to salaried workers and salary sacrifice. Part of the aim was to assess whether too harsh a stance was being taken with employers that were guilty of inadvertent breaches of the complex rules.

As a result of the consultation, the government has reinstated naming and shaming but has raised the threshold at which employers will be subject to it, and removed salary sacrifice schemes from consideration. As a result, only a company that owes £500 or more in arrears of NMW payments will be named and shamed. However, there will be an increase in the frequency of the public naming of errant businesses.

The government has also announced several changes to the NMW rules, effective from 6 April 2020.

NMW changes

Allowing salaried-hours workers to be paid in additional equal instalments, such as fortnightly or four-weekly

There are four types of work for NMW purposes (salaried hours work, time work, output work and unmeasured time work). A worker is performing salaried-hours work when all the following conditions apply:

  • they are paid under their contract for an ascertainable basic number of hours per year (basic hours);
  • they are entitled to an annual salary for those hours;
  • they are entitled to no other payment for the ascertainable basic hours except a performance bonus; and
  • they are paid either in equal weekly or monthly instalments or by varying monthly instalments resulting in the worker being entitled to be paid in equal amounts each quarter.

The significance of salaried-hours work is that employers will still comply with NMW rules where workers receive less than the NMW for the hours actually worked in a pay reference period month, provided they are paid the NMW for the average monthly hours worked in the ‘calculation year’.

Some businesses, particularly in sectors such as hospitality or retail, fall foul of the NMW rules as employees work variable shifts leading to fluctuating pay month to month. In future, employers will have additional flexibility as to the frequency with which they can make equal payments to salaried workers, thereby mitigating this risk.  

Allowing employers to choose a calculation year for their workers

The calculation year is the period over which salaried hours are calculated. The government decided that by allowing employers to specify a calculation year, and even different calculation years for different workers, they will be able to better monitor basic hours worked for compliance purposes. 

Allowing employers to make premium payments that will not form part of the workers' remuneration for calculating NMW pay

This will allow employers to pay premiums – for example, for working on bank holidays – without falling outside of the definition of salaried-hours work.

Salary sacrifice, pay deductions and compliance

Businesses that offer salary sacrifice arrangements can sometimes inadvertently allow their basic pay to dip below NMW levels after the relevant pay sacrifice has been made. The government has decided not to amend the NMW rules relating to salary sacrifice but it has announced it will seek to support employers by issuing improved guidance and waiving financial penalties and naming and shaming for certain breaches relating to salary sacrifice.

The government’s measures go some way to addressing the difficulties companies have historically faced in complying with the NMW rules. This does appear to herald a more measured approach by HMRC to non-compliance with NMW rules.

Sarah Ozanne is an employment lawyer at CMS

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