The Chancellor has announced that the rate of the National Living Wage will increase to £8.91, with corresponding increases to all the underlying national minimum wage rates, from April 2021. Importantly, the NLW (a higher rate than the NMW) will also now apply for those aged 23 and above (previously it was for 25 and up only).

The Government has confirmed that it followed the recommendations of the Low Pay Commission in full when setting the rates – with the LPC freely admitting that making those recommendations “in the midst of an economic crisis coupled with a pandemic [was] a formidable task“. In its press release (here), the LPC confirmed that “there are strong arguments concerning both low-paid workers – many performing critically important tasks – and the very real solvency risks to which small businesses are currently exposed“. In a nutshell, the rise had to be enough to keep people off the poverty line, but not so high as to send businesses which are already struggling over the line into insolvency.

Indeed, in what for some are already extraordinarily challenging trading conditions, the reality may be that many employers are simply not able to increase employee pay at the same rate as increases to NLW/NMW. This is not just about those at the bottom of the payscale but those higher up – increases to the minimum rates where movements cannot be made at higher levels will produce considerable compression of wage bands and all the employee unhappiness which that can create. As a result, more employers are now paying more people at or around the NLW/NMW than ever before.

This means that employers which might not previously have had to be concerned about the niceties of the NMW regulations could find that their policies around pay and working time actually take some of their employees below NLW/NMW – particularly bearing in mind that the higher rate will now catch more people than before as it kicks in at 23, not 25. Many a business has been caught out by a seemingly innocuous practice (see below for the common areas of risk) which has dipped their employees under the minimum wage rates – and some of these have been highly publicised.

Added to this, we know that companies are under increased pressure to (and be seen to) treat their people well – whether because they need to boost their ESG ratings to attract/retain investors or because their staff and customers are voting with their feet and only choosing those companies that have good track records in this respect.

This is where the Government’s naming and shaming scheme could really hurt. Some of you may recall that the Government announced back in February 2020 that it would resume this scheme for employers found to have been in breach of the regulations governing minimum wage pay. In fact, we are so far yet to see any output from this, but we suspect other events of the year have proven to be somewhat of a distraction. That being said, this scheme is a potential money spinner for the Government (in fines, etc.) and so we anticipate that it may start to pay closer attention to this again as part of the drive to find ways to finance the cost of the pandemic.

The real rub with this scheme is that even companies which are genuinely trying to get things right from a pay perspective have fallen foul of the NMW regulations inadvertently and have subsequently been named and shamed for it. This is less than ideal from a reputational perspective, and may have a negative impact on a company’s ESG rating.

In addition, getting it wrong can be an expensive exercise – which is something companies certainly do not need in the current economic climate. The cost of getting something wrong grows with time because arrears payments are uplifted to current NLW/NMW rates (and penalty payments are calculated as a % of arrears). This is subject to an overall cap of £20,000 per affected employee; however, when dealing with large employers with historic issues (HMRC will go back up to 6 years in its investigations) this has the potential to lead to significant fines. This is a big incentive for businesses to audit their pay and working practices sooner rather than later.

This is a really tricky area and we recommend that any business with staff paid at or near the NLW/NMW rates should take some pre-emptive steps to see if this might be an issue. To help you to assess this, we have set out some common areas of risk below.

Areas of risk

• Working time – whether an employee has been paid the NLW/NMW will depend on the pay received and the hours worked. On the face of it, what is ‘working time’ might seem a straightforward question – simply time spent by an employee doing his job – but that is not necessarily the case. If an employee has to go through any checks or undertake any mandatory steps before he can start work or leave afterwards, such as security searches, handovers, getting changed for work on site or drug and alcohol tests, then the time spent going through these processes will also be working time. There can also be issues where employees work through unpaid breaks, as that is working time that they are not being paid for;

• Salary sacrifice – where an employee is a member of a salary sacrifice scheme, such as for additional pension contributions, childcare vouchers etc., then this must not take their average hourly pay below NMW. You get no credit for the value of the pension benefit or the childcare vouchers which the salary has been exchanged for. On the basis that this denies the lowest paid the benefit of the tax breaks brought by a salary sacrifice scheme, the government did look at whether this was really right earlier in the year, but concluded recently that it was. The only concession is that an employer caught paying below the NMW on that basis alone would not be subject to a penalty – underpayments would still be due and it could still be “named and shamed“.

• Travel schemes – where an employer offers to provide discounted travel cards for its employees and deducts the cost of the card from employees’ pay over a period of time, such deductions are likely to reduce NMW pay. Again, you get no credit for the value of the travel card or the discount applied;

• Uniform – If an employee has to supply any element of their own uniform then the cost of purchasing this will be deducted from an employee’s pay when calculating NMW pay. Employers should be aware that ‘uniform’ is defined very broadly in this context. The example given in the HMRC manual is of an employee working in a hairdressers who has to wear a plain white t-shirt and black trousers. If these are supplied by the employer, even at a discount, the cost to the employees of purchasing them from their employer would be deducted from their pay before determination of compliance with the NMW floor;

• Salaried employees– many employers probably won’t worry about their salaried employees, providing that their annual salary is above NMW based on their contractual hours of work. However, a “salaried worker” for NMW purposes is one whose required annual working hours are “ascertainable from his contract”. This should be relatively straightforward, shouldn’t it? They work 40 hours a week, so you just multiply that by 52 and you’ve ascertained the hours for the year. Sadly not. HMRC say that there are in fact 52.14 weeks in a year; an employee can’t therefore ascertain his hours for the year from the contract (although this is patent nonsense) and so is not a salaried worker for NMW purposes. So what? Well, with a salaried worker you look at the pay received over a whole year and the hours worked over the year and average them out to ensure NMW has been paid in each week or month. If an employee is not a salaried worker, however, the employer needs to ensure that he is being paid the correct amount for each individual pay period based on the actual hours he works in that week or month;

• Record keeping – there is a requirement under the NMW Regulations to maintain sufficient records to evidence that the NMW has been paid for at least the last 3 years. It is a criminal offence not to do so. There is no particular format the records must take and it may be that payroll records are sufficient; however, this might not be the case where you have salaried employees whose hours of work you do not track and so you cannot evidence what hours they have actually worked. There is a presumption that an employee has not been paid the NMW unless an employer can prove to the contrary and so this is an added incentive to ensuring proper records are kept.