National Minimum Wage investigation

These educational letters could be the precursor to an investigation if action is not taken, and we have, therefore, listed some frequently asked questions to assist employers in understanding those obligations, and the areas of potential risk.

What is the National Minimum Wage?

The NMW is the minimum amount an employee should be paid per hour; this is called the National Living Wage for employees over 23, and the NMW for employees under 23. The amount is changed each year, and the rates for 2022 are shown below:

Meeting the NMW requirements is more than just making sure the correct amount is paid each hour. Requirements placed on staff, and deductions from their wages are taken into consideration by HMRC potentially resulting in employees pay notionally reducing for a particular period, thus causing it to fall below the NMW (resulting in a breach).

How is the NMW enforced? 

The NMW is enforced by HMRC on behalf of the Department for Business, Energy and Industrial Strategy (BEIS). The principal means by which HMRC enforce the NMW is through notices of underpayment. In more serious cases, the employer may have committed a criminal offence, and so HMRC refer the case to the Crown Prosecution Service. 

There is also an associated system of publicly naming employers that breach NMW law, which is designed to deter employers from underpaying their workers. Under this system, employers issued with a notice of underpayment are named via a BEIS press notice. This can severely damage an employer’s reputation, increasing the importance of employers engaging specialists to minimise such exposure. All cases where the arrears found to be payable to employees exceed £500 will be considered for naming, although this threshold can be reduced to £100 in cases where previous non-compliance has been established.

What penalties can apply? 

As well as forcing the employer to pay the worker for any deemed underpayment of NMW, HMRC can issue penalties up to 200% of the underpayment, to a maximum of £20,000 per worker.

What are the common issues? 

There are a number of factors employers should consider when setting wages and policies, and these will usually be the subject of any HMRC NMW investigation:

• Uniform and equipment: If an employee is required to pay for their own uniform or equipment, this will be considered a deemed deduction under the NMW regulations. If that deduction reduces the employee’s pay below the NMW for the relevant period, then the employer will be in breach.
• Saving schemes: Although voluntary savings schemes appear beneficial to the employee, if the funds are retained by the employer, in the employer’s account, HMRC view them as deemed deductions, and could consider the employer to be in breach of NMW regulations.
• Lottery syndicates: Similarly, if the employer operates a lottery syndicate (generally at the request of its employees) whereby it deducts an amount and uses it to purchase lottery tickets (or passes it to a particular employee to do so), HMRC could consider this to be a deemed deduction for the purpose of NMW.
• Salary sacrifice arrangements: Many employers use salary sacrifice arrangements, usually to provide childcare vouchers or pensions. These can also count as a deemed deduction. 
• Rounding time worked: If the employer’s system rounds the time at which an employee clocks in/out, this could mean employees are not paid for the full amount of time they have worked.
• Admin charges: Such as for processing court ordered deductions. 
• Unpaid time: For example at the start and end of shift, such as for changing into protective gear/uniform and setting up or closing. 
• Travel time: This would not include commuting to a regular place of work, but it does include other travel that is essential for the job. This is often difficult to define, and there are specific rules set out in NMW Regulations 2015 (Regulation 20 and 34) on what travel is included.
• Training time: Any unpaid training time will reduce the employees pay for the period. If the effective hourly rate falls below the NMW, the employer will be in breach. This could also apply if the employee resigns and is asked to repay the employer for that training.
• Not keeping up to date with increases in rates: Rates typically increase on 1 April every year, and rates will also increase as younger employees get older (per the above table) and apprentices no longer qualify as apprentices.
• HMRC also has the power to conduct site visits. It's important to engage with a tax advisor if you have been subject to a site visit. 
• Lastly, and importantly, HMRC also has the power to interview employees and obstructing this process can have severe repercussions.

How common are HMRC NMW investigations? 

In recent years, HMRC has increased its focus on NMW investigations and has subsequently allocated more resources dedicated to NMW enquiries. In one recent tax year alone, HMRC opened over 2,600 new cases, issued £14 million of penalties, and £16 million was paid to 155,000 workers.

When will HMRC initiate a National Minimum Wage enquiry/investigation?

Investigations can begin after an employee has made a complaint to HMRC that they believe they are not receiving the correct NMW. In some cases, HMRC has directly contacted employees and actively encouraged them to file a complaint. 

There are also instances where HMRC re-visit employers who have had previous NMW investigations to ensure they are still complying and are updated on recent legislation. Therefore, after an investigation is closed, it's important to remain vigilant and continue to follow NMW regulations.

How can Buzzacott help? 

NMW investigations can be expensive and compromise the reputation of the business; even if the mistakes are unintended. Consequently, it's important precautions are taken to ensure costly mistakes are not made. In the first instance, Buzzacott can work with employers to ensure they are compliant with the NMW Regulations, especially when there are changes in the legislation. 

Should HMRC have already opened an investigation, we can work to bring that investigation to a conclusion as swiftly as possible and make representations to HMRC to reduce any liability to tax and penalties.

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