24 November 2023
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National Minimum Wage increases: Beware compliance pitfalls

To The Point

The increase to the National Minimum Wage announced by Government on 21 November 2023 may lead to industrial relation issues for employers and could result in pressure to increase wages for other workers.  The complexity of NMW legislation and the need for accurate record-keeping also pose challenges for employers to ensure compliance as getting it wrong can be costly.  We take a look at what employers need to know.

The largest ever increase to the National Minimum Wage was announced by the Government on 21 November 2023, with the top rate increasing from £10.42 to £11.44 in April 2024.  This increase of 10% is higher than the national average increase in pay of 6% and will mean that the minimum salary of a worker working 40 hours per week will be near £24,000.

The increase is likely to cause some industrial relation issues for employers, as the wage gap between job roles may be squeezed.  This together with the continued pressure on household finances may lead to greater pressure on employers to increase wages for workers with earnings above NMW.

In addition, the increase to NMW will bring more employers within scope for HMRC to investigate compliance. The law in respect of NMW is notoriously complex and is far from intuitive. The first issue for employers is to determine the type of work, for the purposes of the NMW Regulations, its workers fall within, which may vary from role to role. The type of work determines how NMW is calculated, what elements of pay are included when calculating wages for NMW purposes and what deductions from pay will reduce wages under NMW legislation. Determining NMW compliance is fact sensitive and a matter of interpretation of the legislation, which can appear subjective.

Common areas where we find employers misinterpret the legislation are:

  • Determining the work type a worker is undertaking for NMW purposes.  Many employers consider that where they pay a salary the worker will be a Salaried Hours Worker under NMW legislation.  Unfortunately, this is a far too simplistic view of the NMW Regulations.  Often HMRC find that workers do not fall within the definition of Salaried Hours Workers on technical grounds.  The consequence can be significant as compliance will be considered from pay period to pay period rather than an average over the year.
  • The inclusion of bonuses and/or premium payments (such as allowances and overtime payments) when calculating wages for the purposes of NMW.  Often employers include all payments made to a worker when determining NMW compliance however, many payments are not deemed to be wages for the purposes of NMW. Therefore, a worker that may at first glance appear to earn significantly more than the relevant NMW rate, may be technically receiving less than NMW.
  • The application of salary sacrifice. Salary sacrifice reduces wages for the purposes of NMW.
  • Record keeping! As an employer, if HMRC asked you to confirm how many hours a particular employee (especially one who was paid on the basis of a salary) worked in a particular week/month during the last six years, could you provide a record of those hours?  It is a requirement of the NMW Regulations to keep records to demonstrate compliance.  We find many employers do not have adequate records of hours worked.

Getting NMW compliance wrong can be extremely costly in both a financial sense (making back payments and fines of 200% of those payments) and also from a PR perspective, as employers are named and shamed where they fail to comply.  In the vast majority of cases we see, compliance issues with the NMW Regulations are not because of any deliberate intention to avoid them or negligent approach to the NMW Regulations but rather due to the complexity of the law and its interpretation. Ensuring NMW compliance is far more complex than taking monthly/weekly pay and dividing it by the contractual hours.

Next steps

We have assisted many clients in considering NMW compliance and in demonstrating to HMRC that they have not breached NMW Regulations.  If you would like to explore your compliance please contact Andrew Moore.

To the Point 

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