Breaches of Minimum Wage Requirements
Posted on: August 7th 2023 · read
In late June, the Department for Business and Trade (DBT) “named and shamed” 202 organisations which they found to be in breach of National Minimum Wage (NMW) law, failing to pay nearly £5m to around 63,000 workers, including three charities. In light of this announcement, MHA’s HR Solutions team have summarised the key issues and consequences of breaching this law.
The NMW was introduced in the UK in 1998, partly due to the decline of in trade union membership but also as it was recognised that there were people who were low paid who tended not to work in unionised sectors. It set minimum pay rates for workers aged 16-17, 18-21 and 22+. A separate rate was then set in 2010 for Apprentices aged up to 19 or during their first year of apprenticeship.
The National Living Wage (not to be confused with the voluntary Living Wage) was introduced in 2016. This was effectively a new minimum wage level for workers aged 25+. Annual increases to both the NMW and National Living Wage are recommended by the Low Pay Commission and largely accepted by the Government.
Over the years, there have been several changes to the age ranges resulting in the current banding of 16-17, 18-20, 21-22, with the National Living Wage applying to workers aged 23+. From 2022, the apprentice rate has been the same as the 16-17 year old rate. It’s no wonder that employers find this confusing!
Facing the Consequences
An employer who fails to correctly pay the NMW will be fined twice the amount of the underpayments. However, that is the least of their problems as they will also be placed on the Government’s “Name & Shame” list. This list is published by the Government and released to the press who can be keen to in highlighting the shortcomings of these organisations. And charities are not afforded exemption; the most recent list includes United Church Schools Trust, Little Sunbeams Pre-School (Portsmouth) and St Mark’s Pre-School in Salisbury, all of which have charitable status.
As well as a financial penalty, employers face a reputational risk for failure to comply. This may result in a loss of customers for commercial organisations but it also has ramifications for the Not for Profit sector.
Most Not for Profit organisations often rely on public fundraising, sponsorship and grant funding. Any damage to reputation will heavily impact on this, be it directly - Government grants may be denied to those who have breached minimum wage legislation - or indirectly - private sponsors or the general public will be disinclined to support organisations who are seen as being unscrupulous.
In addition, candidates have more awareness regarding potential employers via social media and it is more important to them now than ever that employers act ethically. This is of particular relevance in the current labour market where employers are effectively competing for employees. Therefore, this is a risk that most in the Not for Profit sector cannot afford to take.
So where do employers go wrong?
Other than flagrant breaches of the regulations, well-meaning employers can inadvertently fall foul due to the following:
1. Failure to keep up with the annual increases
The NMW and National Living Wage rates increase in April each year so employers who have workers on minimum rates need to ensure that these are increased in line with legislation.
2. Age range changes
As noted above, there have been a number of changes over the years since the NMW was introduced in respect of the age ranges for qualification for certain rates, therefore employers need to ensure they have always paid the relevant age-related rate and continue to do so.
3. Individual employees age increases
Employers need to ensure that they track employees’ ages in order to increase their pay rates accordingly.
4. Apprentice rate
This can only be applied to workers on official Government approved apprenticeships schemes; it cannot be applied to workers whom employer deems to be an “apprentice” due to their age and / or lack of experience. In addition, the Apprentice rate only applies during the first year of apprenticeship or if employees are aged 19+. Employers need to ensure that Apprentices are moved onto the appropriate age-related route at the relevant time (this was where Little Sunbeams Pre-School (Portsmouth) got caught out).
5. Exclusion of premium pay
NMW and National Living Wage calculations are based on basic hourly rates only. Where employees are paid at a premium rate e.g. an overtime rate or an enhanced rate for working at weekends or on public holidays, only the portion of the rate which is the normal basic hourly rate paid counts towards the calculations; the enhanced portion is discounted.
6. Calculations and reference periods
This is where employers are perhaps most likely to inadvertently breach the regulations. The reference period for NMW and National Living Wage purposes is set by the frequency with which a worker is paid. It can be a week, a fortnight or any other time but no longer than a month. The hours worked during the reference period do not individually have to be paid at the correct rate, but must be on average. Where irregular hours are worked but pay is based on 1/12th of annual salary, it is possible for the average pay in a reference period to fall below the NMW or National Living Wage requirements.