National Minimum Wage: as the rates rise, the safety net shrinks

Employers are well accustomed to the annual rise in the National Living and National Minimum Wage, which are changed by the government to reflect the recommendations by the independent Low Pay Commission. But this year, the change was particularly significant, amounting to an increase of close to 10%.

This is something employers will need to pay close attention to because it will see a greater number of employees brought closer to the minimum threshold and therefore increasing the chance of an inadvertent breach.

The National Minimum Wage Regulations are complicated but, in short, workers are entitled to be paid no less than the national minimum wage in any pay reference period. The pay reference period is one month, or any shorter period a worker is paid in reference to.

What’s changed?

On 1 April 2024, the rates increased as follows:

National Living Wage:

• now applies to 21 and 22 year olds, having previously only kicked in at 23; and
• the rate increased from £10.42 an hour to £11.44.

National Minimum Wage:

• for 18 to 20 year olds, this increased from £7.49 an hour to £8.60; and
• for 16 and 17 year olds and apprentices under 19 in their first year apprenticeship, this increased from £5.28 to £6.40.

Daily accommodation offset:

• increased from £9.19 per hour to £9.99.

There is no qualifying period for these rates and exceptions are extremely limited.

In this article we refer to these 2 categories (National Living Wage and National Minimum Wage) together as the NMW. It’s also useful to remember that the National Living Wage is not the same thing as the Living Wage (set by the Living Wage Foundation), which is a voluntary rate linked to the cost of living. The current UK Living Wage is £12 an hour.

Shrinking safety net

At a basic level, for those hourly or salary paid workers who are paid at the NMW, it’s critical that employers immediately implement the annual increase. However, the scale of this year’s increase means greater attention must be paid to workers whose basic pay sits above NMW level. Ensuring compliance once factors such as additional hours worked and pay deductions are accounted for can be complex.

In a press release in February 2024, HMRC named and shamed over 500 employers for failing to pay their staff at these statutory minimum levels. Practices resulting in these breaches vary hugely, but many are likely to have been inadvertent (perhaps arising from the complexity of the underlying rules!), for example, resulting from deductions to wages which had the effect of pulling the relevant level of pay down.

Whilst previously, employers might have taken comfort from the fact that certain groups within their workforce were paid at a level that ensured that even reductions like these would keep them above this red line, this big jump in the NMW is likely to bring many more workers into the danger zone. This means that employers need to be more alert to the common risk areas that can result in underpayment.

Pay that sits only slightly above the NMW may be stretched too thinly when hours regularly exceed the contractual ‘9-5’. This may be an issue in sectors such as media where entry level jobs are sought after and so pay can be low. Either employers must pay overtime, or they must ensure that they have a clear understanding of how many hours in excess of the “standard” hours can be worked before a NMW breach and keep within those parameters.

There are also important strategic considerations to grapple with due to the impact that this year’s significant NMW rise will have on pay differentials across organisations. This year’s NMW increase means that the pay differential between roles will have narrowed, potentially quite significantly compared to previous years. For example, an entry level role paid at NMW may now sit much closer to its team leader, whose pay the employer has not been obliged to increase. Employers are faced with increasing pay for everyone to retain these structural differences, or risk losing staff who are demotivated by what they may perceive as unfair.

Common risk areas

The government report that accompanied February’s “naughty list” gives a useful oversight of the reasons for minimum wage breaches (i.e. when total remuneration within the pay reference period fell below the minimum wage rates). The most notable reason for breaches are:

• Pay deductions: 35% of employers deducted pay from workers’ wages for reasons including food / meals; parking permits and travel costs; uniform purchase; training costs (particularly e-learning modules); and salary sacrifice schemes.
• Unpaid working time: 31% of employers failed to pay workers correctly for working time. This included unpaid travel time; additional work before and after a shift (for example team briefings); rounding down clocking in time; time for mandatory training (including e-learning modules); and trial shifts.
• Incorrect apprenticeship rate: 16% of employers paid the incorrect apprenticeship rate.
• Incorrect work type: 6% of employers paid for the wrong work type. The hours for which the NMW must be paid (i.e. the number of hours deemed to be within the relevant pay reference period) depends on the type of work the worker is doing. There are four types of work for NMW purposes which we discuss further below:
  
  • salaried hours;
  • timed hours work;
  • output based; or
  • unmeasured work.

As we explore below, these breaches may often be inadvertent due to the complexity of some of the underlying calculations and tests.

Risks in practice

We consider below a few of the common breaches and actions employers can take to try to both detect and avoid these.

Pay deductions:

The Regulations require certain deductions to be taken into account when hourly pay is calculated. This includes payments paid by or due from a worker in connection with their employment. This means that what the worker is left with after the deductions are made must meet the NMW threshold.

Recent years have seen uniform policies come under the spotlight, with HMRC taking enforcement action when employers require particular clothes to be worn at work, but deductions for these costs (or payments made by staff) have then pulled pay below NMW. Although many employers now have a good understanding that specific uniform must be reimbursed, a blind spot is more likely to be a less prescriptive code, such as “black trousers and black shoes”, which workers can purchase themselves. Payments for more generic uniform like this would also be factored into relevant pay.

Actions:

• Audit current practice and ensure clear policies in place: Employers need to have clear policies and processes in place to ensure that they are notified of purchases like these and have visibility of them. These would need to ensure accurate reporting, and provide the opportunity to spread the cost across pay periods. The policy should also set reasonable parameters of where they can be acquired from and at what cost.
• Monitoring: Processes need to provide for spotting problems quickly. What checks are in place to ensure problems are caught before each payroll run? Who has responsibility for this? Are there clear communications between managers, HR and payroll?

Unpaid working time:

The report identifies a number of areas where employers are not paying for all working time. For example, common breaches arise from practices such as rounding clock-in time (to the nearest hour / half hour / five minutes), failing to pay staff for trial shifts and unpaid travel time. But taking one example that has perhaps come to the fore due to an increase in hybrid working is overlooking time undertaking mandatory training.

If training undertaken by an employee is mandatory, it would constitute working time and would therefore need to be factored into NMW calculations. This means that staff paid at the NMW, but also those paid close to it, will need to be paid for the time spent undertaking this sort of training. And as we know, this wider group is now likely to have grown significantly.

An area of scrutiny for HMRC has been e-learning modules. Often these courses are compulsory (covering topics such as health and safety and diversity and inclusion) but may well be conducted by staff on their own device at home. Given the boom in hybrid working and huge rise in online training, visibility of when training like this is undertaken may be increasingly difficult for employers.

Actions:

• Technology: Ensure that you have technology to capture time spent on e-learning modules.
• Visibility: It may be more straightforward to require all training to be undertaken during working hours to avoid this problem arising. There should be clear and recorded instructions to employees on when training should be completed and how it should be recorded.

Incorrect apprenticeship rate:

In February’s report, 16% of employers’ underpayments came down to a failure to pay apprentices at the correct rate. These largely arose from a failure to increase the rate of pay when the apprentice either passed a certain milestone (such as completing the first year of their apprenticeship for those aged 19 or over) or incorrect classification (either being paid as an apprentice when they were not truly one or failing to increase pay when the apprenticeship had finished).

Actions:

• Get the contract right: We wrote recently about 10 top tips for employing an apprentice. This highlights the need to get the contract right and to be clear about what happens at the end of the apprenticeship. Not only are these points important for ensuring the technical requirements for an Apprenticeship Agreement are met, these should help ensure that the rate of pay is correct for the relevant stage of that apprenticeship journey.

Incorrect work type:

As explained above, how the NMW is calculated depends on how the worker is paid, and therefore which category the worker falls into for NMW purposes. The distinction between salaried work and unmeasured work is particularly tricky in practice.

Those who are paid an annual salary through regular instalments throughout the year may fall into the category of ”salaried worker”, but this depends on whether the criteria below are satisfied and not simply whether they receive a “salary”. This is something we have recently discussed here.

As explored below, the key questions for the employer are: is the worker truly a “salaried worker”? And, if not, are they NMW compliant for each pay reference period?

To be a salaried worker all of the following must apply:

• Their contract must entitle them to payment for a fixed number of basic hours per year;
• Their contract must provide for an annual salary for those basic hours;
• Apart from their salary, performance bonus, or salary premium, their contract must not entitle them to any other payment for their basic hours; and
• They must be paid in equal instalments at intervals that are no more frequent than weekly and no less frequent than monthly. Alternatively, they may be paid in varying monthly instalments that total the same amount each quarter.

The need for HMRC to be able to calculate the exact number of hours the employee is required to do means that this definition is more restrictive than simply any job that attracts an annual salary.

Many workers who receive an annual salary will fall outside these criteria and be pulled into the definition of an “unmeasured worker”. Obligations such as “[y]ou may be required work additional hours” etc., qualified by “[t]his has already been taken into account in determining your salary and benefits and you will not be entitled to extra pay if you work additional hours”, are common. But this would mean that the hours under the contract are not ascertainable, and the worker would fall outside of the “salaried hours” definition and would most likely be considered an unmeasured time worker.

The majority of professional services employees – who are paid a monthly salary for set minimum weekly hours – will in fact be “unmeasured time” workers.

Why does this matter? If the worker is a salaried hours worker for NMW purposes, hours can be averaged across the year to determine NMW compliance. In contrast, unmeasured work is assessed by looking at each individual pay period. NMW compliance across the whole year does not automatically equate with compliance in each pay reference period, and this is something that has caught out some employers in recent years.

If there is no daily average agreement in place (which is unlikely in the professional services context), a worker doing unmeasured work must be paid for the NMW for every hour actually worked. Crucially, this is assessed for each pay reference period (which for monthly paid staff would be a month). For those who work regular hours across the year, ensuring pay meets the NMW is not generally a problem as calculations are likely to be consistent and therefore more predictable. However, if you have peaks of activity (with some months busier than others) it is much easier to inadvertently fall below NMW as pay in those months is divided by that higher number of hours worked in that period. Unlike salaried hours workers, this calculation does not allow for compensating for peaks with troughs later in the year.

Not all employers, particularly in professional services contexts, offer paid overtime. Instead, extra hours may be compensated by offering time off in lieu (TOIL). But employers need to remember that for unmeasured workers, NMW compliance is considered for that pay reference period. There is a limited degree of flexibility, as TOIL taken in the pay reference period that immediately follows that in which the overtime was worked is likely to fall within the rules. If the TOIL it is taken any later than this, however, it will not mitigate the NMW breach. It’s also essential that the extra hours worked and the TOIL balance each other out completely so that “full pay” is received for the additional hours. 

Actions:

• Do the maths: Understand the danger zone for each role. It’s not unusual for ”normal” hours to exceed those set out in a contract but knowing when this will become a problem for NMW purposes is key. How many additional hours can be worked before pay is stretched too thin?
• Understand your workforce: ensure the business has a clear understanding of who is a “salaried” worker and who is an “unmeasured” worker.
• Keep records: Connected to this is evidencing compliance through record keeping. Not only is it a criminal offence not to keep records, HMRC will assume there is a breach unless the employer can prove otherwise. Having systems in place to check compliance at the end of every month or year is also key.
• TOIL / overtime policy: Timing is everything. If TOIL is needed to ‘correct’ NMW breaches, policies need to ensure that it is taken within the same pay reference period or the period immediately following that in which the overtime was worked. A “use it or lose it approach” is not sophisticated enough. Managers need to understand the policy and why this is important in order to ensure that the policy is actually put into practice.

National Minimum Wage Audits

If an employer identifies and remedies a NMW breach before it is identified by HMRC there will be no penalty. As penalties are 200% of the underpayment (subject to an overall maximum penalty of £30,000 per underpaid worker), there is a significant incentive to ensure compliance. This can be achieved by auditing pay, a process we can support you with.

We review key aspects of pay policy to ensure that key areas of compliance are met and support remedying any breach. When investigating NMW compliance, HMRC will interview the parties involved – including staff – to understand what happens in practice rather than simply take documents and policies at face value. As it will then be for the employer to disprove anything HMRC identifies as a possible breach, it’s important for an audit to include staff interviews to build up a full picture.

If you’re interested in a NMW audit, your usual Lewis Silkin contact can tell you more.