NMW – avoiding the pitfalls
01 April 2019
This article was featured in the April 2019 issue of the magazine.
Samantha Mann MAAT MCIPPdip, CIPP senior policy and research officer, spotlights commonplace errors and discusses how they can be avoided
The introduction of the national minimum wage (NMW) was hailed as a vote winner for the Labour party in 1997 but it is in recent years that the minimum wage has regularly captured the headlines as increasing numbers of employers face the shame of being named for failing to pay the NMW to their workers.
The reason for being issued a notice of underpayment (NoU) by HM Revenue & Customs’ (HMRC’s) NMW enforcement teams, however, may not be down to malicious intent by the employer as the reasons are increasingly due to technical error. You will have read in earlier articles about the publication of lists that detail common errors made by employers as they pay their workers.
We know, all too well, that error caused by ignorance of the law is never considered a defence. Indeed, employers that have settled any arrears in full to their workers before HMRC have stepped over their threshold may still be included in the naming-and-shaming list maintained by the Department of Business, Energy and Industrial Strategy (BEIS) where an inspection process has begun.
By the time you read this the BEIS consultation on the NMW and salaried workers and salary sacrifice, that ran from December 2018 to March 2019, will have closed (see on your behalf). The consultation focussed on a small number of key areas of concern for employers and the payroll professionals who serve them relating to:
pay reference periods allowable for salaried hours workers
overtime and pay premia
anything else that could be addressed within regulations without causing detriment to workers.
We know from the response numbers alone how important this area continues to be for you all.
...increasing numbers of employers face the shame of being named for failing to pay the NMW...
Salaried hours workers
BEIS guidance (https://bit.ly/2DD9JaG) reminds us that for a worker to be a salaried hours worker, they are:
under a contract to do salaried-hours work
paid under their contract for a set basic number of hours in a year
entitled under their contract to an annual salary for those hours
paid in equal weekly or monthly instalments – e.g. 12 monthly or 52 weekly instalments.
Much has been made about the use of a divisor e.g. 52, 52.14, 52.17 and many more have been mentioned over recent years. Neither BEIS nor HMRC promote a specific divisor that employers should use; instead, they confirm that it is for the employer to ascertain how the annual number of hours that the salary represents are calculated.
The method to be used by the employer where the total number of hours isn’t detailed within the contract, needs to be clear. The advantage of operating a salaried hours contract is that it provides an equal amount of pay (and hours) to be applied across each weekly or monthly pay reference period (PRP) regardless as to the hours worked within the PRP.
If an employee exceeds this annual amount during the year – they will need to be paid at least the minimum wage for each hour worked in excess of the annual figure.
Equally if an employee leaves part-way through their calculation year the employer needs to be able to confirm that they have not been underpaid at that point. For workers in sectors that experience significant peaks and troughs of work due to seasonal demand this can easily occur.
The method used by the employer to calculate that number and monitor if that annual number is exceeded must be known and clearly understood by all.
Fee for AEOs
The NMW regulations don’t mirror other areas of law and the deduction fee that employers are permitted to take for administering an attachment of earnings orders (AEOs) – such as those for fines or unpaid council tax – is a good example of such conflict.
Deductions made for the employer’s use or benefit will reduce the worker’s pay for minimum wage purposes. These deductions remain a common area of error for employers.
Don’t be fooled by authorisation granted for the deduction to be made as it isn’t matched in the NMW regulations.
A key area that we hope will be addressed by the recent consultation is the limit of PRPs that can be used for salaried hours work, which currently are weekly and monthly only. We know that many other PRPs exist – fortnightly and four-weekly are particularly common in the retail industry. Workers appreciate the reliability of being paid a regular amount throughout the year, indeed every bit as much as workers who are paid weekly or monthly (which we know remain the two most popular PRPs).
Survey responses confirm to us that NMW regulations and their application should mirror that of pay as you earn (PAYE) income tax, National Insurance contributions (NICs), and automatic enrolment – to name just a few – in recognition of the wide variety of PRPs that exist.
Note that the wide use and flexibility of different PRPs applied for PAYE income tax, NICs and automatic enrolment is not mirrored in the NMW regulations for salaried hours work.
...NMW regulations don’t mirror other areas of law ...
Failure to apply new rates
Listed in HMRC’s December 2018 Employer Bulletin (https://bit.ly/2EWJAFD) as the top reasons for employers failing to pay the NMW occur when rates of pay change are:
the annual NMW increase is applied (for PRPs starting on or after 1 April)
workers move up to a new age band as a result of having a birthday, finishing an apprenticeship or when an apprentice age 19 or over completes their first year of their apprenticeship.
Ensure that processes are in place to monitor when rates increase. Payroll software is an excellent tool for providing reminders and alerts for birthdays and annual increases; however, this only works when coupled with awareness by the payroll operator.
So much more…
We could have discussed accommodation, uniforms, working time and so much more besides but space eludes us and so we will leave these discussions for another day.
The consultation included a final section which asked whether there are any other NMW rules which penalise employers without protecting workers from detriment? We know the answer to this is yes and although the consultation has now closed the CIPP policy and research team haven’t. Accordingly, we are keen to hear more views as we are hopeful that this is the beginning of a conversation that will see the NMW regulations become fit for purpose for a 21st century workforce where employment is aspiring to be ‘fair and decent’ for all.
Keep your comments coming to [email protected] as they are influencing change.