Common pitfalls in applying the National Minimum Wage – how to avoid being named and shamed

Posted: 05/07/2023

Some 202 employers were recently named by the Department for Business and Trade (DBT) in its nineteenth ‘name and shame’ round for failing to provide their lowest paid staff with the National Minimum Wage (NMW). The list related to investigations into breaches between 2017 and 2019. The employers were collectively ordered to repay workers almost £5 million and faced penalties of almost £7 million after breaches affecting 63,000 workers.

The cost of non-compliance can be huge. Penalties of up to 200% of the underpayment (capped at £20,000 per worker) can be applied and there is the potential for significant reputational damage in being named by the DBT. No employers, however small, are exempt from paying workers the NMW.

With an increased focus on enforcement of NMW breaches, the enforcement budget having more than doubled since 2016 and the number of enforcement officers also having risen substantially, the pressure on employers to get it right is higher than ever. HMRC encourages employees who think they have been underpaid to complain and is clear that they can remain anonymous throughout any investigation. It is also important to note that HMRC investigations can look back up to six years, meaning former employees can complain about historic pay.

The most recent list included household names like WH Smith, Argos and Marks & Spencer, who were quick to point out in the media that their breaches were inadvertent and had been swiftly rectified.

Argos and Marks & Spencer stated that they were named due to a ‘payroll error’ and an ‘unintentional technical error’ respectively.

With the DBT acknowledging that some underpayments are accidental, and some of those named stating the same, this article sets out below a number of pointers to help ensure compliance, based on the most common mistakes:

Deductions from wages

It is common to make deductions from wages, for example for the cost of uniforms, tools and equipment, meals, parking permits, the private use of company vehicles and till shortages.  

Where deductions are made from a worker’s gross or net pay, these can reduce the level of pay to below the required rate for a worker that qualifies for NMW purposes.  

Taking uniform as an example, where a uniform is not required or where a worker freely chooses to purchase additional items of uniform, there is generally no NMW issue.  

However, if a set uniform is required and deductions are made from the worker’s pay to cover the cost of the items provided, this will constitute a deduction from pay for NMW purposes.  Depending on the rate of pay for the worker in question and the amount of any deduction, this could lead to the worker’s pay falling below the NMW.  

Employers may consider spreading any costs/deductions across a few pay periods, to ensure that the pay remains above the NMW after the deduction is taken into account.

A similar rule applies where an employer requires staff to purchase uniform items from them (or a third party) and does not reimburse them for those costs.

This is the rule that caused issues for WH Smith, the worst offender in the most recent list.  WH Smith commented it had misinterpreted rules around uniforms and had asked staff to wear specific coloured trousers, skirts and shoes without reimbursing them for these costs. This was remedied in 2019, once the mistake was brought to its attention.

Inaccurate working time records

Accurate payment of wages depends on accurate records of the hours a worker has worked during any particular pay period. If time records do not properly capture a worker’s working time, they may not be paid correctly, and this can lead to a NMW breach.  

For example, an employer may operate a clocking-in system which always rounds down to the nearest hour. If that employer has a mobile worker, but does not take into account the mobile worker’s required daily car checks or travel between jobs, or if an employer fails to take account of time spent by workers undergoing required security checks, or changing in and out of required PPE, they may be underpaying their employees.

Training time and shadow shifts

Some employers assume that training time or time spent undertaking a trial or a shadow shift is non-working time. This is incorrect and a worker is entitled to be paid at least the NMW for time spent on these tasks. The same applies to meetings arranged at the start or end of a shift or handover periods.

Failure to pay the correct NMW rate to apprentices

The apprenticeship rate only applies to genuine apprentices, being those employed on a recognised apprenticeship scheme or engaged under a contract of apprenticeship. All apprenticeships must incorporate structured training.

If an apprentice is 19 or over and has completed the first year of their apprenticeship, they are legally entitled to at least the NMW for their age group.

Time spent by apprentices studying or training is also considered working time and should be paid accordingly, even if this training takes place at home and/or takes place outside of their normal working hours.

Failure to uprate the NMW

A worker’s age can dictate which NMW rate should be applied. Employers therefore need to ensure that, for their younger workers, they are reviewing the NMW rates on those workers’ birthdays to ensure any uprated rate is applied promptly. Any uprate of the NMW should be applied with effect from the first pay reference period after the worker’s birthday.

For further information and advice on the application of the NMW, please feel free to get in touch with a member of the team.

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