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Beware inadvertent overpayments after minimum wage rise

Jon Fisher tells HRNews how changes to minimum wage rates announced in the Autumn Statement may lead to breaches of legislation if unchecked

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  • Transcript

    The national living wage and the national minimum wage are set to rise in April. The announcement was made by Chancellor Jeremy Hunt in the Autumn Statement a fortnight ago. It means changes will be needed to payroll, obviously, and staff will need to be informed. However, less obvious is the need for checks to avoid inadvertent underpayments causing technical breaches of the relevant legislation, breaches which can have serious implications for the business, as we’ll hear in a moment.

    Hunt confirmed that the national living wage for those aged 23 and over will increase by 9.7% from £9.50 to £10.42 an hour. It represents an annual pay rise worth over £1,600 to a full-time worker and follows the recommendations of the independent Low Pay Commission. The national minimum wage for 21 to 22-year-olds will rise by 10.9% to £10.18 an hour. The hourly rate for 18 to 20-year-olds rises to £7.49, and for 16 to 17-year-olds to £5.28. The changes will take effect from 1 April 2023.

    As Jon Fisher explains in his article for Out-Law, the increases mean that national minimum wage legislation becomes relevant to far more employees. He says: “It's a mistake just to think about hourly paid employees, as the higher rates increasingly bring salaried employees close to the minimum. Once the increase takes effect, the minimum annual salary for a worker aged over 23 working for 37.5 hours per week will be more than £20,300.”

    He goes on: “Even where an employee's headline rate is more than the new minimum, employers will need to review the position carefully due to the complexity of the NMW calculation.”

    Complexity is the key word here because small mistakes, easily made, can have serious consequences and, as we know from experience, the Revenue gives employers very little leeway. We are not talking about deliberate evasion or fraud, rather inadvertent mistakes, technical breaches, which can easily go unnoticed until the Revenue comes calling and their checks uncover the underpayments.

    So, what’s the price of those mistakes? Jon Fisher joined me by video-link from Leeds to discuss this. I asked Jon if we’re talking big numbers:

    Jon Fisher: “Yes, they can be I mean, it depends on the size of the arrears but it's not just paying the arrears because there is an uplift you have to apply which is based on the current rate of the national minimum wage, not the rate when you committed the breach, then you have to pay interest, and then there's a penalty of 200% of the arrears well. So, effectively you end up paying back the arrears, double again, each time as a minimum. So, it is expensive and it is much cheaper to get it right in the first place.”

    Joe Glavina: “We talked about this issue last year, Jon, and you told me about the Revenue’s strict and inflexible attitude towards technical breaches. Has their attitude changed at all since then?”

    Jon Fisher: “Not noticeably, no. Their attitude is ‘the law is the law’ and you may have had the best of intentions, and we recognise the law is very complicated, but if you breached it you breached it and there is no real discretion in the punishment system to say we may not charge a penalty in this particular case. They do tend to apply the penalties come what may and it's frustrating and clients get very frustrated by it, particularly if they are good employees who pay their taxes and have just slipped up inadvertently but they do seem to be unwilling to show any flexibility in that regard.”

    Joe Glavina: “We're talking here technical breaches, slip ups, as you say. So, what are the sorts of things that employers are getting wrong in your experience?”

    Jon Fisher: “Salary sacrifice is still one. It is still the case that if you look at national minimum wage compliance after you deducted the salary sacrifice from pay, so somebody’s notional salary may be well above national minimum wage but after they've sacrificed. In each pay period, remember, if they do a particularly big sacrifice for a cycle to work, or something like that, you know, that may bring them below national minimum wage and that that's one thing that still catches people out. Also, rate increases. So, every April the rate increases and if your payroll has not quite caught up, and it's not factored in, that can be a problem. Then the other thing is the age bands, everyone 23 and over now qualifies for the highest rates of national minimum wage whereas previously that was 25 and over. So, some people have just slipped up because they haven't applied that to all people who are 23 and over and again, it's an accident, it's an oversight, but it's still a breach and will be treated as a breach and our advice would always be you've got to go in and correct that proactively, before HMRC get in contact, and fully correct it. So, it’s not just paying the arrears, there may be an uplift to pay as well but you will need advice on getting the calculation, right. As long as you've done that before HMRC get in contact then they won't prosecute, they won’t go after you for penalties, they won’t name and shame you, but if there's still any anything to pay then they will, even if you've spotted the error and tried your best to do it, but maybe you haven't quite properly corrected it, then they will still go after you in my experience.”

    Joe Glavina: “Final question, Jon. We see household names in the press and the potential for reputational damage. The obvious response is to say ‘very sorry, technical error, we’re a good employer’ but I wonder if that will wash. Is there a job here for the communications team to limit the damage?”

    Jon Fisher: “So firstly, there is an appeal process against being named and shamed. The guidance is very much that only in exceptional cases will an appeal succeed and there are no published examples that I'm aware of where an appeal has succeeded. The naming and shaming was put on hold for a few years, but they are now doing catch up and there are more regular lists and I think we going to see a lot more companies named and shamed for breaches which now are quite historic. So, we may, through that, learn what kind of grounds employers have managed to avoid being named and shamed on, but certainly in my experience, you look at the lists and there are what you would describe as ‘innocent technical breaches’ and people are still being named and shamed for those breaches. So yes, you need to be proactively ready with your communications. You should get notification of when the list is going to be published and that your name is going to be on it and your PR team, your comms team, have to be ready to go out to press because the press isn’t interested in the nuances of it, they’re not interested in the fact that it was innocent breach, an oversight, a technical breach, they look for the biggest household names. They publish how much they've underpaid and if you've got a big workforce, and it's a small error, it might still add up to quite a big amount and that’s what the headline will be, and your comms team need to be ready to try and counteract that.”

    Jon’s article explaining all of those points in detail is: ‘Autumn Statement 2022: employers urged to take note of minimum wage rise’. We have put a link to it in the transcript of this programme.


    - Link to Out-Law article: ‘Autumn Statement 2022: employers urged to take note of minimum wage rise’

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