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National Minimum Wage investigations – the devil can be in the detail!

Posted on 6 December 2021

In October, officers from The Gangmasters and Labour Abuse Authority visited a hotel in Llandudno, Wales, in a joint investigation with North Wales Police and HM Revenue and Customs’ National Minimum Wage (NMW) team. Two female workers were interviewed, and said they were paid as little as £250 per month for up to 60 hours of work per week. They claimed they were told to lie about their working hours if asked, and one added that she was forced to live in a cupboard with no washing facilities.

Whilst this is a clear example of abuse that warrants the attention of the authorities, HMRC continue their NMW investigations into large employers looking to catch them out over technicalities rather than clear breaches of the rules.

Every few months the government releases a list of companies that have breached the requirement to pay employees at least the NMW.  Whilst it would be expected to see the hotel owners from Llandudno, feature the latest published list included household names such as John Lewis, Pret a Manger and The Body Shop.

The requirement to pay NMW is something that all companies should be acquainted with. All employees are entitled to be paid at least a certain level of pay depending upon their age. 

With this well-established understanding, it raises the question of how large employers are finding themselves investigated by HMRC, "named and shamed" and facing payments of NMW arrears. The answer lies in the fact that the rules are complex, and in conducting investigations, HMRC focuses on areas where technical but unintentional breaches of the rules occur. Examples of where problems can arise include:

  • Insufficient or lack of timekeeping records;
  • Additional time worked by employees and not paid for, such as coming in early or leaving late, being subjected to security searches etc.
  • Trial shifts;
  • Salary sacrifice;
  • Deductions for uniform costs or imposition of specific dress code;
  • Volunteers;
  • Deductions from pay for savings clubs, travel cards or subsidised car parking;
  • Deductions for accommodation.

Issues in practice

The complexities referred to above can be illustrated through a case recently heard at the Employment Appeals Tribunal (EAT) – Augustine v Data Cars Ltd [2021] EA-2020-000383-A. In this case Mr Augustine worked as a taxi driver for Data Cars Ltd and paid £160 per week in fees for equipment required to enable him to carry out his job. He rented a car from a company associated with Data Cars Ltd as well as paying for insurance, fuel and cleaning costs. He also hired a uniform that enabled him to undertake additional assignments as a "gold driver".

Mr Augustine subsequently brought a claim that he had not been paid NMW and there was a dispute over which payments fell to be deducted when calculating NMW. The Employment Tribunal found the fees, insurance, fuel and cleaning costs should be deducted but decided the car and uniform hire were optional expenses and therefore did not take them into account when calculating NMW. When Mr Augustine appealed to the EAT it was held that both the car and uniform hire should have been included in the deductions. 

The statutory test, reiterated in the HMRC guidance was whether the expenditure was "in connection with employment". It does not have to be a requirement of the employment, so the fact that he could have used his own vehicle or chosen not to hire the uniform was irrelevant. The fact was that both the car and the uniform were connected to the employment.

In light of this, employers should be aware that any costs incurred by an employee or worker that were "in connection with employment" must be deducted when calculating NMW, even if the costs are incurred by the employee by choice. The judgement also confirmed that when an employee or worker claims not to have been paid NMW the burden of proof lies with the employer to show that is not the case and therefore this further emphasises that employers should retain adequate evidence to show they have correctly paid NMW.

Risks for employers

The latest published list of breaches included 191 employers and covered underpayments to over 34,000 workers. The list included underpayments for periods up to 2018 and with many enquiries, ongoing more "naming and shaming" can be expected in the near future.

As stated above employers have an obligation to pay their employees at least the relevant rate of NMW.  Any failures must be corrected based on current NMW rates rather than those that applied when the underpayment arose. Penalties of up to 200% of the arrears capped at £20,000 per affected employee can be applied. In addition, employers who underpay employees by £500 or more will be named.

The potential financial and reputational impact of a HMRC enquiry may also quickly generate interest from the Board and other key stakeholders.

HMRC recognise that not all NMW underpayments are intentional and therefore can sometimes be persuaded to take a more lenient approach, but only in circumstances where employers can demonstrate that they are actively trying to improve their compliance. The best way to improve compliance is through a proactive, external review.

The publication of names is a reminder that even where there is no intent to pay their workers in full they can still inadvertently breach NMW rules. All employers should therefore review their NMW system and processes to ensure these are effective and that compliance monitoring extends beyond the payroll and time and attendance systems, and includes working practices that might lead to increased working time or reductions in pay. Where underpayments are identified, these should be corrected and steps taken to prevent a reoccurrence.  For more information please contact Paul Noble.

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