The consequences of failing to pay the National Minimum Wage

With the new rates now in place for the National Minimum Wage (“NMW”), it is important that all employers update their pay structure to reflect the changes and keep sufficient records to ensure workers are being paid the correct entitlement.

As we all know, pay is one of the most important aspects of any employment relationship, and employers are legally obligated to pay workers in accordance with NMW as well as their contracts of employment.

Back in Nov 2023, The Office for National Statistics reported that approximately 366,000 jobs did not pay the National Minimum Wage, which constituted around 1.3% of UK employee jobs.

HMRC are responsible for enforcing payment of the NMW and can charge penalties for non-compliance, as well as forcing any underpayment to be repaid. HMRC can look back for up to 6 years, and any sums owed are then used to calculate the penalty.

The current penalty is up to 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.

In addition to potential fines for non-compliance, 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.

HMRC has identified several factors that can lead to underpayment of wages in its Employer Bulletin. These include:

• missing an employee’s birthday and paying them 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.

Most issues with incorrect pay can be avoided if employers have a clear grasp of their payroll responsibilities. To reduce the risk of errors, employers should ensure that:

• they have robust systems in place to track when workers move between pay bands to ensure the correct rate is applied each week or month
• they correctly classify staff as employees, workers, or self-employed.

In relation to the second point, it is strongly recommended that employers seek legal advice on contractual arrangements and worker status wherever there is a risk of falling foul of the regulations.

National Minimum Wage legislation requires employers to keep sufficient pay records to demonstrate that workers are receiving the correct entitlement. Workers are entitled to access these records if they believe they have been underpaid and may bring a claim in the Employment Tribunal if an employer fails to provide them or refuses access. From April 2027, the Fair Work Agency will be responsible for enforcement. Maintaining accurate, up-to-date records is therefore essential.

Where mistakes arise, employers should tackle the situation head-on and correct it without delay. Acting quickly helps prevent the issue from escalating and leaving them open to potential court or tribunal proceedings and penalties for not paying the correct wage in the first place.

Swift action also supports positive employee relations. Workers are generally receptive when errors are acknowledged and resolved promptly, whereas ignoring the issue can damage trust and goodwill.

Failing to pay staff correctly can expose employers to unlawful deduction from wages claims and potentially significant costs. Employees usually raise mistakes informally first, giving employers the chance to put things right. Acting quickly is essential, as delays can lead to lengthy and expensive formal action.

If an employer fails to respond, the employee is likely to seek legal advice and escalate the matter. This may result in a formal grievance, requiring management time for investigations, meetings, and appeals. The employee could also involve ACAS or make a complaint to HMRC, who will investigate whether the NMW has been paid. HMRC can also carry out their own investigations. With the risk of fines and enforcement action, this is not an issue employers can afford to ignore.

Employees also have the option to issue proceedings directly, rather than complaining to HMRC, by bringing a claim in either the Employment Tribunal or the County Court. At present, Employment Tribunal claims for unlawful deductions must be submitted within 3 months less 1 day of the last deduction. This deadline is due to extend to 6 months minus 1 day from October 2026, under the Employment Rights Act 2025. County Court claims have a 6-year time limitation period from the date of underpayment, and employers may also face legal costs and interest in addition to any award for breach of contract.

We realise that understanding employment legislation can be challenging, and if you have any questions on pay or statutory rates, or would like advice, our team of employment law experts is here to help, contact us today.

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