Simplify payroll to mitigate risk of NMW breaches after rates rise, says lawyer

UK employers should review their salary sacrifice arrangements in light of the increase to the national minimum wage announced by Rachel Reeves in last month’s Budget. The rates rise, effective from 1st April, runs the risk of bringing hourly paid and salaried employees to a level below the minimum wage threshold which could result in penalties and back-pay liabilities. We’ll speak to an employment lawyer about the impact of the rise and how firms can minimise the risk of inadvertent breaches.

As a result of Chancellor Rachel Reeves’ Budget, the National Living Wage for over-21s will rise by 6.7%, reaching £12.21 per hour from April. That’s over £23,800 a year for a full-time employee working 37.5 hours per week and represents a 16.3% boost, the largest percentage rise of all the age groups. It brings younger workers closer to the pay levels of older employees and aligns with the government’s plan to move towards a single adult minimum wage for workers aged 18 and over.

The risk to employers is highlighted by Jon Fisher in his article for Out-Law. He says: ‘“Employers will need to review their position even where an employee’s rate is more than the new minimum. This is due to the complexity of the NWM calculation and is particularly relevant in regard to employers who operate salary sacrifice schemes, such as pensions contributions.
Employees must not be allowed to sacrifice their pay to below the NMW, and employers should ensure that their payroll systems have measures in place to prevent this from happening.” He says sacrificing pay for benefits like pension contributions must not push wages below the legal minimum.

So, let’s hear more on that. Earlier I caught up with Jon Fisher who joined me from Leeds:

Jon Fisher: “The point is it’s the pay after the salary sacrifice which counts for national minimum wage purposes. So if you pay somebody £14 an hour and they sacrifice £3 of that, then their pay for national minimum wage purposes will be £11 and therefore below the required rate, even though, in effect, they are actually, in reality, paid more than national minimum wage. So it's just making sure that there are systems in place so that low paid workers in particular are not allowed to sacrifice salary into pension, for example, below that minimum threshold for national minimum wage. Ideally you want to buffer above that because then there are other complications in terms of unpaid working time and other issues which may bring the national minimum wage rate down. So, it's really just making sure that your payroll is set up so that people cannot actually fall below national minimum wage through salary sacrifice.”

Joe Glavina: “In your article, Jon, you highlight the penalties, which are severe, and the possibility of back pay. Could you just explain what those risks are because they are significant aren’t they?”

Jon Fisher: “They are significant, yes. I mean, for salary sacrifice first time around, first offence, there is a more lenient regime but, generally you'd have to pay the arrears of national minimum wage pay to the workers, and you'd also have to pay a penalty worth double the arrears to HMRC, and you'd be named and shamed in HMRC’s list of offending employers. So it is quite an onerous penalty regime and there are proposals in the new Employment Rights Bill to shift this away from HMRC into a specialist labour enforcement agency. So I would expect, if that goes ahead, there would be some more active enforcement of this, even more than we've seen to date.”

Joe Glavina: “You mention in your article a strategy which employers should consider which is consolidating benefits and premiums into base pay. How does that work and why is that a good idea?”

Jon Fisher: “So one of the other problems with national minimum wage is that it's quite hard to identify what pay counts towards national minimum wage. It's not all elements of pay. So for example, shift premiums usually will not count and employers may find themselves in a situation where even quite well-paid workers who they think are earning well above national minimum wage, actually, when you look at the technical calculation, are very close to that minimum rate, or even below it. So the idea is if you make payroll simpler and simply consolidated everything into base pay, so no actual increase in actual pay for the employee, but for national minimum wage purposes there would be a much higher basic rate which gives you more leeway for things like salary sacrifice so there's less risk of an inadvertent breach. It also means you've got more scope for national insurance savings, for example, by putting more into salary sacrifice, particularly after the new hike in employers’ NICs, that could be something which could enable clients to save money by actually consolidating pay in this way. One thing they do need to be aware of though of course is it has already become more difficult to change terms and conditions unless the employee voluntarily agrees to that because the fire and rehire, the dismissal and re engagement route, is harder because of the code of practice. But if the Employment Rights Bill comes into force in its current format, then certainly within the next 18 months or so, it's going to be pretty nigh on impossible to change terms and conditions through that route. So if this is something a client wants to do, it's already going to be difficult now but they're better off facing into it now than waiting because in time it's going to be pretty much off the table.”

Joe Glavina: “In your article you advise employers to engage with payroll and engage with their legal team. Is that because this about getting the process right and also getting the technical side right? 

Jon Fisher: “Yes, absolutely. Legal need to be saying this is how the national minimum wage calculation works, because it is complicated and it is highly technical, but payroll, the ones are actually processing that and making sure people are actually paid - and one thing I've learned in this job is what you decide in reality, in theory, as to what's going on with all your policies, it all comes down to actually how payroll interpret that, what the systems do and how much comes out the other end and what people actually get put in their bank account, and the two are not always as aligned as you'd like to think. So it's really important those two teams work together and, particularly for payroll, they need to be making sure that we have these safeguards in place so that inadvertently people can't sacrifice pay below that national minimum wage level, or that there are flags immediately raised that somebody has been paid below that level so that correction can be made under that month or the subsequent month, which will help avoid getting into the penalties regime.”

That rise to the NMW takes effect on 1 April 2025. If you would like help reviewing your current pay arrangements in light of the rise please do contact Jon Fisher – his contact details are there on the screen for you – or you can contact your usual Pinsent Masons adviser.

- Link to Out-Law article: ‘UK Budget: national minimum wage sees biggest boost on record’