Graham Farquhar explains the common mistakes employers make and how to avoid them

Last month, more than 200 employers found themselves on a published list of those who had failed to pay their employees either the national minimum wage (NMW) or the national living wage (NLW).

The name-and-shame regime is a key weapon in HMRC’s arsenal for dealing with employers that do not pay their staff the NMW or NLW. But is it too heavy handed?

While most would agree that a naming and shaming regime is appropriate for those who deliberately avoid paying employees the agreed basic legal minimum, what is becoming more apparent is that employers are being caught out by some of the more complex rules. HMRC has stated that common errors relate to: failing to account for overtime, not paying apprentices correctly and making deductions for uniform costs from pay.

What should employers do?

Employers should start by considering their employee and worker life cycle and identifying where errors can arise. While this may seem tedious and unnecessary, minor breaches of the NMW can soon add up.

It is vital for companies to maintain accurate records and understand what amounts to working time for NMW purposes. For example, when employers ask workers to attend additional training or briefings throughout the employment relationship without paying them, this may not seem like a ‘big ask’. However, such time is classed as working time for which they should be paid at least the NMW. The impact of this decision could be costly. Unpaid monthly training or briefing updates may soon add up to a significant underpayment of the NMW, particularly when your workforce is large. Particular care should be taken where apprentices have to travel considerable distances to attend college courses as this too can cause problems.

Many employers have also been caught out for making deductions for uniform costs. This is trickier than you would expect. Under NMW rules, requiring employees to follow a dress code without any additional pay to cover the cost of the dress code is considered a deduction from NMW. The NMW guidance gives the example of a hairdressing salon requiring its employees to wear white t-shirts and black jeans. If the salon does not pay the employee a clothing allowance and is paying the NMW, then HMRC will consider that the employer has failed to pay the employee the appropriate wage.  

Up until this year, the NMW and the NLW had different dates where the rate changes. One was in October and the other in April, and this resulted in many businesses missing increases in rates of pay. This has now been aligned, but it is still important for employers to keep track of birthdays, especially if salary levels are set in accordance with, or near to, the NMW or NLW. The NMW increases when individuals reach 18, 21 and 25 years old. Recognising annual rate changes effective from 1 April each year should also be part of an employer’s salary planning.

Accurate record-keeping is a must

It is a legal requirement for employers to keep records for at least three years for all workers and ex-workers from which they can show what NMW the worker was entitled to and what they were paid. Failure to do so could result in criminal prosecution.

A proactive assessment of how you store and maintain your workforce data should be undertaken alongside a review of your current processes and procedures to make sure both are aligned. This should help demonstrate that you have a robust strategy in place to mitigate any potential exposure. Accurate record keeping is therefore essential, not only to gain insight into your workforce but to mitigate the risk of NMW non-compliance.

Companies should not forget educating employees on the need to accurately record their work time and to discuss with HR departments any issues they may have.

Putting in place these processes and controls will be a giant step towards ensuring your brand isn’t tarnished by being added to the list of those failing to pay the NMW.

Graham Farquhar is employment tax partner at RSM