National Minumum Wage- The Pitfalls

Niamh McKenna, Payroll and Employment Taxes Manager

Contact Niamh McKenna

or reach out to a member of our Payroll & Employment team.

It would be fair to conclude that amidst the current cost of living crisis, employee remuneration is a hot topic. It is difficult to turn on the news at the moment without coverage of employees in pay disputes, with institutions like the NHS currently experiencing unprecedented industrial action. In the midst of this, the last thing any employer wants is to be found to be paying below the National Minimum Wage, which, increased on 1 April 2023. Many would disapprove of companies who fail to comply with minimum wage rates and this is likely one of the reasons HMRC choose to publicly name and shame some businesses they find guilty – Sports Direct and Primark are a few of the household brands to hit the headlines in recent years! However, falling short of paying above the National Minimum Wage may be easier than you think, which is why we have outlined the common pitfalls in this blog post.

National Minimum Wage – The pitfalls

HMRC have updated their guidance on the checks they undertake to ensure compliance with the National Minimum Wage (‘NMW’). You may think that your business already complies with the National Minimum Wage, so you don’t need to worry about this, however you’d be surprised to learn the many common pitfalls of staying compliant. Failure to stay compliant is not only a criminal offence but can result in being fined penalties up to 200% or a maximum of £20,000 per employee affected and being publicly ‘named and shamed’ by HMRC.

Given the consequences of non-compliance are so severe, NMW compliance should always be high on a business’ agenda and policies in place to monitor this.

A reminder of the new rates from April 2023:

National Living Wage

(applicable to all of those aged 23 and over)

£10.42
21-22 Year old rate £10.18
18-20 Year old rate £7.49
Under 18 rate £5.28
Apprentice rate £5.28
Accommodation offset £9.10

Extra Hours Worked

Workers can often be asked or expected to carry out additional tasks outside of their set hours without pay. This can vary per company and common examples can include pre and post shift tasks such as setting up machinery, changing into uniform or ‘staying back’ to tidy the shop floor after a shift. This time might not seem like much where it is an extra 10-15 minutes here and there, however if this sounds familiar then you may find your company falling foul of meeting the NMW where your workers are not remunerated for the extra time. Training time should also be counted as working hours. This was found to be one of the most common causes for underpayment of the NMW.

Make sure your teams are aware that it is not just a harmless 15 minutes to get ready for a shift and actually, it could put the company in a compromising position.

Deductions from pay

It is vital that workers receive their NWM after any deductions have been accounted for. Deductions can include the cost of uniform, work related equipment or meals purchased from a staff canteen. Should several deductions be taken in one month, this could risk lowering the employee’s net pay below the NMW. It may seem that this won’t create an issue, as the employee is aware of the deductions that will be take from their pay. However, as the employer, HMRC will always look to you to ensure NMW compliance for all employees so ensure NMW compliance is considered when processing deductions through the payroll.

Salary Sacrifice

Where an employee enters a salary sacrifice agreement to forego a portion of their earnings in exchange of a non-cash benefit, it must not reduce their earnings below the National Minimum Wage. This applies regardless of what the employee agreed to, as the benefit cash equivalent does not count towards earnings for NMW purposes. Remember employees cannot opt or agree to have pay reduced below NWM rates! So even if an employee is happy to sign up to foregoing 30% of their earnings in exchange for a car, if this conflicts with NMW rates then you cannot facilitate it.

Living accommodation

Where an employer provides accommodation, some of the value can count towards the NMW. The accommodation offset is a rate set by HMRC that represents the maximum value given towards an accommodation benefit for the purposes of calculating whether NMW has been paid. Essentially, there is a limit to how much you can charge depending on the employees’ rate of pay or a limit to how much you can consider for free accommodation.

Trial Periods

It’s very common for employers to suggest a trial shift before passing the interview process and hiring the individual. You might find the candidate interviews great but want to see them in practice, where you find they may not be what you’re looking for. Whilst this is ok – consider whether you should be remunerating them for this trial shift! There is no set formula to determine whether the candidate should be paid for a trial shift, although the longer the trial period, the more likely NMW is payable. In general, if a trial period is longer than a day, it’s likely NMW is due to the individual.

The trial period should be limited to what is reasonably necessary for employers to assess the candidate’s ability and should not be an excuse to get free labour.

New age brackets

It’s very important to ensure a system is in place to make sure you stay up to date, not only with annual increases, but also to recognise when an employee is about to enter the next age bracket. Failure to update a newly turned 21-year old’s pay to make sure it is in line with or above £10.18 might find you facing an unhappy employee as well as HMRC’s penalties. So when the cakes and banners are rolled out to celebrate ‘big birthdays’ in the office, remember there is more to consider than just party time!

Travel time

If a worker needs to travel for business, time spent travelling should be treated as working time for minimum wage purposes. This only applies to travel that is solely and exclusively for business purposes, not ordinary home to work travel, unless that employee is working whilst travelling for example, using a laptop on the train. If you are benefitting from the work the employee is undertaking, then it is more than likely you should be paying them for it!

Pay periods

The amount that an employee is paid must reflect the hours worked in the pay period. For most employers this is 1 month and cannot be longer than 31 days. Workers must be paid on average for the time they worked in that pay reference period. NMW rules apply per pay period, so you must make sure you are monitoring this regularly.

If you are worried that you or your company may be falling into any of these traps, AAB can assist to get you back on the right track. If you would like to know anymore or have questions, please do not hesitate to get in contact with one of our UK Employment Taxes Team Gillian Forrest, Becki Diamant, Niamh McKenna, Claire Bruce or your normal AAB contact.

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