The National Living Wage (NLW) will increase by 9.7% from 1 April 2023 to £10.42ph, with the National Minimum Wage (NMW) rising by 10.9% for 21–22-year-olds and a 9.7% increase for all remaining bandings.
With rising business costs, many employers will understandably be looking to assess how best to fund the increase without affecting day to day business. Considered thought will also be required on how to ensure compliance with the regulations.
HMRC’s enforcement activity is well known, and payroll teams and external providers are, in our experience, more adept at preparing for rate increases and considering the knock-on impact to monitoring controls than they have been historically. However, in our experience, most traditional payroll systems do not have the functionality to fully process the intricacy of NMW rules and the significant increase in the rates makes preparing for the change even harder. The main reason is that NMW compliance all depends on the fact pattern associated with a worker: it is virtually impossible to build a system that can cater for all potential worker scenarios.
What can you do to remain compliant?
Having robust controls and documentation in place is key to ensuring compliance with the NMW Regulations. The majority of the cases where we have seen underpayments arise are not through deliberate action but are usually linked to business processes and practices implemented with the right intention but that, unfortunately, have had a knock-on effect on NMW pay.
Here are the most common errors we see in practice where an employer will typically need to implement additional controls in order to ensure NMW compliance.
Unpaid working time – This often includes time before or after shifts for tasks such as handover or changing into PPE.
Deductions or payments – For NMW purposes, strict criteria has to be met and many employers fall foul of the rules for items such as tools, training or social events (even where the worker voluntary requests them).
Apprentices – Again, there are strict criteria governing this type of worker and controls are key to demonstrate to HMRC at least the minimum rate has been paid.
Dress Code/uniform – If a dress code is imposed on workers, or a charge is imposed on them for the provision of uniform, this can reduce NMW pay.
Salary sacrifice – Any change to workers terms and conditions which leads to a reduction in their pay will have NMW consequences (even where this benefits the employee overall) and a robust control process is essential.
What are the consequences of getting it wrong?
The financial costs of getting NMW compliance wrong can be significant, but perhaps the bigger factor to employers is the impact on reputation.
HMRC has the power to force an employer to repay arrears owed to workers regardless of whether the breach was accidental, in addition to charging a penalty of up to 200% penalty of the total arrears at stake.
Where total arrears across the workforce exceed £500, HMRC can refer the business for public naming and shaming in publications which are circulated periodically: clearly where this happens, the executive team of any organisation will want to know how and why the mistake occurred.
HMRC continuing enforcement
Data from the Government’s 2022 NMW Compliance and Enforcement report shows that HMRC have received year-on-year budget increases to tackle non-compliance, with two well-known methods of identifying businesses to investigate.
The report demonstrates that a sector-based approach targeting businesses HMRC believe are at risk of inadvertently breaching NMW rules, alongside acting upon all complaints received from current or former workers employed in the last six years, has proven successful. HMRC recovered over £16 million of arrears for over 155,000 workers in 2020-2021, with 208 employers also publicly named and shamed for underpaying workers.
Over recent months, we have seen HMRC utilising their resources to extend their approach to include awareness campaigns aimed at encouraging more workers to better understand their NMW entitlement and raise complaints to HMRC where required. In addition, we are also seeing HMRC expand their enforcement approach and starting to target businesses and workers by geographical location to complement their established methods.
In the current economic climate, the significant increases in NMW rates from April will put organisations under financial pressure. HMRC knows that as employers adapt by reorganising their operations and remuneration packages this potentially increases the risks of non-compliance. In response, we are likely to see HMRC’s enforcement budget and activity continue its upward trend.
Dale O’Reggio and Siobhan Waters are NMW specialists in BDO’s Employment taxes team