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National Minimum Wage – Unintentional breaches

Increase in NMW: What are the risks for retailers?

The government has recently announced the latest increase in National Minimum Wage (NMW) rates, which will come into force on 1 April 2020.  The rate for over 25 year olds is set to rise from £8.21 to £8.72. This is big news for retailers for two reasons: 1) the majority of retail staff are paid by the hour and the cost of the new rates must be met from somewhere; and 2) retail is one of the key industries of interest to HMRC when auditing compliance with the NMW Regulations [1].

The retail industry has a high volume of hourly paid staff and we are now seeing more retailers paying at or around the NMW rate than ever before. However, compliance is not simply a case of “do you pay the correct NMW rate for the correct age bracket, per hour of a shift?”…

… In fact, the policies and practices that retailers apply to their employees (often innocently) could in fact be resulting in inadvertent breaches the NMW Regulations, leading to some employees receiving less than NMW. According to the Low Pay Commission, around one in five low-paid jobs for those aged 25 or above are paid below NMW.

The issue for retailers is not simply a case of meeting the increased costs (albeit that may be complicated enough, potentially having knock-on effects for employees, such as reductions in premiums and headcount cuts, etc.).  In our experience of advising retail clients through HMRC audits, there are a number of areas in which employers risk being caught out.

Areas of compliance risk for retailers

Scenarios in which we have seen employers caught out are:

  • Work uniform – If an employee has to supply any part of their own uniform (including shoes) the cost of purchasing these items should be deducted from their pay when calculating NMW. What this means is that the employee must receive the NMW after that deduction.
  • Working time – An employee’s ‘working time’ might seem straightforward – you would think that it is simply calculated by reference to the time spent on shift doing the job. However, additional activities at the start or end of a shift can also count toward working hours, such as security searches, team briefings, getting changed for work on site or drug and alcohol tests.  The time spent going through these processes is highly likely to be considered by HMRC as working time and should be paid at the NMW rate.
  • Similarly, if employees work through an unpaid break, this becomes working time for which they should be paid NMW.
  • Salary sacrifice – Where an employee is a member of a salary sacrifice scheme, including schemes for the payment of pension or childcare vouchers, then they must receive the NMW rate after this deduction has been made.
  • Seasonal work – Retailers need to consider whether any of their employees work varying amounts over the year, for example to cove, or whether hours are averaged out over a year with pay given in equal monthly instalments. If the latter, retailers must have a contract which HMRC will classify as a “salaried hours” contract [2]. The contract must contain an “ascertainable” number of hours that the employee is expected to work in the year – expressed in the number of hours per month or per year. It should not refer to hours per week (as most do). If the contract is not truly a salaried hours contract, HMRC will not allow for pay to be averaged out over the year. This means that NMW Regulations breaches will occur in months in which an employee is paid less than the hours they have worked, and this is so even if there are other months in which the employee is effectively overpaid.
  • Deductions – HMRC will consider that other areas of deduction, even where it is “opted into” by the employee, will reduce NMW pay. Example deductions could include some payments into savings schemes, social clubs and even the purchase of items from the employer where this is done by way of a deduction from pay. Again, NMW will need to be met after these deductions.
  • Record keeping – It is a criminal offence under the NMW regulations not to maintain proper records showing that the NMW has been paid by the business for at least the last three years. There is also a presumption that an employee has not been paid the NMW unless an employer can prove to the contrary.

WM Comment

The above are just some of the areas in which we have seen retailers get caught out by HMRC for breaching the NMW Regulations – there are many others. NMW compliance is likely to remain a key area of focus for HMRC and for the press for the foreseeable future.  Retailers must remember that the “intention” of the employer is not a defence, nor is ignorance of the detail of the NMW Regulations.

If HMRC come knocking (a fate already suffered by a significant number of retailers) a lengthy and intrusive investigation could ensue, with large financial penalties a real risk. It is therefore sensible to review your employment contracts and practices for compliance now.

Please do not hesitate to contact Walker Morris’ Employment team for further information, advice or assistance.

[1] National Minimum Wage Regulations 2015/621; National Minimum Wage (Amendment) Regulations 2020 (draft)

[2] This relates to HMRC’s definition, which differs from the common understanding of what is “salaried”