The consequences of failing to pay the National Minimum Wage

New National Minimum Wage (“NMW”) rates for 2017 came into force on 1 April, just 6 months after the last increase. Updates were previously introduced every 1 October but from 2017 onwards this has been moved to 1 April.

The new hourly rates are as follows:

• Apprentices: £3.50 (up from £3.40)
• Age 16-17: £4.05 (up from £4.00)
• Age 18-20: £5.60 (up from £5.55)
• Age 21-24: £7.05 (up from £6.95)
• The “National Living Wage” (age 25+) also increased from £7.20 to £7.50

The Apprentice rate applies to apprentices aged 16 to 18 and those aged 19 or over in the first year of their apprenticeship. All other apprentices should receive the National Minimum Wage applicable to their age.

Penalties for not paying the National Minimum Wage

As we all know, pay is one of the most important aspects of any employment relationship and employers are legally obliged to pay their employees or workers in accordance with the current legislation as well as their contracts of employment. The Office for National Statistics worryingly reported that approximately 362,000 jobs did not pay the National Minimum Wage in April 2016 which constituted around 1.3% of UK employee jobs.

HMRC are responsible for enforcing payment of the National Minimum Wage and can charge penalties for non-compliance. The current penalty is 200% of the unpaid wages, with a maximum penalty of £20,000 per employee. This may be reduced by 50% if paid within 14 days. Directors can also be banned from being a director for up to 15 years.

Finally, HMRC also routinely publish the names of companies that they consider to be serious offenders. This may cause reputational damage as the names are usually then picked up by the national press and published in “name and shame” style news stories.

Advice for Employers on preventing and dealing with mistakes

HMRC have given some common reasons for underpaying wages in their Employer Bulletin. These include:

• missing an employee’s birthday and paying the lower rate for their previous age
• over-deducting from wages
• misclassifying employees as interns or self-employed
• failing to pay for all the time that an employee is working, for example when they are shutting up shop or waiting to clear security.

Where mistakes arise, employers should tackle the situation head on and correct their mistakes as soon as possible. Otherwise they leave themselves open to potential court or tribunal proceedings and penalties for not paying the correct wage in the first place.

National Minimum Wage legislation requires employers to keep records sufficient to establish that they are paying workers their correct entitlement. Workers are also entitled to access their records if they believe they have not been paid at least their National Minimum Wage entitlement and also to bring a claim in the Employment Tribunal where the employer fails to produce pay records or fails to allow them to exercise their right of access.

Many pitfalls around incorrect pay can be avoided if employers fully understand their pay processes and legal obligations to their employees. Employers should ensure that:
• they have solid systems in place to identify workers moving from one pay rate to another and to ensure that correct rates are being paid to workers each week or month
• they classify staff as employees/workers/self-employed correctly

On the second point, it is advisable to obtain legal advice in respect of contracts and the status of workers where employers are at risk of falling foul of the regulations. This will be most relevant for employers using new or unusual business relationships with their staff and is especially important in light of recent case decisions such as Uber, CitySprint and Pimlico Plumbers where large awards for back pay are possible.

If an employer spots that they have made an underpayment, it is important that they take action quickly to rectify the problem. This will help maintain the working relationship with any affected workers and also to avoid the issue from escalating. Employees will usually understand if an issue is identified, communicated and fixed quickly, but if it is ignored this goodwill will soon be lost.

The consequence of ignoring mistakes – claims from employees

If employers don’t pay or underpay their staff then they are at risk of claims for unlawful deduction from wages. These claims can recover up to two years of underpayments which can add up to significant amounts.

If an employee spots a mistake in their pay then they are most likely to raise the issue informally, giving the employer a chance to deal with the problem. Taking action at this point is strongly recommended as the next steps are likely to be time consuming and ultimately expensive.

If no action is taken, the employee is likely to take legal advice, at which point matters will become more formal. They will usually be advised to submit a formal grievance to the employer, requiring them to spend time following the formal grievance procedure which means management time spent on investigations, meetings and potential appeals. The employee could also involve ACAS or even make a complaint directly to HMRC who will investigate whether the employer has at least paid the National Minimum Wage. We have looked at the potential fines above and it’s clear that this is not something that an employer should be keen to risk.

Employees also have the option to issue proceedings, which can be done in either the Employment Tribunal or the County Court. Claims in the Employment Tribunal need to be submitted within 3 months less 1 day from the last day that there was an unlawful deduction of payment. County Court claims have a 6 year time limit from the underpayment date and there is also the likelihood of legal costs and interest being awarded on top of any award for breach of contract.

The Backhouse Team

Tel:      01245 893400

Email:  [email protected]

Web:    www.backhouse-solicitors.co.uk

Or visit our offices at 17 Duke Street, Chelmsford, CM1 1JU