Minimum wage compliance

12 February 2018

This article was featured in the March 2018 issue of the magazine.

Tim Bridgett, employment taxes senior manager at PSTAX, looks at developments, practice and compliance pitfalls 

Originally introduced by the Labour government in the National Minimum Wage Act 1998, the national minimum wage (NMW) came into force in April 1999 when it was set at £3.60 per hour. Since then the NMW has more than doubled, rising to its current level of £7.50 (£7.83 from April 2018), and the national living wage (NLW) was introduced for the over-25s in April 2016. Although the Department for Business, Energy and Industrial Strategy (BEIS) is responsible for NMW/NLW compliance, enforcement falls to HM Revenue & Customs (HMRC).

In simple terms, the NMW/NLW limits apply to ‘workers’, including apprentices and volunteer workers, who get paid for doing work for an employer and who usually work under an employment or apprenticeship contract. It does not apply to self-employed workers. It also does not apply to volunteers who are not engaged under an employment contract to perform work.

For NMW/NLW purposes, employers need to aggregate all the pay elements and allowances relating to actual hours worked in a particular pay period, ignoring any ‘premium’ rates for overtime worked. Some payments made by an employer do not count towards the wage calculations and these include: tips, loans or advances of wages, pension payments, lump sums on retirement or redundancy payments. Additionally, the hours of work that count for the calculations include any time when a worker is: 

  •  at the workplace working, including appropriate rest breaks

  •  sleeping between duties, where there is a statutory requirement for them to be sleeping at the workplace (such as care home workers)

  •  at work and required to be available for work, regardless of whether there is actually any work for them to do 

  •  required to be available for work either on standby or on-call at or near their workplace

  •  travelling when on business (does not include normal commuting)

Employers have to be especially careful with ‘sleep-in’ rates as this is what can cause the biggest difficulties, particularly where allowances rather than hourly rates are used, as illustrated in the Example.



Salary: £7.80 × 140 hours

Saturday overtime: £7.80 × 20

Saturday premium: £3.90 × 20 (ignored as relates to hours already paid)

Sleep in allowance: £35 × 4 nights    (based on 8-hour shift)

Whilst the basic hourly rates appear to be above the NMW/NLW limit, the aggregate rate, once ‘sleep-ins’ are taken into account, works out at £7.22 per hour, which would be below the NMW/NLW for an employee over 25.


The NMW/NLW is enforced by HMRC compliance officers, who can carry out inspections of employers at any time. Additionally, workers can make their own claims for underpaid work through employment tribunals or the courts. 

Where underpayments of NMW/NLW are identified, employers may be required to repay arrears of the minimum wage to each worker identified, for up to six years. Additionally, penalties for breaking minimum wage law also apply and can be up to a maximum charge of £20,000 per worker.

The BEIS also has the power to publicly name and shame employers who have been found by HMRC to be non-compliant. In the latest list published in August 2017, around 230 employers were confirmed as having underpaid their workers, with Argos Ltd the largest employer. This press release also confirmed that: “Since 2013, the scheme has identified £6 million back pay for 40,000 workers, with 1,200 employers fined £4 million.”

In addition to the amounts of wages underpaid, there is also the issue of the additional tax/National Insurance contributions (NICs) which will be due in most cases. The NICs will be calculated in the pay period in which the award is made, but the tax is calculated under special rules in that it is worked out relating to each year that the higher wages would have originally been earned. Settlements can be entered into with HMRC to reflect this. 

In November 2017, the Government launched a new compliance scheme for social care providers that may have incorrectly paid workers below legal minimum wage hourly rates for ‘sleep-in’ shifts. Employers must register to join and – if accepted onto the scheme – must declare any underpayments made. By joining the scheme, employers won’t have to pay the financial penalty, but more importantly (in some cases) won’t be publicly named by BEIS. especially careful with ‘sleep-in’ rates... 


Excuses, excuses, excuses

HMRC has published details of some of the excuses employers have given for underpaying staff, including:

  •  “The employee wasn’t a good worker so I didn’t think they deserved to be paid the [NMW].”

  •  “She doesn’t deserve the [NMW] because she only makes the teas and sweeps the floors.”

  •  “My workers are often just on standby when there are no customers in the shop; I only pay them for when they’re actually serving someone.” 

Clearly, these are not acceptable reasons for failing to pay the NMW/NLW and, whilst the vast majority of employers would be unlikely to act on a similar basis, it does illustrate the need to take great care to ensure compliance.