Staff underpayments at John Lewis lead to revision of 2016-17 pre-tax profits

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John Lewis has set aside £36m after its ‘pay averaging’ system (which smooths out monthly pay for non-salaried staff over the year) led to wage underpayments for the last 6 years. The underpayments are potentially significant and the group has revised its 2016-17 pre-tax profits from £577m to £541m.

This case demonstrates that even the most established and reputable of employers can inadvertently fall foul of national minimum/living wage (NMW/NLW) regulations due to errors in payroll processes. It is likely that the errors went undetected for years. Employers cannot assume that there will always be ‘red flashing lights’ in these scenarios.

A spokesman for John Lewis said, “This arrangement was implemented to support partners with a steady and reliable monthly income, but we now believe this arrangement may not meet the strict timing requirements for calculating compliance with the national minimum wage regulations. Once we have completed our review, we will make any retrospective payments required to current and former partners affected.” Its Chairman confirmed that the group was now working with HMRC to ensure that its pay practices meet minimum wage and living wage rules.

This error has led to a significant reduction in this year’s profits and generated unwelcome adverse publicity for John Lewis.

This announcement comes at a time when the Government and HMRC are taking an increasingly interventionist approach. Although the John Lewis partners are employees, similar issues have been raised by the ‘worker status’ debate (highlighted by cases such as Uber, Citysprint and Pimlico Plumbers). This is because the courts have found that individuals who have been classified as self-employed, when they are in fact workers, will be entitled to receive the NMW/NLW and paid holidays (including any historical payments owed). Misclassification of workers can also lead unwelcome attention from HMRC.

Our employment team have extensive experience of advising in this area. If you would like advice on a current concern please contact David Smedley or Andrew Rayment.