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UK Budget Horiz

Challenges of Complying With U.K. Minimum Wage

By Samantha Mann, MAAT, MCIPPDip

UK Budget

The Queen's speech of 2017 contained none of its usual pomp and circumstance, thanks to the less-than-convincing outcome of the “'snap'” General Election, and will be the last until 2019. It is predicted that 2018 will be too busy a year in the Parliamentary calendar because of Brexit negotiations.

All focus is on the outcome of the Brexit negotiations and, as I write, the Repeal Bill is now laid before Parliament to ensure a smooth legislative transition for the U.K. once we exit the European Union.

With much uncertainty on the political stage, let us consider instead topical challenges for U.K. employers and their payroll professionals under the banner of “business as usual.”

In a week during which the Matthew Taylor report has been published, which looks to achieve “good work for all,” and as we await the publication of the interim strategy and consultation by the Director of Labour Market Enforcement (LME), the increasingly topical subject of minimum wage compliance continues to challenge the innocent and unwary.

Investment in Minimum Wage Compliance

HM Revenue and Customs (HMRC) has invested significantly in recent years to ensure that its compliance teams, across all business heads of tax, are able to go out to gather all taxes due to the exchequer (i.e., treasury). Rarely a week goes by without one media headline mentioning the “tax gap.” We are clear as to the purpose and largely clear as to the working practices that are to be adopted by the “traditional” tax compliance teams. Regardless of the political fallout caused by snap elections, for the tax compliance teams it is business as usual, which for a cash-strapped government means they are busy, busy, busy.

But less is known and understood about the expanding size and workload of the National Minimum Wage (NMW) compliance teams, who in recent years have seen increasing investment by government and thus an increase to their staff numbers. By NMW we include the NMW and the National Living Wage (NLW) introduced in April 2016.

NMW was established in 1999 to raise the pay of the lowest-paid workers. It is reviewed annually by the Low Pay Commission (LPC), which has the challenge of protecting the lowest paid in society without risking employment. When it was introduced, it served just over 1% of the worker population.

The introduction of the NLW, which has a policy expectation to achieve an hourly rate (for workers aged 25 and over) of 60% of median earnings, the proportion of the workforce being covered by the minimum wage is now estimated to reach 14% of the labour force by 2020.

An increased number of compliance officers, when coupled with an increased percentage of workers in receipt of NLW, means it is reasonable to assume that a higher number of employers will be found to be noncompliant.

Let us explore some of the areas that have been catching employers and experienced payroll practitioners out with payment of the minimum wage.

We have been talking to Chartered Institute of Payroll Professionals (CIPP) members over the year to research their experiences and problem areas, and these are many and varied. I will focus on two key areas and look to the latest guidance published by the Department for Business, Energy and Industrial Strategy (BEIS) in April 2017 to see what it guides employers to do, and consider some of the reasons why.

Salaried Hours

Back in February, 359 businesses that had been found to have failed to pay their employees the minimum wage were named by BEIS. Setting aside the increasing argument that the current method of naming and shaming by BEIS is an extremely blunt and ineffective tool, the publicity that followed this case highlighted an area of concern about an accurate calculation method that should be used for salaried-hours workers.

Media coverage had suggested that HMRC advocate the use of a divisor of 52.17 when calculating a monthly reference number of hours. As BEIS guidance both in October 2016 and since in April 2017 is silent on a divisor to apply, we approached both HMRC and BEIS to seek clarification.

Both departments provided the following response:

“Regulation 21(3) National Minimum Wage Regulations 2015 sets out: The second condition is that the worker is entitled under their contract to be paid that salary or salary and performance bonus in respect of a number of hours in a year, whether those hours are specified in or ascertained in accordance with their contract (‘the basic hours’).

In order to comply with this requirement, employers need to either specify the annual hours in the workers’ contracts or provide sufficient information in the contract to allow the annual hours to be ascertained for the full calendar year.

HMRC does not specify the use of a particular divisor: if an employer has a credible system for determining the annual hours, HMRC will use that when investigating potential NMW breaches.

The BEIS guidance, Calculating the minimum wage, provides information for employers ….”

We turn now to that guidance to see how BEIS assists employers with their interpretation of the regulations:

“The employer does not have to show the total basic hours for a complete year but it is recommended to do so and it must be possible to precisely calculate what the total basic annual number of hours is in relation to the full year.

For example, if a contract sets out a monthly number of hours it is possible to work out the annual total by multiplying by 12. However, if a contract sets out the weekly number of hours, the hours for the whole year can’t be determined by multiplying by the number of weeks in a year because the days in a year cannot be divided by 52.”

Whilst pointing out that 52 isn’t equally divisible into the number of days in a year, the examples provided in the BEIS guidance don’t go on to assist an employer with the calculation of a “notional hours” figure that will be used as a reference point to ensure that minimum wage has been paid in a given pay reference period.

Sleep Time

The NMW Regulations 2015 define sleep time as:

“Hours when a worker is available only includes hours when the worker is awake for the purposes of working, even if a worker is required to sleep at or near a place of work and the employer provides suitable facilities for sleeping.”  

Tribunals have supported this view as is demonstrated by the case of Shannon v. Clifton House Residential, which held that the employee was only entitled to NMW for the hours during which he was awake and working.

However, each situation needs to be looked at on an individual basis, and a starting point is to look at the nature of the work being undertaken by the worker. Does the worker have an obligation to be physically present at their workplace? For example, what would happen if they left—would the worker be disciplined? If they would be disciplined or they are otherwise prevented from leaving, then case law suggests that the time spent at work, whether awake or asleep, is subject to NMW compliance, because being present is work in itself. This was established in an Employment Appeal Tribunal (EAT) ruling from Whittlestone v. BJP Home Support Limited.

The claimant appealed, saying she was entitled to be paid the NMW for the hours during which she slept at the house of three young adults who suffered from Down syndrome so that she could provide potential care for them. The EAT disagreed with the tribunal findings and allowed the appeal because, in respect of the sleepover, the tribunal had failed to recognise that the claimant was required to work, that this was and could only in the circumstances be "time work," and that it was irrelevant whether any activity was actually performed.

BEIS guidance and HMRC compliance work are adapting to take on board the complex myriad of cases, and so it will pay dividends for employers across all sectors to keep fully abreast of the latest updates.

And there is more …

There is always so much more we could discuss, but space prevents me, so we will leave other areas of NMW compliance for another day. I feel confident that we will revisit this subject again as complexity continues to increase from work across government departments, in tribunals, and as a result of compliance activity.

BEIS guidance and the approach and interpretation taken by HMRC compliance teams, along with many other issues, are being taken up by the CIPP policy team and other stakeholders, such as the Low Income Tax Reform Group and Tax Aid, with BEIS, policy owners, and HMRC. These stakeholders police compliance with minimum wage legislation and increasingly the LME and the LPC as their involvement and interest with minimum wage compliance increases.

SamanthaMannSamantha Mann, MAAT, MCIPPdip, is a Senior Policy & Research Officer for the Chartered Institute of Payroll Professionals (CIPP) who has more than 30 years of experience working within payroll in the SME sector. Sam uses her wealth of knowledge to provide technical support to the Advisory service, writing technical articles, and writing and delivering presentations.