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What national minimum wage enforcement means for the City

What national minimum wage enforcement means for the City

At the end of last week, the Government named and shamed another batch of 113 employers for failing too comply with the national minimum wage (“NMW”). We are not going to name names, but see here if you missed the press coverage last week. Whilst most of the employers named to date are smaller employers, several household names have been named: all very embarrassing for the HR teams concerned!

The press coverage obtained as a result of this policy of “naming and shaming” is intended to drive compliance more generally. This means that HMRC, who enforce NMW compliance, are currently on the look out for high profile scalps, so that the headline writers do not get bored.

Making sure that employers comply with NMW legislation is a key Government policy and the enforcement mechanisms have been strengthened by successive Governments. Enforcement powers include:

  • Naming of employers now happens (almost) automatically once a notice of underpayment being issued by HMRC.
  • Employers can be fined up to £20,000 per worker. The fine is currently 100% of the underpayment, but the Government have announced this will increase to 200% of the underpayment next year. There is a 50% discount for prompt payment.
  • Workers are entitled to recover an additional amount which is calculated by reference to the current NMW rate.
  • HMRC can issue civil claims on behalf of the workers allowing them to recover back pay for up to 6 years.

We don’t mind admitting that some of the NMW legislation is devilishly complicated. It is noteworthy that the sanctions described above apply to employers whose breaches are accidental.

Employers who refuse or wilfully neglect to pay the NMW face criminal sanctions. In reality only the worst offenders are likely to face a criminal prosecution but it remains a powerful sanction.

Last month, the Government announced new enforcement measures. These include increased funding for NMW enforcement with a focus on high risk sectors (including social care and retail). Company directors will also face disqualification.

The Government have also announced the introduction of a national living wage. This is not to be confused with the national living wage recommended by the Living Wage Foundation which sets a voluntary wage rate of £7.85 an hour outside London and £9.15 an hour in London.

The Government’s living wage will effectively add an enhanced NMW rate for those workers over 25. The current NMW wage rate for adults is £6.70 per hour. The Government’s living wage will be £7.20 per hour when introduced in April 2016. The stated intention is that that will increase to £9 an hour by 2020.

These higher rates mean that more businesses will have workers who are at risk of being inadvertently underpaid. Most obviously at risk are:

  • salaried workers who undertake substantial unpaid overtime;
  • workers who have a low salary and who rely upon on annual bonuses or allowances to top up salaries; and
  • workers in back office functions outside London (where market rates are lower).

Most of our clients are City based employers for whom NMW issues are not a great concern, but they remain of interest for the following reasons:

  • There remains a requirement to keep sufficient records to demonstrate compliance.  There are criminal sanctions for non-compliance. The burden of proof rests upon the employer.
  • There may still be reputational damage if contractors such as cleaners, caterers and security staff employed at corporate offices by outsourced service providers do not receive NMW. Partly for this reason many City employers insist that their service providers pay enhanced pay rates in line with the Living Wage Foundation’s living wage rates.
  • For private equity clients evaluating transactions in sectors involving lower paid workforces (such as healthcare, social care, distribution and retail) NMW compliance will be an important due diligence item. An underpayment of NNW not only gives rise to historic liabilities but can substantially damage valuations. Our team have been involved in transactions that have not proceeded as a result of NWM issues.
  • For private family offices or high net worth individuals who engage domestic staff. This can be a particular issue where the provision of accommodation is an important of the pay package. Most benefits in kind do not count towards NMW. Accommodation is taken into account but the maximum value that can be attributed towards accommodation is £5.08 per day - irrespective of the true value of the accommodation provided.

The Government are also expected to consult on the introduction of a new offence of aggravated breach of labour market legislation. It is not known exactly what this will cover, but it forms part of a noticeable trend towards criminalising employers who breach key employment laws.