National Minimum Wage – Pitfalls for employers

This summer marks the 25th anniversary of the National Minimum Wage Act being passed, with the National Minimum Wage (NMW) commencing the following year.  This feels like an appropriate time to recap the legislative requirements and look at the most common pitfalls for employers.

All employers will be aware of the obligation to pay workers (not just employees) the NMW, or for workers aged 23 or above, the National Living Wage (NLW). The applicable rates are set by the UK Government each April. The current hourly rates (set in April 2023) are as follows:

  • Apprentice rate – £5.28  (though some apprentices will get the NMW/NLW for their age, if in their second year)
  • Workers under 18 years old – £5.28
  • Workers 18 to 20 years old – £7.49
  • Workers 21 to 22 years old – £10.18
  • For workers aged 23 and older – £10.42

Employers should also be aware of the legal requirement to keep records for NMW/NLW purposes. A failure to do so could give rise to criminal liability.  There is an assumption that a worker has not been paid at the correct rate unless the employer can prove that they have!  These records should include details of the hours worked by workers and the payments made to them to ensure that workers are being paid the correct amounts. If required, these records should be given to HMRC enforcement officers or the workers themselves for their inspection.

If an employer was found not to be paying the NMW/NLW, there are a number of potential consequences. HMRC can serve a notice of underpayment (calculated using the current rate), there can be civil penalties of 200% of the sum underpaid (up to £20K per employee), as well as potential criminal prosecution.  Employment tribunal or court claims can also be brought by the individual worker. 

However, from a reputational perspective, arguably the most damaging consequence for employers could be “naming and shaming”. The naming scheme (the UK government website lists all the employers who have not complied with their duty to pay their workers at least the NMW/NLW) came into force in January 2011. The purpose of the scheme is twofold:

  • act as a deterrent to employers who may have been tempted to break the law by paying workers less than they are due and
  • it demonstrates that there are real consequences for employers who pay workers less than the NMW/NLW rate. 

With the above in mind, what are some of the main pitfalls that employers should bear in mind to avoid liability?

  1. Working Time: Employers should ensure that individuals who carry out regular unpaid overtime or work through unpaid breaks, particularly those who are paid monthly salaries, rather than an hourly rate, are being paid at least the NMW/NLW for their average working hours.  This requires record keeping as to the number of hours the workers are working.  It is very easy for employers to find themselves in breach of the Regulations by failing to ensure that unpaid overtime does not reduce the average hourly rate below the required level.  Remember also that time spent going through mandatory steps such as security searches, alcohol testing, getting changed on site, should be treated as working time. 
  • Uniforms: Where workers are required to obtain and wear a particular uniform or comply with a certain dress code, the cost of the uniform will be deducted from salary for the purposes of assessing whether the correct rate has been paid.  A number of very large employers have fallen foul of this provision and been “named and shamed” as a result. 
  • Accommodation: This is a thorny issue.  Where the employer provides accommodation for workers, but charges for it, this can have effect on compliance with NMW/NLW.  The employer can charge up to £9.10 per day for accommodation.  Any excess will reduce the effective rate of pay and may mean there has been a failure to pay NMW/NLW.  If the accommodation is provided free, then the employer can count the £9.10 on top of the worker’s wages for the purposes of assessing compliance (the only benefit in kind which can be taken into account for NMW/NLW purposes. 
  • Salary sacrifice: If a worker is a member of a salary sacrifice scheme, for example for pension contributions, the employer must ensure that their participation in such a scheme does not take their hourly rate of pay, after the sacrifice is effected, below the NMW/NLW.

To avoid being caught out by these pitfalls, employers should ensure that they have effective monitoring procedures in place to keep a close eye on how many hours are being worked and how this affects a worker’s weekly or monthly pay packet.  It is worth carrying out a full audit of workers’ hours and pay and ensuring that you can prove compliance with the law.  If you would like any more information regarding any of these issues, please do not hesitate to contact our team of specialist employment lawyers for more information.

This update contains general information only and does not constitute legal or other professional advice.

Pauline Hughes, Solicitor: / 0141 221 8012 / Connect with Pauline on LinkedIn