21 March 2021
Lora Murphy ACIPP, CIPP policy and research officer, provides an update and a reminder of recent significant developments
In the 2020 Spending Review (http://ow.ly/I8ru30ry5Bo), which was delivered on 25 November, the national living wage (NLW) and national minimum wage (NMW) rates to apply to pay reference periods commencing 1 April 2021 onwards were announced. Given the turbulence the pandemic has wreaked on the UK economy many were pleasantly surprised that each of the wage rate brackets would see an increase.
The rates mean that the government’s intention to expand coverage of the NLW to those aged 23 and over, as opposed to it being restricted to those aged 25 and over, is achieved in line with the original timeframe.
Changes to NMW regulations in 2020
The coronavirus job retention scheme and other measures implemented by the government to support both businesses and individuals through the pandemic dominated the work of payroll professionals in 2020. Accordingly, certain changes to NMW regulations made last year may have slipped under the radar somewhat. It is important for those in payroll departments to be aware of these changes, not least because some of them will substantially reduce workloads for those teams, particularly amendments to rules around calculation years.
Changes implemented in 2020 mean employers have the option of selecting their own calculation year for the purposes of calculating NMW. Previously, the calculation year had to be aligned with employee start dates, which proved challenging as different calculation years needed to be applied to different salaried workers, depending on their start dates. This change should alleviate some of the administrative burden associated with completing NMW checks, as now one calculation year can be applied to all workers. Employers must provide any impacted workers with at least three months’ written notice of the new calculation year, where this is to be changed.
The amendments also mean that more workers can be categorised as ‘salaried hours’ workers. Previously, only employees paid an annual salary in equal weekly or monthly instalments for a prescribed number of basic hours could be classified as ‘salaried hours’ workers. As a result of the updates to regulations, the scope of this has been widened, so that those paid in other frequencies, such as fortnightly or four-weekly, can now be defined as salaried hours workers. Additionally, salaried hours workers are now able to receive ‘premium pay’ and pay elements other than salary but remain categorised as such, whereas, historically, this was not the case.
There was substantial confusion around salary sacrifice arrangements and their relationship with the NMW when the changes to regulations were initially announced in 2020. To clarify, salary sacrifice schemes must not reduce an individual’s pay below the relevant NMW amount, in any circumstances.
A change that was implemented, however, means that where an employee has willingly accepted a reduction in salary in return for a benefit, and certain other criteria are met, the employer will not be publicly named nor receive financial penalties. The employer will, however, still be required to pay back any arrears to the impacted employees. Detailed guidance on this matter can be located here: http://ow.ly/O44330rztvR.
Following a brief suspension in 2018 to allow for a review of the process, the government announced in February 2020 its intention of resuming the practice of publicly naming businesses that do not pay their workers the NMW (http://ow.ly/GEoK30rztwv). Some fundamental changes were made to the scheme, such as the increase to the threshold for naming from £100 to £500. Naming rounds were also set to take place more frequently to try and deter non-compliance with NMW regulations. The most recent set of names was published in December 2020 (http://ow.ly/HtTR30rz8nE).
Whilst adherence to NMW rules may superficially appear simple, there are several considerations for payroll professionals when calculating the NMW, and the associated regulations can be complex and challenging at times. Therefore, it felt appropriate to include here discussion of some of the most frequently encountered obstacles relating to compliance with NMW regulations, so that payroll professionals can try and avoid making mistakes of this nature.
Please note that this is just a handful of some of the problems that arise for those calculating and processing the NMW, and is not an exhaustive list.
Change to NMW rates – There will be various points at which the NMW rate paid to an employee may change. An example is where there is a change to rates from 1 April 2021. Nowadays, most payroll software packages have the functionality to automatically capture where NMW changes need to be implemented, but this should always be checked to ensure that it works correctly. Where payroll software does not offer this feature, payroll departments need to make sure that they have robust processes in place to ensure that NMW rates are changed when required. Failure to pay at the correct rates can result in substantial fines for non-compliance.
Where new rates are to be implemented from 1 April 2021, they apply from the next ‘pay reference period’. The ‘pay reference period’ is the period that the pay covers and cannot be longer than a month.
If we take the example of an employee paid on the 15th of each month, and whose ‘pay reference period’ covers a month, the following would apply: 16 March–15 April – paid at old rate; 16 April–15 May – paid at new rate.
The same applies when it is an employee’s birthday which means that they transfer from one NMW rate to another.
Apprentices – Great care needs to be taken in relation to the correct payment of apprentices, who can be paid at the apprentice rate if they are under the age of 19 or are aged 19 or over and in the first year of their apprenticeship. If they are 19 or over and have completed the first year of their apprenticeship, they must be paid at the minimum wage relevant to their age group. Similarly, once an apprentice has completed their apprenticeship, they will need to be paid at the NLW/NMW that applies to their age.
It is highly likely that monitoring apprentices will need to be a manual process, as it is doubtful that payroll software will include the functionality for identifying when either an apprenticeship has ended or the apprentice has completed their first year and is age 19 or over. So, it is particularly important for payroll departments to be mindful of this. One useful tip would be to set up a reminder to check an apprentice’s situation or age at certain intervals to ensure NMW compliance.
Voluntary work – Volunteers may understandably expect employers to reimburse them for the expenses they incur whilst carrying out voluntary work. Examples could include, but are not limited to, the cost of any food and drink consumed whilst volunteering or the costs incurred as a result of travel.
Employers can do this without any NMW implications arising. Similarly, this would also be the case if they offer a small gift (e.g. a box of chocolates) as a way of saying ‘thank you’. In scenarios, however, where other payments are made to the volunteer which could then lead to them being classified as a ‘worker’, the NMW regulations would apply for all of the hours that the volunteer worked.
The accommodation offset – The effect of the accommodation offset on NMW depends on how much an employer decides to charge for accommodation provided. The offset is calculated by ‘pay period’ and applies irrespective of whether the cost is deducted from the worker’s wages prior to payment or the worker pays the cost after they have received their wages.
If an employer opts to charge more than the offset rate, the difference is deducted from the worker’s pay when calculating the NMW. In effect, this means that for the purpose of calculating the NMW, the greater the accommodation charge the lower an individual’s pay will be.
Where the accommodation charge sits below or exactly at the offset rate, this has no impact on the worker’s pay for the purposes of NMW.
Where the accommodation is free, the offset rate can be added to the pay of the worker when calculating the NMW.
...employers have the option of selecting their own calculation year for the purposes of calculating NMW
The future of the NLW
The NLW/NMW rates are not decided on a whim, but extensive research is carried out by the Low Pay Commission (LPC) (http://ow.ly/pUaQ30ry5FK) which is an independent body that makes recommendations to government about the rates.
The government has now published its remit to the LPC for 2021, which requests that the LPC makes recommendations in relation to achieving the government’s goal of setting a NLW of two thirds of median earnings by 2024. Additionally, the reach of the NLW is to be widened to those aged 21 and over within the same timeframe, as opposed to being restricted to those aged 23 and over (from 1 April 2021). This will be applicable UK-wide and will only be achieved should various external economic circumstances allow.
The government expects the LPC’s response by no later than October 2021. The LPC ordinarily publishes consultations annually to collect views and feedback on potential future NMW/NLW rates. The CIPP will be formally responding to this, so keep your eyes peeled for a survey and a virtual thinktank roundtable meeting on the topic.
Featured in the April 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.