National minimum/living wage compliance

25 September 2018

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

In July, Professional in Payroll, Pensions and Reward invited several industry luminaries to participate in a virtual roundtable on this highly topical issue 


Simon Rice-Birchall, partner, Employment, Eversheds Sutherland

Samantha Mann MAAT, MCIPPDip, CIPP senior policy and research officer

Simon Parsons MSc FCIPPdip MBCS, director of payments, benefits & compliance strategies, SD Worx UK Limited

Maria Hartley MCIPPdip, payroll manager, Parkwood Holdings

Richard Blackwell, payroll services manager RCS - Care UK


To what extent do you think employers place emphasis on ensuring compliance with the NMW/NLW requirements?

Simon Rice-Birchall: It varies very much from organisation to organisation. Those that have been investigated place significant emphasis on this. Many that have not been investigated seem unconcerned, focussing often on headline rates of pay without reference to how the NMW is calculated.

Samantha Mann: Not nearly enough emphasis is placed upon the minimum wage. However, the increased publicity around the naming and shaming process by the Department of Business, Energy and Industrial Strategy (BEIS) when combined with the increasing reach of the NMW/NLW rates and a number of high-profile cases in the courts have certainly pushed this subject up the priority list for many employers.

Additionally, the increasingly visible and – some have reported – overtly aggressive activity by the HM Revenue & Customs (HMRC) NMW compliance teams in opening investigations reminds us that there is still much more that should be done to ensure that this most basic of subjects is more widely understood. 

Simon Parsons: Employers are currently confused by minimum pay compliance. They do not appear to understand the principle of time or pay and how that relates to nationally set minimum payments. 

Often employers consider only the make-up hourly rate of pay for hours being paid. Many are not understanding the obligations in relation to work time that is counted but which they are not paying. Equally they are not understanding the impact of policies in relation to uniform. They continue to not understand the interaction of salary sacrifice arrangements (they are not ‘deductions’ but ‘reduction’), nor deductions which are considered for the benefit of the employer. However, there will over time be an increased focus as HMRC pursues employers for what are criminal breaches of little-understood law. 

Often employers consider that national minimum pay is a payroll matter, not understanding that the impact of the law extends to working practices across the business. So, are local managers ensuring that they record and pay for work time or attempting to squeeze additional unpaid work out of the workforce?  

Maria Hartley: The majority of employers will take compliance of NMW/ NLW seriously to avoid the extra workload and where companies take on outsourced work, being investigated or named and shamed would have a huge impact on future bids.

Richard Blackwell: In my experience the employers I have worked with all place great emphasis on the application and compliance of the NMW/NLW requirements. 

HMRC’s public ‘shaming’ of employers that do not comply seems to be working as a quite effective ‘stick’.

Has the introduction of the NLW impacted minimum wage compliance processes? Do you think implementing the projected NLW rate at ‘60% of median earnings by 2020’ will change procedures?

Samantha Mann:  Yes, it has had an impact. I also believe there is a rising awareness of the risk it presents to employers who believe that if they pay rates in excess of the NLW they won’t be found to be wanting during a compliance visit. 

The introduction of the NLW is having a bigger impact on some sectors such as tourism, hospitality, retail and the care sector.

Surveys and anecdotal evidence informs us that the introduction of NLW has caused many members to revisit their procedures together with a total overhaul of all processes to see how greater efficiencies can be made that counter the increase in hourly rates.

At a roundtable meeting with the Low Pay Commission during the summer, there was a very real concern raised about the impact the NLW has on diminishing profit margins and ultimately the impact this will have on service delivery. 

For some sectors the challenge to continue to be a good employer providing a wide range of employment benefits as well as beneficial above-minimum-wage hourly rates when coupled with complex NMW regulations has increased the burden of daily compliance.

Simon Parsons: Not yet although eyes are starting to be opened. 

As HMRC increasingly find unintentional breaches of NMW/NLW law and enforce back payments and fines, then employers will start the process of looking more closely at their practices and effect change.

Maria Hartley: It will not necessarily change procedures; however, it will have an impact on business practices because as the payroll bill increases it may affect the recruitment process as there will be a narrowing of pay between job levels in order to keep costs low i.e. removal of a management level.

Richard Blackwell: We already monitor hourly rates being paid each pay period – we are a predominantly ‘hourly’ paid business – and take steps to rectify any rates that are inadvertently entered incorrectly. Pre-booked holiday can be set up in advance of rates being amended and can retain the ‘old’ rate unless updated accordingly.

Simon Rice-Birchall: Yes, certainly, because more and more workers will be employed at or near the NMW.


Who should take responsibility in organisations for ensuring NMW/NLW compliance? What power should this person have to effect changes to processes and procedures to ensure compliance and to authorise and make appropriate corrective payments in instances of the NMW/NLW being underpaid?

Simon Parsons: As national minimum pay failure relates to criminal activity, then an employer needs to take responsibility at senior levels within the business. Payroll professionals can potentially assist; but equally services of friendly internal or external compliance audit and reviews are an option to consider. As failure to pay NMW/NLW is a criminal activity, the senior lead on minimum pay compliance must be able to expressly change business practice to resolve any potential breaches, and issue communications across the business. Processes for corrective payments must be put in place to ensure that they are made within appropriate timescales. 

Maria Hartley: Responsibility for compliance should lie with all parties; however, the main responsibility lies ultimately with the board of directors to enable the payroll department to have the resources (i.e. compliant software/reports and staff in the case of larger companies) to enable monthly checks of the data to ensure that all payments are compliant and those that are not are dealt with  in a timely manner. 

Richard Blackwell: The board of our company take this corporate responsibility collectively, but delegate responsibility to the human resources (HR) director to rectify anything that is identified in our checking processes. 

Culturally the organisation does not pay below the NMW/NLW rates published, so any corrective action is implicitly sanctioned.

Simon Rice-Birchall: Usually in my experience this falls within HR. I think it should do because terms and conditions of employment, which are usually the preserve of the HR team, are key to calculating the NMW/NLW. HR tends to work very closely with payroll on this subject.

Samantha Mann:  Over recent years we have seen a growing trend for organisations to have a single individual with the responsibility and thus the power to ensure application of legislation on specific requirements e.g. General Data Protection Regulation and gender pay gap reporting – with that individual ideally being the chief executive officer or someone who has a seat at ‘board level’. This is because individuals with boardroom level seniority should have responsibility to ensure that processes and procedures are in place to deliver full compliance. 

To achieve full compliance, however, will require good communications and team work across a number of teams (which will vary depending upon the size and set up within an organisation); at an operational level this should clearly sit within payroll as it is these professionals who have responsibility for delivering compliance at the coalface.


Are there any specific areas of compliance that are particularly difficult? And is the official guidance clear enough on these?

Maria Hartley: The areas that are particularly difficult surround what can and cannot be deducted that will take pay below NMW. Clearer notes and guidance with examples are needed to ensure that employers stay compliant. Also, it makes the task of recovering overpayments and other necessary deductions from pay difficult. It would be useful to allow the employee to sign a written agreement for these deductions to be recovered and to be paid below the NMW/NLW for a short-term basis.

Richard Blackwell: Where to start!? The guidance to comply with NMW/NLW regulations are clear enough, and it is straightforward enough to check if any rates are below the minimum values. Having said that, the way that HMRC go about checking all the other aspects of how the minimum rates can be reduced is, in my view, not clear enough to employers. If you have time to trawl through multiple web pages you can probably get to the bottom of it all but that is a very tall order. 

The unintentional actions of some minor policies at a company can have far reaching consequences for NMW/NLW rates. Clothing policies are a notable example. Specifying the colour and type of shoes to be worn, often for health and safety reasons, is an area that HMRC seem to home in on. Any requirement to purchase a specific type of shoe can result in the NMW rate being breached in the period when the shoes are purchased. That can affect many staff who are paid quite well over the NMW rate if the shoes cost £50–£75 a pair. Someone earning £9.00 and working 40 hours per week would earn £360 per week. If they purchase shoes at £50, HMRC will deduct the £50 from that week’s earnings and do the calculation; £360 - £50 = £310 ÷ 40 = £7.75 per hour! 

It is the consequences of this type of ‘unintended’ breach that many employers find difficult to swallow as, to my knowledge, there has not been any significant publication of this type of issue. 

Simon Rice-Birchall: No, the guidance isn’t. The key areas of difficulty relate to salaried hours, calculating and proving time worked, and expenses.

Samantha Mann:  There is a wide difference in the guidance produced by BEIS aimed at helping employers calculate the minimum wage – and which is widely pronounced as being the authority of employer guidance – and that produced by HMRC in their internal manual. This demonstrates the wide chasm that exists between policy and the practice. Add to this the increasing concern by the legal profession as to HMRC’s interpretation of the regulations and clearly there remains much work to do to improve guidance and education from BEIS and HMRC.

However, several areas continue to challenge and trip the unwary employer; these include but are not limited to: types of work (i.e. salaried work, time work, output work and unmeasured work); working time; TOIL; elements of pay that don’t count towards minimum pay; uniforms or clothing policies; deductions from pay; employer-provided accommodation.

Simon Parsons: The guidance is comprehensive and clear. However, it is also large in content covering complex combinations of impacting rules which are little understood. There are many areas of compliance which are difficult, especially around what time to count, what pay to count, when is school leaving age reached, the impact of deductions for the benefit of the employer, salary sacrifice arrangements and attachment/arrestment employer fees. 


In what way(s) do you think the requirement to display (and, so, report/record) hours worked on payslips from April 2019 will help with NMW/NLW compliance?

Richard Blackwell: We have been displaying the hours worked with the pay rate being paid for years now and it has not really caused any major issues. We do get queries about the pay rates sometimes, particularly when rates have been increased, but the clarity provided avoids too many long discussions about the issue.

Simon Rice-Birchall: It might do so in some cases. The issue will be whether workers understand that they are entitled to be paid for each minute of work they perform.

Samantha Mann:  Education, education, education. This continues to be needed to ensure good compliance and not only of the employer but also the worker. Much misunderstanding along with many hours of calls to payroll departments and to ACAS each week could be saved by improving the lines of communication between the employer and the employee/worker. Understanding what a payslip actually shows the reader begins with the staff handbook and the particulars of employment.

Understanding by both the employee and the employer of which pay period is being reported together with any cut off dates that will have affected the figures being reported, is vital to ensure that transparency is achieved.

And on a final note – neither of the two amendments being introduced from April will ensure that a worker actually looks at their payslip. There are increasing obligations being placed on the employer but as employment rights stack up in number so to should there be a mirroring duty on the worker to take steps to ensure they understand and engage fully with the pay process.

Simon Parsons: The display of hours will have limited impact on minimum pay compliance. It will give employees an opportunity to identify whether the hours they are expecting have been paid; however, it will not assist in the understanding of minimum pay and whether there has been a breach or not.

Maria Hartley: More clarity on the payslip will ensure that the employers stay compliant to avoid the chance of a disgruntled employee reporting them to HMRC due to any errors being more evident. The employee can be more pro-active in raising issues earlier to ensure errors are rectified and back-pay paid on hours that have been missed due to deadlines and passing of birthdays.


To what extent should payroll and/or HR software check for non-compliance and provide advice and support prior to, during and after each payroll run? In what way could the software be improved?

Samantha Mann:  Payroll and HR professionals have a key part to play in ensuring non-compliance is revealed, and that processes and procedures are put in place to maximise discovery of such occurrence. But in a complex organisational structure they may be only one (or two) pieces of the jigsaw and so good lines of communications must be established to ensure everyone who has involvement in the essential data transfer (e.g. line managers, team leaders, employees) contribute to compliance.

Software is also only one piece of the puzzle – albeit a key piece – and much can and is being done to ensure that it plays its part in compliance. But it can only go so far in coding-out solutions of such a complex nature.

The adage ‘rubbish in rubbish out’ continues to hold true in this century.

Simon Parsons: The process of checking for NMW compliance in software is the application of a complex formula and extensive configuration rules to hours, pay elements, deductions and also the inclusion of salary sacrifice arrangements. Where appropriately configured, minimum pay compliance can be monitored on known provided data. However, payroll cannot check work time not notified or where the employer has limited understanding of the configuration rules required in relation to what does or doesn’t count for minimum pay compliance. In the SD Worx service, there are options for minimum pay compliance which (based on the employer specified configuration) applies complex formulae for time and pay (including the impact of relevant deductions and salary sacrifice) to determine the rate paid for minimum pay (not the pay rate), to determine the minimum due and identify any underpayments. Also, there is the capability to correct errors or pay the underpayment amount identified.  Employers must ensure that their employment policies, terms and conditions and payroll rules ensure compliance with NMW/NLW. HR solutions can potentially police the base rates being used, but what they cannot deal with is understanding the impact of other payroll elements and time capture that impact minimum pay. Payroll can potentially, assuming the appropriate configuration has been applied, audit the compliance of time and monies paid to ensure that any breaches are identified to enable correction. As failure to pay NMW/NLW is a criminal activity, employers must take a lead in ensuring that they pay at or above the minima.

Maria Hartley: Good reporting within HR and payroll software would ease the burden of the checking process enabling the employer to be more compliant, so this is a vital requirement.

Richard Blackwell:  Some software packages can be set to check for NMW/NLW compliance and will automatically adjust with operator approval if required. This is ideal. Reporting from other systems can also be useful to identify instances where rates are below NMW. 

In an ideal world the payroll software should be capable of identifying and correcting NMW breaches.