NMW/NLW compliance matters

25 June 2018

This article was featured in the July - August 2018 issue of the magazine.

Tim Bridgett, employment taxes senior manager at PSTAX, discusses some of the major risk areas identified


We have noticed a significant increase in compliance activity by HM Revenue & Customs (HMRC) in respect of the national minimum wage (NMW) and the national living wage (NLW) as well as receiving an increasing number of queries from our clients. 



As discussed in our previous article on this subject (see Issue 38, March 2018), for NMW (and NLW) purposes employers need to aggregate all the pay elements and allowances relating to actual hours worked in a particular pay period. 

Deductions from pay, either from gross pay or from net, can have significant impacts on minimum wage calculations. Great care must be taken to ensure deductions do not reduce the hourly pay levels to below the appropriate NMW/NLW level.

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 Department for Business, Energy and Industrial Strategy also has the power to publicly name and shame employers that have been found by HMRC compliance teams to be non-compliant.

...ensure deductions do not reduce the hourly pay levels to below the appropriate NMW/NLW level


Allowances and ‘sleep-in’ rates

This will generally apply to employees working in the care sector, who are often paid overnight allowances for sleeping on work premises. These ‘sleep-in’ rates do count towards the NMW/NLW calculations. 

This area has been the subject of much discussion over the past few years, with several high-profile tribunal cases being heard. 

HMRC has acknowledged that its official guidance in this area has been particularly misleading. HMRC’s 2013-guidance had this to say about sleep-ins: 

“Time when a worker can sleep and is not working is not time for which you have to pay them the minimum wage.”

However, in the guidance published in April 2017, HMRC reversed its advice and the same section now states:

“A worker, who is found to be working, even though they are asleep, is entitled to the minimum wage for the entire time they are at work.”

In November 2017, HMRC introduced the social care compliance scheme to address these issues. The message was clear in that HMRC still expects all employers to pay their workers according to the law, including the NMW. However, it did also say that organisations that do register with this scheme may make disclosures of NMW/NLW underpayments and that HMRC will waive financial penalties faced by any employer found to have underpaid their workers for ‘sleep-in’ shifts, with the condition that those shifts must have taken place before 26 July 2017. 

The social care compliance scheme will end on 31 March 2019, by which time all employers must have shown that they have repaid their arrears relating to time spent sleeping. 

Annualised hours

This applies where salaried workers will not be working for the full twelve months in a year, but their salary will be divided equally across the year. This will mostly apply to individuals working at schools. Although the hours worked by these employees are likely to fluctuate from week to week and month to month, under the NMW guidance employers should divide the annualised hours by twelve to identify the notional hours due for each month for their NMW calculations.

It is essential that workers engaged to work on this basis have a contract that explicitly states what hours they are expected to work during the course of the year, or at least provides sufficient information in the contract to allow the annual hours to be calculated. HMRC’s National Minimum Wage Manual (https://bit.ly/2sCnLmM) (‘the NMW Manual’) gives an example where such wording is not sufficient:

“Where a contract specifies a minimum number of hours to be worked, such as ‘at least 40 hours per week’, then it is not possible to ascertain the exact number of basic hours and the worker will not be performing salaried hours work.”

Clearly, great care must be taken to ensure the wording of such contracts meet the requirements of the minimum wage regulations.


Salary sacrifice

Any deductions from an employee’s pay can have a detrimental effect on NMW calculations and this is particularly relevant for employers that allow employees to participate in salary sacrifice schemes. HMRC guidance on salary sacrifice schemes states that:

“A salary sacrifice arrangement can’t reduce an employee’s cash earnings below the [NMW] rates.”

However, this has not stopped some employers having serious issues with NMW compliance. In examples we have seen, employees participating in childcare voucher or car leasing schemes have had reductions in pay sufficient to bring their hourly rates below NLW levels. In both examples, this was in relation to part-time workers, but it can easily apply to workers engaged on a full-time basis if insufficient checks are undertaken on pay levels before an employee joins any salary sacrifice scheme.


Accommodation and rent deductions

There are certain cases where rent deductions taken from the pay of employees who are staying in employer-owned or employer-provided accommodation, can count towards the NMW/NLW calculations and reduce their pay levels accordingly. This will apply regardless of whether the deductions are taken from gross or net pay. 

GOV.UK explains that charges for accommodation will only affect an employee’s pay for minimum wage purposes if the charge is higher than a notional daily amount known as the accommodation offset, which is currently £7 per day. Though these rules will apply where the accommodation is provided in connection with the worker’s contract of employment, they may also apply where there is no link to the employment, where the employer is the worker’s landlord either because they own the property or are subletting it. This could apply in the case where a council is providing an employee with a council house and is making rent deductions directly from pay, rather than the individual making payments from their own bank account. However, GOV.UK goes on to say:

“If someone working for a local housing authority or social housing provider gets accommodation from their work, this doesn’t automatically count towards the [NMW] or [NLW]. It only counts if the accommodation is linked to the employment.”

If we look at the NMW manual, no mention is made of the additional clause for housing authorities, and this may be interpreted to mean that there are issues even if there is no link to the employment. Therefore, as many councils are also local housing authorities, care should be taken in cases where the employer is the landlord, to ensure there are no compliance issues.


...if insufficient checks are undertaken on pay levels before an employee joins any salary sacrifice scheme


In summary

It’s clear that there are still many areas where employers are not fulfilling their duty to ensure pay levels are above the required statutory minimum levels. 

It can prove difficult to comply with the regulations, which is not surprising given the incredible complexity and contradictory nature of some of the guidance. Employers must take increasing care to ensure compliance with the legislation and avoid any excess charges. 

As always, we would recommend that professional advice is sought.