National Minimum Wage – avoiding the pitfalls

It is often assumed that following national minimum wage (NMW) law is as simple as paying your workers the correct amount. But there is far more to consider to make sure you are compliant.

With the UK now into the 2024 national living wage increase to £11.44 (for those aged 21 and over), businesses urgently need to review their current payroll processes to ensure they are up to date or they risk inclusion on the government’s latest NMW ‘name-and-shame list.’

The main reason for a breach of NMW rules is breaking the pay deduction rules, which makes up 35% of infringements, followed by unpaid working time (31%), incorrect apprenticeship rates (16%), and incorrect work type (6%).

So, what do we need to look out for?

1. Incorrect wage deduction

Employers will sometimes need to make extra deductions from employees’ wages, alongside statutory payments like tax and deductions like student loans and child maintenance.

Additional deductions could range from uniform costs to training expenses and should be agreed with the employee first.

However, even if they add up to a large amount, deductions must not take someone’s pay below the NMW, save for a handful of reasons, which can be found on the ACAS website, or employers risk an underpayment legal breach.

So, no matter how much needs to be deducted, make sure an employee’s hourly rate is at least at the NMW.

2. Unpaid working time and time off in lieu (TOIL)

Any scenario that an employer mandates an employee is present at or must partake in should be paid.

This includes additional work before and after a shift, trial shifts, mandatory training, and security checks.

If an employee works extra hours over and above their contractual hours, some employers offer them the option of time off in lieu (TOIL) compensation – extra time off work – rather than overtime pay.

However, employers must be careful when offering TOIL to those on wages around the NMW level as they must ensure they give their employees the same amount of time back in TOIL or the overtime or pay may fall below NMW and risk compliance breaches.

3. Apprenticeship rates

Apprentices usually have a lower rate of pay than other employees, to pay this rate the apprentice must be someone engaged under a genuine apprenticeship contract or agreement.

4. Incorrect work types

The working hours when NMW must be paid depend on the work the employee does. The four types of work are:

salaried hours work: the worker’s contract contains a basic number of hours for which they are to be paid and the worker is entitled to an annual salary;
timed hours work: the worker is paid in accordance with the number of hours they work;
output work: the worker is paid by the number of products they make or tasks they complete; and
unmeasured work: paid in any other way.

If an employer classifies an employee under the incorrect type of work, they may not be paid NMW for all their hours, which would count as another breach of the law.

5. Tips and service charges in NMW

If a business is in the service or food industry, it must not use tips or service charges to count towards the NMW.

Employers must pay workers at least the NMW, and then any extra income should be paid on top.

This is also if the customer gives the gratuity straight to the employee, for example, leaving cash on a restaurant table, or through the venue’s payment systems, like an extra service charge on top of the bill that is paid by debit card.

What happens if NMW is paid incorrectly?

HMRC will investigate and, if they uncover a breach, take action against the employer, including:

issue a notice to pay money owed, going back a maximum of six years;
issue a fine of up to £20,000 and a minimum of £100 for each employee or worker affected, even if the underpayment is worth less;
start legal action including criminal legal proceedings;
pass on the names of businesses and employers to the Department for Business and Trade (DBT), who may put them on a public list.

So, to guarantee your business stays safe and compliant, make sure you are well acquainted with all the rules and complexities surrounding NMW.

If you need assistance with running your payroll, get in touch with us here at Kennedys Accounting, our Payroll Bureau will be pleased to assist you.