Rules on minimum wage are complex and employers need to be on the ball

24 May 2018

Author: Rachel Penny
Practice Area: Employment Law


It was reported earlier this month that more than 200,000 people received a combined payout of £15.6m in pay that they had previously missed out on because employers paid them less than the minimum wage.

This was a big rise on the £10.9m that HM Revenue and Customs recovered in 2017 and the government crackdown also managed to more than double the number of underpaid workers who received money they were owed.

This is undoubtedly good news for those employees who had been unfairly treated. But while there will always be some employers out there who breach HMRC rules by deliberately underpaying, the rise is also indicative of another trend, which has seen many more employers who think they are following the rules being named and shamed for honest mistakes.

In the last few years, National Minimum Wage issues have exploded for a combination of reasons. Firstly, in April 2016 we saw the introduction of the National Living Wage, an obligatory minimum wage payable to workers in the UK aged over 25.

This coincided with an increased focus on alternative or flexible forms of working in the so-called 'gig economy', with the definition of who is classed as an employee coming into question.

The third factor has been a huge increase in HMRC enforcement activity. Whatever the reasons behind this, there has been a huge upscaling in resources.

This month, Carson McDowell and EY held a joint event with our respective clients to explore this change in the landscape and increasing significance of National Minimum Wage issues.

The feedback we received at the event confirmed that this is a problem area for employers, and not just those employers from sectors that might be considered to be most at risk of a breach.

To date, the focus has been on traditionally low-paid sectors, such as domiciliary and social care, retail, hospitality and food manufacturing, but all the signs are that will change in coming years to include almost every sector.

Many employers assume that provided their hourly rates of pay are at or above the applicable rates, they are compliant. This is not the case.

The headline rates are easy to understand, but the underlying formulas used by HMRC in their calculations are very complicated.

The devil is in the detail and the rules vary depending on the type of contract the employee or worker is engaged on, which elements of pay count for National Minimum Wage and which deductions are permissible.

In fact, in many instances, the rules operate counter-intuitively. For instance, while basic pay, commission payments and performance related bonuses count towards the National Minimum Wage, shift allowances or shift premiums do not.

As well as the risk of technical breaches, developing case law on worker status is also driving another group of employers into the at-risk-of-enforcement category.

The actions taken in the past few years by workers against companies such as Uber have added further concern for employers who want to be clear where they stand.

Case law that has long been viewed as settled is also now being challenged.

For example, employers who provide staff with a place to sleep on shift - ie nurses or domiciliary care workers who are on call - were previously exempt in legislation.

A recent case has now turned that on its head.

I used to rarely get questions on the National Minimum Wage from clients.

Now, the added complexity means it is an issue all types of clients tell me they are wary of being tripped up by.

The National Living Wage is rightly viewed as a bold policy which has kick-started something of a low-pay revolution.

It has made people sit up and take notice of the issue of low pay, with workers themselves seeming more prepared to speak up.

But with HMRC now very much primed for enforcement, companies previously not in their sights are getting caught out, so all employers would be wise to be on the ball and to start checking they are complying with the new regime.