The increasing burden of NMW compliance on employers

NMW rates have risen rapidly over the past few years and employers have typically been struggling to increase other pay bands at the same rate. This leads to an ever-increasing population paid either at NMW or close to NMW. We only expect further convergence of NMW and other pay bands with the cost pressures coming from the rise in the employer NIC rate to 15% and the cutting of the secondary threshold.

These factors could put many graduate and other roles uncomfortably close to NMW. Where roles are paid at NMW or close to NMW, employers must be extra careful to ensure that processes for time recording are robust and NMW is being calculated and paid in accordance with the regulations.

Compliance can often be complex. It is not sufficient to take the view that a salary above NMW is compliant. Many employers do not consider in detail how the regulations require pay and hours to be counted to test NMW compliance.

This is an area of increasing risk which can be demonstrated by the following example:

A graduate has a £27,000 annual salary and contributes 5% to their pension under a salary sacrifice agreement. Their pay for NMW purposes is £25,650 (£2,137.50/month) - only just above NMW based on a 40-hour week.

Whilst they are paid at a headline rate above NMW, it is possible that they could breach NMW in a pay period even without working any overtime. The calculation to check whether NMW has been paid in this case depends on whether they are a ‘salaried’ or ‘unmeasured’ worker for the purposes of the NMW Regulations.

There are a number of conditions to be met to be classed as a ‘salaried’ worker for NMW purposes. In particular, the number of basic annual hours an employee is required to work must be ascertainable. This is not always possible to demonstrate.

If the employee does not meet the conditions to be a salaried worker they will be treated as an unmeasured worker. This means that NMW must be paid for each pay period based on the hours actually worked. If for example there are 22 working days in a month, this worker would need to be paid for 22 x 8 hours = 176 hours. At minimum wage, this would be £2,148.96- an underpayment that HMRC could enforce of £11.46.

Also, if the employee works overtime which is not recorded and paid, this could create further breaches. HMRC will seek to establish the facts by reference to records and worker interviews.

Salaried worker status can alleviate the problem of having to consider exactly how many hours are worked in a pay period but it does have its own complexities around monitoring overall hours worked so it is not automatically a ‘better’ option.

The example shows the need to consider NMW compliance in detail when engaging workers at rates close to NMW, as breaches can easily occur. Key factors that need to be considered include:

• What is the worker type and how does NMW need to be calculated?
• What are the implications for salary sacrifice?
• What time and attendance recording processes are in place and what is the policy on overtime?

There is currently significant HMRC activity focussed on enforcing the NMW, with new enquiries being opened on a regular basis. HMRC is currently focussed on enforcing the NMW in Northwest London so businesses in this region should be extra vigilant.

With penalties of up to 200% for any underpayments identified, as well as reputational damage when employers are named and shamed, there are significant costs to employers of breaching the NMW regulations. However, it is possible to self-correct any errors prior to an HMRC review being launched without penalties/naming and shaming.

• We can carry out a risk review for you and highlight where you can improve your processes and policies and if necessary, take corrective action prior to an HMRC review.
• We can advise you on your pay, benefits, and other contractual arrangements with employees to ensure that you are compliant with the NMW regulations and best practice to minimise risk and administration requirements.
• We can support you with responding to HMRC queries and investigations.

If you would like to discuss any of the above, please do get in touch with your usual contact or any of the contacts listed.

Note: We have used NMW to refer to what is technically NLW for those aged 21 and over, as this terminology is more commonly used. 

Approval code: NTEH71224139