To avoid being brought to book by an increasingly vigilant HMRC, employers must ensure they fully understand their obligations under National Minimum Wage laws, says retail expert Adam Bernstein
Every few months HMRC publishes a list of those employers it finds underpaying employees the National Minimum Wage (NMW). The most recent list, published mid-August, was the largest ever and named 197 employers who collectively owed £465,291 to workers.
Since the scheme was introduced in October 2013, 687 employers have been named and shamed, with total arrears of more than £3.5 million – none will have welcomed HMRC’s attention, especially as they’re now on HMRC’s radar.
Low pay and the NMW is a very real problem for retail, and it’s something not overlooked by the Low Pay Commission (LPC) when it reports to Government about the recommended NMW rate. In the LPC’s spring 2016 report, it said: “A number [of businesses] were concerned about the introductory rate of £7.20 – notably in sectors, including small retail, some small firms, agriculture, food manufacturing, textiles and especially social care.” The report also noted concerns from retailers, hotels and restaurants, the hairdressing sector, and childcare sector about the 2020 goal of NMW reaching just over £9 an hour. The rise doesn’t sound like much, but to retailers struggling with competition from the web and razor-thin margins, the 2020 goal could be a problem.
Indeed, The Guardian reported (July 2015) that retailers were likely to increase prices or cut large numbers of jobs to pay for the rise in the minimum wage announced in the 2015 summer Budget, according to Moody’s, the credit rating agency. However, the reality is harder to detect, since Brexit and the fall in sterling has masked the price rises seen on the high street.
With real pressure from the Government and the media to have employees paid correctly, employers do need to know the rules.
Lee Ashwood, a senior associate in the employment department of Eversheds, says that you would think that calculating NMW is simple, but it’s not. “To most, the calculation would be total pay divided by the number of hours worked. Unfortunately, it is not that simple and this is often why employers inadvertently pay people less than NMW.”
The first step, he says, is to note that the calculation must be based on the relevant ‘pay reference period’. But not all pay in the reference period counts towards the calculation.
Mr Ashwood goes into detail: “A pay reference period is the period for which an employee receives pay (assuming they are paid regularly and at least once a month). For example, if someone is paid weekly, their pay reference period is one week; for those paid monthly, it is one month. Employers then need to look at the total employees were paid before deductions for income tax and National Insurance contributions in the period in question (the relevant pay reference period), and then remove any payments and deductions that do not count towards NMW.”
Basic salary, bonus, commission and other incentive payments based on performance, all count towards NMW. But there are a number of elements that do not count, including pension payments or benefits in kind, such as private medical insurance or other benefits (except an accommodation allowance); any extra pay for overtime or shift work. Only the basic rate of pay is taken into consideration for overtime worked; expenses; and any allowances or payments that are not attributable to their performance and is not part of their basic salary, for example an additional element of pay that is for London-weighting or an on-call allowance.
The amount that is left is the total amount paid for the purposes of NMW.
To stay out of HMRC’s reach Mr Ashwood firmly advises employers to note these relevant factors when calculating NMW. “Remember, NMW is not going away. As the government minister responsible for NMW, Margot James, recently said: ‘This Government is determined to build an economy that works for everyone, not just the privileged few. That means making sure everyone gets paid the wages they are owed – including our new, higher, National Living Wage. So we’ll continue to crack down on those who ignore the law.’ With media attention heightened when it comes to underpayment of employees, employers had better watch out.”