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Challenges of meeting legal minimum pay requirement: is it understood?

Challenges of meeting legal minimum pay requirement: is it understood?

Challenges of meeting legal minimum pay requirement: is it understood?

In the early compliance audits by HM Revenue & Customs, those exposed tended to be small and isolated instances, some deliberate and some naive ignorance! In recent months, it is clear some large employers appear to be struggling in their reward strategies in assuring compliance of paying legal minimum pay, whether that be National Minimum Wage or National Living Wage.

These organisations must have professionals in reward in both HR and payroll, yet have made some fundamental mistakes committing criminal activity in the payments they make to employees for work time.

Minimum pay is governed by employment law, and breach is criminal. HM Revenue & Customs are charged with policing its application.

It is based on several significant factors:

  • Hours counted as work time
  • Earnings towards meeting minimum pay comparison as opposed to earnings that don’t
  • Deductions from an employee wage for the benefit of the employer – including legally allowed administration fees for Court Attachments or Arrestment’s

In addition, employers are confused in their strategies of the impacts of their reward structures such as:

  • Salary Sacrifice – a contractual pay cut, regardless of the Peninsula ruling in relation to maternity rights pretending it isn’t
  • Overtime premiums (and some other similar additional payment amounts) do not count
  • Sickness, Parental Payment, Holiday time is not relevant as the employee has not worked that time
  • Pensions and when it is an employee contribution versus a pay-cut and employer contribution – you cannot sacrifice so much that you have in effect worked for free

So, in recent examples we have seen:

  • Tesco who appear to have not realised that actually there is a fraction more than 52 weeks in a year, so when there is a 365 day year there are 52.14 weeks, and for leap years 52.29 – also that employees actually don’t purchase childcare vouchers and cycles for work, they are salary sacrifices with contractual pay cuts with the provision of an alternate tax and NICs free Benefit in Kind from the employer. Employee purchase is not tax and NICs free.
  • John Lewis whose averaging spread out into the future amounts even for extra hours that needed to be paid, in effect, right now
  • Monsoon who deducted money from wages for the compulsory purchase cost of what in effect was high fashion expensive uniform for each new season
  • Sports Direct who required employee to be on premises for various duties outside of normal paid time. Yes if you expect them to be there before and after for a period, then you pay that period.
  • the recent ruling in relation to care workers who are required to sleep overnight at their work place in readiness to carry out essential care duties – yes they are entitled to at least the legal minimum pay even if sleeping.

The Gov.UK guidance is sparse at best, the former DTI book, although thick and full of content, at least spelt out some detail. The ACAS website can be more helpful and surprisingly the Northern Ireland statutory information excitedly more detailed.

Often the commentary of failure is around a payroll error or mistake, but is it? The issue is more likely the understanding and interaction of reward for employment practice. Senior officials could find themselves committing a crime because of rogue local practices attempting to squeeze unpaid (and unrecorded) work time, and reward process fads that can be ignorant of the legal requirements to pay people for all the relevant work time they do.
It’s not about when you did the work or how old you were when you did it. Its all about the pay period it is paid and the age at that point.

Critical touch points for compliance:

  • Months with 31 days where there just might be 23 working days if you are working out some sort of average salary payment, have you paid enough hours?
  • First Payment made for periods starting from 1st April, is the average being paid above the new minimums – payment in arrears counts for little – the new rate applies
  • Ensuring that salary sacrifice, for the benefit of the employer deductions and fees are appropriately taken into account and that these contractual reduce other earnings first
  • Don’t mix in with non-work elements such as holiday, sickness, parental leave and overtime premiums etc. those earnings don’t count
  • Make sure that the for the benefit of the employer deductions do not impact including admin fees
  • And very importantly, if you have inadvertently underpaid, pay it as soon as you can when they are next paid.

An hour worked is an hour paid, now with a nationally set legal minimum.

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About the author

Simon Parsons
Director of Payments, Benefits & Compliance Strategies

Simon has been a major contributor to SD Worx’s payroll expertise since 1984. Besides being influential in the development of SD Worx’s payroll services, he is a major presence on a number of HMRC consultative groups and committees.

A fellow of the Chartered Institute of Payroll Professionals and one of the original Masters of Science in Payroll Management, Simon is a regular author and speaker on payroll matters. He is also Chair of IReeN, the electronic exchange with government user network, and the Honorary Chair of the British Computer Society (BCS) Payroll Group (The Chartered Institute for IT). 

Simon has won a number of awards in the past including the Strathearn Award for Lifetime Achievement at the 2012 Pay & Benefits Awards, the Payroll Alliance Award for Advancing the Payroll Profession in 2010 and IPP Person of the Year in 2006.

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