National Minimum Wage: How to Avoid the Pitfalls

Small Business Owner

Earlier this year, the Government released its latest list of organisations owing wages due to miscalculation of the national minimum wage (NMW), with the hospitality sector being one of the worst offenders. In this blog I hope to address how you can avoid falling into the same trap and avoid facing penalties, should you be unlucky enough to be caught out during a PAYE visit from HM Revenue & Customs (HMRC).
Whilst there are a few companies who deliberately pay below the NMW, the majority of those in the hospitality sector were caught due to the following misdemeanours:

  • Using customer tips to top-up staff pay
  • Making staff pay for their own uniforms
  • Getting the NMW rate wrong
  • Confusing the NMW with the National Living Wage
  • Not paying employees for attending staff meetings (where they are held either before or after the shift)

In the first two examples above, HMRC deducted the customer tips and uniform costs from the hourly pay of the employees, leading in both cases to the pay they then received being below the NMW. Whilst they are easy mistakes to make and it is likely that the employers did not intentionally underpay their employees, the potential outcome in respect of fines and penalties is considerable.
Pay averaging
A large majority of employers who pay the NMW are caught out due to what is known as ‘pay averaging’, which is a scenario whereby workers’ annual pay is calculated and then paid in equal monthly instalments regardless of variations in hours worked in particular months. Pay averaging assists both the employer and employee with certainty, in that the employer can be sure of the monthly payroll costs and the employee knows that their income will be consistent, despite the number of hours that they have worked in that month.
So, why does pay averaging potentially cause a breach of NMW regulations?
NMW regulations differentiate between types of work carried out, the key categories are:

  • Salaried hours worked – paying for a fixed number of hours work in a year and paid on an annual salary in weekly/monthly instalments; and
  • Time worked – paying for time actually worked (e.g. at an hourly rate). Time worked often involves clocking in and out at the start and end of the day to inform the employer of actual hours recorded.

In respect of salaried employment, there is no calculation required for NMW purposes because the regulations allow for pay averaging over the course of a year. Even if the hours worked vary month-on-month, the employer does not need to worry if less than NMW is paid in one month, provided the NMW is paid on average for hours worked over the whole year.
The regulations are, however, very different for time worked, which is where some businesses come unstuck. The average hourly rate is calculated based on a ‘pay reference period’ of between one week and one month, depending on the worker’s normal pay period (with one month being the longest). The worker’s pay for the pay period is divided by the hours they worked during the period, leading to a calculation of the average hourly rate. If the computed rate is lower than the NMW on force then the worker’s employer is in breach of the legislation. However, the employer may also be in breach unknowingly if an employee has worked more hours than normal in a particular pay period, taking their salary below the NMW.
In a large majority of cases, if the calculation had been carried out annually, the employer would have paid in excess of the NMW; however it only takes one breach in a year to lead to action being taken. Whilst that may seem harsh, these are the realities of the legislation and the reason why it is important to have the systems in place to ensure that calculations are carried out correctly.
As a recommendation, if at all possible, pay your employees on a salaried basis to avoid carrying out monthly calculations, which removes the risk of being caught in breach of the NMW regulations. If this is not possible, make sure that you comply with the regulations by familiarising yourself with the knowledge to complete your assessment correctly. If you don’t, apart from the requirement to pay any arrears to employees who have been underpaid, there are, as mentioned previously, potentially stern penalties from HMRC. Continuous breaches can also lead to naming and shaming as well as potential legal claims from both the relevant authorities and employees alike.
If you need further guidance on the NMW within your business then contact our expert, Adam on You can also contact us, free of charge, in regards to matters surrounding tax.
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