The increasing price of not paying your staff

Fair pay for a fair day’s work is essential for a good employee-employer relationship, but it’s also a legal requirement.

Earlier this year it was revealed that about one in four workers aged over 24 was paid below the legal minimum. Bristol City Football Club, Costa Coffee and Odeon Cinemas were among those in the news in 2018 for failing to pay workers enough but they are not the only employers still getting caught out by the minefield that is the complex set of minimum wage rules. An estimated 11,000 businesses failed to pay the minimum wage in 2018-19 with HMRC identifying more than £24m in arrears. And with bigger teams and a growing budget (which has doubled in recent years to £26.3million last year), HMRC is scrutinising employers more than ever and achieving record enforcement results.

The damage to a business for failing to comply with national minimum wage legislation can be serious. One of HMRC’s most successful civil enforcement tools is the Notice of Underpayment. These ensure payment of arrears within 28 days but they also allow HMRC to levy a significant financial penalty (up to 200% of the value of the arrears found to be owed and no less than £100 but capped at £20,000 per worker). In 2017-18, HMRC levied financial penalties of over £14million. There was also the risk of the public naming and shaming scheme which had been suspended but which has been relaunched today, albeit with a supposedly more proportionate approach promised.

Although uncommon in practice, there is the potential for criminal proceedings for offences covering a range of misconduct, from refusing or willfully neglecting to pay minimum wage to failing to keep or preserve minimum wage records. The penalty can be an unlimited fine and the only defence available to an employer is that it had taken all reasonable precautions and exercised all due diligence to ensure compliance with minimum wage legislation. To date, the civil sanctions are far more common in practice than the criminal ones - there has only been seven criminal prosecutions for breaches of minimum wage rules and they have mostly related to very small employers with no significant financial penalties imposed.
But with over 3 million workers in Britain due to have their pay increased again from April 2020 and with the overall enforcement for non-compliance very much on the rise, we look at some of the most common traps for employers.

So where did most employers get caught out?

Below are four examples of the most common pitfalls:

1. Failing to pay employees the correct rate of pay in line with their age. There are now five different pay brackets of minimum wage, without the correct system and framework in place failing to move an employee up a pay bracket at the appropriate time is an easy way for employers to fall foul of minimum wage legislation. With the only defence to breaching minimum wage laws one of due diligence and having taken all reasonably practicable steps, employers need to have a payroll system in place that ensures they pay the correct rate.
2. Confusion over what constitutes ‘working time’. As well as time spent at work, it may also include time spent travelling to and from different places of work or time spent waiting to start or finish work. A retailer was fined because factory staff spent extra time queueing to clock off after their shift for which they were not paid and a football club had to pay substantial arrears when lengthy travel to away games was included as working time left players falling below the minimum wage threshold.
3. One of the most common breaches of minimum wage legislation applies to employers who ask their staff to wear a uniform, even simple black trousers or skirt and a white shirt. Employers cannot ask their employees to pay or contribute to any kind of uniform if it will bring their minimum wage payments below the appropriate threshold. Wagamama and Monsoon have both been caught out with this. The same is true of work equipment. This rule applies even if the employee benefits individually from ownership or use of the work equipment or uniform. Salary sacrifice schemes have previously had the same effect where deductions were taken directly from pay causing it to fall below the minimum wage threshold: Iceland Foods hit the headlines last year for operating a Christmas savings scheme that had this effect. But the government has had a change of approach and now, provided some strict criteria in respect of the salary sacrifice scheme is met including that it is opted into by employees, any financial penalties will be waived in relation to any resulting breach of minimum wage legislation.
4. Unpaid placements. At the tail end of last year it was in the news that Samantha Cameron’s fashion label, Cefinn, had been the subject of a complaint to HMRC after advertising for an unpaid internship. It was looking for a PR and Marketing intern to carry out tasks such as market research for a three-month period. The complainant was of the view that the role, as described in the advertised job description, would classify the intern as a “worker” under employment law who would be entitled to be paid at least minimum wage and they reported Cefinn to HMRC on that basis.  The case of Cefinn is not to say that unpaid interns or work placement students are never legal – interns who are job shadowing and doing a short period of work experience can be unpaid, but if it is more than that businesses need to give careful thought to whether a wage is required to stay within the minimum wage legislation.

We have an experienced team of regulatory lawyers who can work together with our employment team to assist where a non-compliance has been identified, either internally or by HMRC with the risk of a Notice of Underpayment. We can assist you with your investigation into the potential non-compliance, including liaising with accountants or tax specialists as required, to identify any defence or mitigation in relation to the alleged breach. We can also provide specialist advice and guidance on liaison with HMRC if you have received notice of action or are amidst an investigation – do not think it is too late to involve us at that stage.

The obvious complexities surrounding the minimum wage mean it is easy for employers to make an honest mistake that falls foul of the law. Our advice to anyone in this situation is to seek advice as soon as possible to ensure any reputational damage can be avoided.