Pay audits can stop employers falling foul of minimum wage laws

Out-Law Analysis | 21 May 2018 | 9:52 am | 3 min. read

ANALYSIS: HM Revenue and Customs (HMRC) is taking a tougher line on minimum wage enforcement, but there are steps that employers can take to protect themselves against breaches of the complex legislation.

The National Minimum Wage (NMW) is now 20 years old, but until recently enforcement action against large employers has been rare. That has now changed. In the wake of concerns over employment practices at employers such as Sports Direct, HMRC has significantly expanded its National Minimum Wage Taskforce and has embarked on a more proactive approach to enforcement, focused initially on investigations into large employers in the retail, hospitality and care sectors.

It is fair to say that HMRC's approach has not found universal favour with employers. In a recent, colourful opinion piece in Retail Week (registration required), Iceland chief executive Sir Malcolm Walker equates HMRC's approach to "harassment".

According to Sir Malcolm, during its investigation into Iceland, HMRC focused on two issues in particular: a 'Christmas Club' savings scheme operated for the benefit of employees; and situations in which employees chose to buy work shoes even though they had shoes provided for free as part of their uniform. In respect of the Christmas Club, Sir Malcolm commented that HMRC "wasted many hours of our management time on this issue, and remains hopeful of bridging the Treasury's funding gap with a fine running into tens of millions of pounds".

The overall thrust of Sir Malcolm's article - that HMRC's resources would be better utilised elsewhere rather than trying to catch a responsible employer out on technicalities - is a common refrain amongst employers who have been subject to an investigation by the enforcement team. In their other dealings with HMRC, employers have become used to a collaborative relationship where the focus is on supporting them with compliance.

However, in our experience, the National Minimum Wage Taskforce's approach is very different. In its investigations, it tends to focus on potential technical breaches, with little regard to whether they were intentional or whether the arrangements being scrutinised actually benefit employees. This can lead to the perverse position where employers feel compelled to implement changes which actually make employees worse off in order to head off challenges from HMRC.  A number of employers and employers' organisations made this point to the director of labour market enforcement, and their comments are reflected in his recently-published strategy paper for 2018-19.

HMRC's current published enforcement strategy states that it will not allow self-correction once it has contacted an employer to initiate an investigation. Therefore, once this contact has been made, even employers who fully co-operate with the investigation and seek to correct any errors which are revealed may be issued with a 'notice of underpayment' and subjected to a penalty of up to 200% of the arrears, capped at £20,000 per employee.

In addition to the financial implications, this carries a significant reputational risk, as employers who are issued with a notice are automatically 'named and shamed' by the government's business department (BEIS). An increasing number of household names have featured on the list of offenders, and the BEIS publications invariably attract widespread media coverage.

There are, however, steps which employers who have yet to be contacted by HMRC can take to reduce the risk of making their own appearance on the list. Employers can carry out legally privileged audits of their pay practices and correct any issues before HMRC commences its investigation.

Employers should not be complacent just because their hourly rates exceed the minimum rate, or even if the entire workforce is salaried. The legislation is highly complex, and can result in even comparatively well-paid individuals being deemed to have received less than the NMW in certain pay periods. Risk factors include paying salary four-weekly; having dress codes without providing any uniform or clothing allowance; operating salary sacrifice; and failing to record working time accurately.

The recommendations by the director of labour market enforcement in his 2018-19 strategy paper indicate that employers' comments on HMRC's approach are being heeded. The paper calls on HMRC to adopt a more compliance-based approach, with perhaps less strict sanctions for 'accidental' breaches, including the possibility that there would be no naming and shaming. Whilst it is not clear when, or even if, those recommendations will be implemented, this increases the incentive for employers to put their houses in order now and ensure that their pay arrangements are compliant.

Jon Fisher is an employment law expert at Pinsent Masons, the law firm behind