The government’s tax collector is making National Minimum Wage (NMW) and National Living Wage (NLW) audits a bigger priority and is investing in manpower.
This summer Argos was named as one of 233 employers who faced a record £1.9 million in fines following a large-scale National Minimum Wage (NMW) and National Living Wage (NLW) review by HMRC. Debenhams and John Lewis have also been named and shamed in the press this year.
Underpaying staff can come at significant financial cost, starting with having to make up the difference through back-pay. With an additional penalty fine of up to £20,000 per worker and HMRC authorised to audit the previous six years, the cost of non-compliance can quickly add up for larger employers.
The more worrying aspect for many businesses, however, is the significant risk of reputational fallout that results from being named and shamed. The cost to a brand, from a customer, employee or investor perception point of view, may be harder to quantify but could dwarf any liabilities due. An additional concern is that many businesses are inadvertently defaulting on payments despite what appear to be legitimate reasons and processes.
While no-one is safe - small businesses have been named and shamed for a total underpayment of less than £100 - we know that HMRC is focusing on industries where there is a good chance of success. Food and beverage, especially producers and manufacturers who often have large workforces at the lower end of the pay scale, is one of the sectors that HMRC are investigating.
Here’s what you need to know about the audit process and how to protect your business.
Avoiding accidental underpayment
It is rare for reputable businesses to knowingly pay less than the minimum wage. Instead, it is more common for firms to have inadvertently failed to pay at least the minimum wage in what is known as a ‘technical’ breach. As recent cases show, these ‘technical’ breaches can occur legitimately.
It could happen when an employee’s quoted hourly rate is in line with the NMW. But once averaged out over a longer time frame (say, 12 months), the amount they receive compared to the total time worked takes the actual rate below the NMW.
It may also happen due to legitimate deductions being made from their gross salary (eg salary sacrifice schemes like pensions and childcare) or where there might be a discrepancy in the period that counts as paid work time. A common example of the latter in food manufacturing would be time spent changing into protective clothing and meeting cleanliness standards before starting a shift.
Technical breaches might also occur because of ambiguity in staff contract terms. HMRC recognises four categories of work:
- paid by the hour (‘time work’)
- paid an annual salary, under a contract for a basic number of hours each year (‘salaried hours’)
- paid by the piece - eg items made or tasks completed (‘output work’)
- paid in other ways - eg commission, fixed price for a project (‘unmeasured work’).
A common pitfall is for an employer to consider their employees to be ‘salaried workers’ but fail to include a precise number of hours in their records. HMRC will then argue that the employee is an ‘unmeasured worker’, which can make the resulting NMW calculation less favourable.
Getting HMRC ready
The best way to limit your exposure is to be proactive. This starts with ensuring all employees under contract have some sort of hours agreement with you in writing. You must be able to prove that the agreed amount is realistic. You may also want to consider reviewing your existing policies for clocking in and out.
In the event that you suspect you may have underpaid staff at some point in the last six years, our advice is to initiate a ‘self-review’. If you can provide evidence of the review and that any money owed has been paid to staff, you should not be subject to HMRC penalties even if they decide to carry out their own investigation. Don’t forget former employees either - make sure your HR department is consistently capturing forwarding contact information for anyone leaving the business.
The fallout from being named and shamed impacts the very core of an organisation and any doubt should be acted upon urgently.
Our Employment Tax team have already supported a number of successful self-reviews and are always on hand should you have any questions about minimum wage compliance. For more information, please contact Peter Gomersall.
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