There has been a rise the number of firms investigated by the Revenue for breaches of the national minimum wage legislation. Accountancy firm Grant Thornton conducted the research and they warn that businesses are at an increased risk of heavy fines for unintentional breaches as the Revenue cracks down. Those at risk include household names that regard themselves as good employers and unlikely targets.
This has been reported by HR Magazine which highlights the most common practices resulting in breaches including salary sacrifice, pension contributions and employee workwear policies all of which can lead to employees’ base pay being dragged below the national minimum wage rate.
The article highlights how HMRC has stepped up its capability significantly in recent times. Since 2016 it has increased its NMW enforcement budget by 99% to £26.3 million. There are now more than 450 NMW enforcement officers, up from 330 in 2017. The government has also increased the potential penalties facing businesses underpaying employees; rising from 50% of the arrears owed to workers in 2014 to 200% of the underpayment today. In the year 2019-20 over £18.5 million in penalties was given in over 3,300 closed investigations in 2019-2020.
Michelle Perry, an associate director at Grant Thornton, said that due to “the myriad of challenges” currently facing businesses, it is inevitable that some will be caught out, even those with the best of intentions. She told HR Magazine that it is important to determine where the responsibility lies within the business and take appropriate action to ensure there are no compliance gaps. On that point she says it is often the case that finance teams expect HR departments to ensure there are no breaches, and vice versa, so there needs to be absolute clarity around that issue. She says: ‘Typically, businesses will have basic checks in place for such things as rate changes and simple payroll checks. However, this is not sufficient to properly safeguard against all potential infringements as breaches are often in respect of more technical issues’. She says: ‘The legislation surrounding this issue is complex and if there is not sufficient expertise available in the business, we recommend working with an advisor to provide technical support.’
She’s right, it is complex and mistakes are not uncommon in our experience. So let’s hear more about this from Jon Fisher who has been helping a number of clients avoid these problems. Jon joined me by video-link from Leeds and I started by asking how expensive this could be for employers who get this wrong. In other words, are these 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 advertently 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, you know, employees moving from one age band to another, and particularly last April they changed the age bands so that 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 mentioned the rate increases we see every April. So, last April they changed the age bands so that everyone 23 and over now qualifies for the highest rates of national minimum wage whereas previously that was 25 and over. Jon talked to this programme about those changes back in March, as they were about to come in. That programme is called ‘NMW record keeping changes from 1 April’ and is available for viewing now from the Outlaw website.