HMRC has intensified its National Minimum Wage (NMW) enforcement in the North East. Employers should review their NMW compliance now to avoid potential penalties and public naming for any violations, says Lee Muter, Employment Taxes Partner at UNW.
What is the background?
HMRC’s enforcement activities for ensuring compliance with National Minimum Wage (NMW) involves regular reviews and is well funded by Government. Its enforcement budget is in excess of £27m and it is more likely that an employer will receive an NMW enquiry due to:
- Regular targeted reviews of employers within “high risk” sectors or via a regional focus;
- Visiting every employer where they receive a NMW complaint from (say) a disgruntled current or previous employee;
- From a referral from other government or HMRC agencies (an Employer Compliance Review passing on details of underpaid employees to the Low Pay Unit for example).
As there is a risk of penalties of 200% and being named publicly for any transgressions, employers need to increase their focus on this area.
What is HMRC’s regional approach towards NMW?
HMRC’s regional enforcement approach has been in place since November 2022 and the North East was confirmed earlier this month as the latest area of focus. HMRC selects a region based on central data they hold which suggests workers in that area are more likely to be paid below NMW. HMRC then looks to target that area for a more intensive review, using a variety of ways to gather intelligence to aid their enforcement of NMW.
How is HMRC approaching employers?
- The “nudge” letter
Typically, HMRC has been issuing “nudge” letters to over 20,000 employers in the North East region. This letter does not assert that anything is incorrect with their NMW but suggests that they should carry out a check into their compliance. The letter does not state any deadlines by which checks should be made and there is no obligation to either reply to the letter or to carry out a check.
If an employer does decide to carry out a check of their compliance themselves (or with the help of their advisers), any issues they find can be dealt with proactively through self-correction, rather than having HMRC carry out a review. This approach has the advantage of being very discreet and enables the employer to control the self-review process rather than being led by HMRC and then be subject to a stressful and time-consuming investigation.
- HMRC follow up
From its initial nudge letter, HMRC will then target employers for a follow up letter offering to perform a review of their NMW compliance. An employer is free to turn down this “attractive” offer of assistance (HMRC has stated in their December 2023 Employer Bulletin that employers are “strongly encouraged” to take up the offer of a free health check with one of their NMW experts).
If employers do not either look to review their compliance, or look to speak to HMRC’s NMW experts, HMRC has stated that they “run the risk of HMRC’s NMW team undertaking an official full review of their business”. The clear inference is that HMRC expect employers to act.
What do employers need to consider for NMW?
NMW compliance and legislation is complex, and most non-compliance which has been part of the public naming lists has been inadvertent and of a technical nature. Often, the amounts underpaid have been relatively insignificant in terms of the total amounts spent on salary but have resulted in significant impacts to the reputation of a business.
At its simplest, the calculation of NMW should be about multiplying the hourly rate of the minimum wage by the number of hours an employee works.
However, the rules take into account a number of variables such as:
- What type of worker an individual is;
- How working time is calculated and how it is recorded, including unpaid overtime;
- What deductions are made from a worker’s pay, including those payments an employee may be obligated to meet; and
- How employers monitor their NMW compliance in terms of record keeping, policies and controls.
Employers must regularly revisit their NMW compliance to ensure employees are not underpaid.
What should employers do now?
For those who have already received a “nudge” letter, or who will receive one in the next week or so, they should strongly consider a review of their NMW compliance. Even if they are currently paying their employees above current NMW rates, they should look at their compliance afresh to ensure that they have not inadvertently underpaid any employees.
As the hourly rates of NMW have increased significantly in recent years, salaries of between £25,000 and £40,000 could potentially be at risk of NMW underpayment. There are numerous tales of employers who have not taken into account areas such as:
- Salary sacrifices (pension, electric cars, cycle to work);
- Purchase of clothing and uniforms by employees;
- Unpaid “overtime”;
- “Clocking-in” processes not recording the full working time; and
- Apprentices not being paid the correct rate for their age group, or for any off-site travel and training time.
A proactive review should enable an employer to identify the main risk areas within their business and ensure any non-compliance is dealt with proactively.
For those employers who have not had a “nudge” letter, or who have not considered their NMW compliance for a while due to changes in the business, or other priorities, they should also take the time to self-review their current employees pay and records. While the eventual result may be a clean bill of health, the discipline of a self-review can often lead to changes to improve levels of efficiency and can lead to employers feeling more confident should they ever receive an official investigation.
For those employers who are looking to raise finance or are looking to go to market to sell their business, it is vital that record keeping and compliance is of a high calibre as a due diligence will often target NMW compliance.
How should an employer self-review?
To help avoid possible financial penalties of 200% of unpaid wages, employers should consider instigating a review of their NMW records. This can be carried out by themselves or in assistance with a suitably experienced advisor.
Employers need to consider the following:
- Assess the current state of their NMW compliance, including looking at all contracts, and recording of time;
- Identify the main risk areas and plan how to investigate those;
- Carry out a check of those areas of risk in more detail for a sample period to understand whether there is a risk of underpayments;
- Where there are any underpayments, set out a plan to self-correct and rectify the situation (for up to 6 years);
- Change any processes and policies which led to any underpayments, or where there are potential risks of non-compliance.
What should employers do in the future?
As the legislation remains unchanged, is likely to retain its complexity and remains to be policed by a well-funded HMRC team, employers should regularly review their compliance and have monitoring processes in place, ideally for each and every pay period. Particular care needs to be taken for any significant changes in a business, especially where new benefits are introduced or where there have been changes to any working arrangements.
If employers do have any concerns regarding NMW and need to take further advice, UNW’s employment tax team has experience of identifying risks, working with employers as part of a HMRC investigation, and suggesting improvements to current contracts, or processes.
If you would like to discuss how we can help you, or have any other employment taxes related queries, please get in touch with us at employmenttaxesteam@unw.co.uk
