Complying with National Minimum Wage requirements and mitigating risks

Complying with National Minimum Wage requirements and mitigating risks

The National Minimum Wage (NMW) was introduced in the UK following the inception of the 1998 act and set out a minimum amount per hour that a worker must be paid. However, staying compliant with the NMW rules has become so much more than monitoring the hourly rate of pay. This is due to an ever increasing HMRC enforcement of the rules, coupled with changes to the rules themselves, such as:

• the introduction of regulations in 2015
• amendments to salaried worker rules in 2020
• annual amendments to the rates such as the higher National Living Wage (NLW) rates being extended to all workers aged 23 and over.

In this article, we look at the fundamental steps a business will typically need to consider when undertaking proactive steps to comply with the NMW rules and mitigate the risk of a breach arising.  

Complying with National Minimum Wage

Essentially, NMW compliance is made up of  five pillars:

1. Entitlement 
2. Worker type 
3. Working time 
4. Payments and deductions 
5. Record keeping, policies and control mechanisms 

As an employer, only if you understand each of these and have policies in place to govern and control each, can you mitigate the risk (as far as possible) of a potential NMW underpayment arising.

Complying with the NMW rules can be compared to a game of dominos: if one pillar falls down, then the whole lot does. As a result, full attention is required on each area in order to avoid falling foul of the legislation.

So, what steps can you take to identify NMW risks and proactively comply with the legislation?

There isn’t a one size fits all approach - there never can be - but most employers will need to undertake some, or all of the following:

1. Assess the current state of NMW compliance – What controls are in place? What do policies say on working time, pay and deductions? Do you know which workers are entitled to NMW?

2. Log what is in place (risk register or otherwise) and identify areas where further investigation is required – In most cases, there will be gaps in records, or current reports won’t give all the detail you need. So, further investigation might include:

• Undertaking working time studies to observe what happens in practice. It is not enough to just go with what the contract states and what payroll records might suggest. Is all time being captured? Is all time actually being worked? Are breaks being taken? Are any timesheets being incorrectly overridden? 

3. Sample check records and explore whether there are periods where there is a risk of an underpayment – For example, are any deductions reducing pay for NMW purposes and are your monitoring controls picking up all of these potential scenarios?

4. Based on all data gathering, set a plan of action – Before undertaking an action plan, it might be necessary to engage with other business stakeholders via forums or surveys to gather further information. This cross-department collaboration will, for example, provide observations into typical practices and how regularly they occur. Only if you gather enough data can you set an effective action plan, which will encompass but not be limited to:

• Rectifying potential historic failings (but note this has to be done in a certain way otherwise the risk is NOT mitigated).
• Updating policies, controls and processes. As part of this, undertaking a worst case scenario analysis will be key to ensure the policy accounts for the most common scenarios, but ensuring anything outside the norm is identified and workers raise quickly to the right contact. 
• Formulate a considered communication strategy to ensure all key stakeholders are engaged and workers fully understand the dos and don’ts. 
• Supplement with training to key stakeholders who will be responsible for the monitoring process. 
• Throughout, obtaining professional advice is a must. HMRC’s enforcement continues to evolve and it will be necessary to update processes on an ongoing basis to mitigate new risks being challenged by HMRC.

What happens if I get NMW wrong?

Failure to comply with the rules not only results in a NMW arrears payments being made to each worker, but if its due to HMRC enforcement, then the employer will be faced with an additional penalty (of up to 200% of the arrears due to the worker) and potential public naming and shaming. The arrears payments will typically also be pensionable, so an additional employer pension contributions and the amounts are also subject to National Insurance Contributions (NIC), so an additional 13.8% employer NIC is due as well. 

We are here to help

If you have any questions in relation to National Minimum Wage compliance or need support with calculations, please get in touch with a member of our specialist team or your usual Azets advisor.