Why are so many employers failing to pay the minimum wages?

5 Mar 2020 By Alex Watson and Richard Branson

With the number of businesses inadvertently breaching the NLW and NMW at an all-time high, Alex Watson and Richard Branson ask what can be done to tackle the problem

From April 2020, the national living wage (NLW), the minimum wage rate for the over 25s, will rise from £8.21 per hour to £8.72 per hour. The government has also promised to increase this top rate gradually to £10.50 by 2024 (alongside extending the NLW to those aged 21 and over).

The national minimum wage (NMW) rate for 21 to 24-year-olds will also rise from £7.70 per hour to £8.20, and the wage for 18 to 20-year-olds will increase from £6.15 to £6.45 in April. There will also be further rises in the rate paid to 16 and 17-year-olds and apprentices. If all goes to plan, these increases will exceed the current rate of inflation, boosting the earnings of the country’s lowest-paid workers.

While it is widely acknowledged that further increases in the NLW and NMW are necessary to effect real wage increases and reduce poverty, these changes – and the structure of the current NLW/NMW enforcement scheme – pose significant challenges and risks for businesses in 2020.

Report on non-compliance 

According to government figures, in 2017-18, HMRC recorded 1,016 instances of companies failing to comply with the NLW and NMW, issuing financial penalties of more than £14m in the process and identifying £15.6m in pay owed to more than 200,000 workers. This is a tremendous increase from the total £3.9m financial penalty for underpaying more than 98,000 workers in 2016-17, and the £1.8m penalty for underpaying more than 58,000 workers in 2015-16.

The Resolution Foundation’s recent report, Under the wage floor, which reviews international evidence on the effects of minimum wages to inform the UK government's decisions, found that despite increases in HMRC resource in this area, leading to an impressive increase in wages recovered and financial penalties levied, the likelihood of HMRC identifying companies for breaching the NLW/NMW is still as low as 13 per cent. While HMRC identified 1,456 companies as failing to pay the NLW/NMW in 2018-19, the actual estimated number of employers that failed to pay in this period is estimated to be closer to 11,000.

With the number of workers covered by the NLW/NMW set to almost double by 2024, the Resolution Foundation is calling for the government to sharpen the teeth of the legislation and to increase the penalties for employers in breach. But is this the solution?

Key problem areas for employers

Most employers do not intentionally underpay the minimum wage; however, a lack of clarity, particularly for SMEs with less payroll resources, and the rigidity of the existing rules as to what sums can or cannot be counted for the purpose of the NLW/NMW, and what payments or deductions reduce the NLW/NMW, can lead to serious inadvertent underpayments and penalties for employers – even if there are clear benefits for workers.

Errors in calculating pay often arise from employers including sums that cannot be counted towards the NLW/NMW, such as shift premiums or overtime premiums. Equally, issues frequently arise from deductions from wages, even where these are seen as voluntary or beneficial for workers.

Recent high-profile cases have seen HMRC argue that deductions from wages as part of a staff saving scheme (even though it was established to benefit employees and entered into voluntarily) and to cover the cost of clothing (which was purchased voluntarily and not part of the worker's uniform) resulted in an underpayment of wages. Other common reasons for failing to pay the NLW/NMW include: not classifying workers correctly (ie registering them as self-employed instead of employed), and not counting the entire time the employee spends working (eg locking up the premises). It is imperative that business owners ensure HR policies and procedures are up to date.

The future of the minimum wages 

The statistics show that, in its current form, the penalty system is not an effective method of ensuring compliance by business. To the contrary, rather than remedy underlying issues, in some instances the process actively punishes employers that have created schemes with the intention of benefitting staff. However, for the time being, little alternative reform is being mooted.

The expected increases to the NLW/NMW over the next four years are likely to place businesses under even greater financial pressure. By taking early action to review their NLW/NMW affairs, employers can mitigate these risks whether by review of workforce numbers, pay structures, shift patterns, reductions in supplementary benefits or even the introduction of new technology to increase efficiencies. However, with increased HMRC scrutiny and resources to investigate businesses, together with pressure on increasing penalties, NLW/NMW compliance and business planning should be high on the agenda for all employers engaging workers in lower-paid roles.

Alex Watson is director and Richard Branson a lawyer at Fieldfisher

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