Check salary sacrifice arrangements before 1 April NMW rises, warns lawyer

The national minimum wage will rise again in April so employers should review their payment arrangements to avoid inadvertent underpayments. That is the message following the change to rates announced by Chancellor Jeremy Hunt in the Autumn Statement. We’ll speak to Jon Fisher about the risk and how to avoid it.

The new minimum rates will apply from 1 April 2024 and represent the largest ever increase to the minimum wage in cash terms. The National Living Wage will apply to all workers aged 21 and over for the first time (previously it applied only to those aged 23 and over). For that age group the rates will rise from £10.42 to £11.44 and means that, for a full-time worker aged 21, the NLW rate rise will mean an annual pay rise of almost £2,300. For 18 to 20-year-olds it will rise from £8.60 per hour to £9.71 per hour. The apprentice rate will also rise from £5.28 an hour to £6.40 an hour. Overall the rises mean the NMW legislation will be a relevant consideration for many more employers.

That is a point highlighted by Jon Fisher in his Out-Law article: ‘Autumn Statement 2023: UK minimum wage rises announced’. He says that before April employers should review the position carefully due to the complexity of the NMW calculation. He says: ‘This is particularly relevant where employers operate salary sacrifice schemes, such as for pension 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 goes on: ‘Most benefits and many pay premiums do not count towards NMW. Employers who are concerned about affordability may want to consider consolidating those benefits and premiums into the basic rate. That will often involve a change to contractual terms, and so employers looking to do this before the new NMW rate takes effect in April will need to kick off discussions as soon as possible.’

In addition to those discussions, it’s also vital to engage with payroll so the necessary changes are made to pay systems to make sure pay doesn’t fall below the new rates. As Jon says, this is a highly complex area and whilst in the vast majority of cases breaches are inadvertent technical mistakes,  nonetheless the Revenue comes down hard and will impose hefty fines. So let’s hear about that. Earlier Jon joined me by video-link from Leeds to discuss it. First question: what are the penalties?

Jon Fisher: “The standard penalty is 200% of the arrears and there's no real discretion about that. That's what you'll get charged. Historic arrears, going back several years, there were slightly lower percentages in place but certainly, more recent arrears, it’s 200% of the arrears and then you’ve got to pay the arrears themselves. They're also subject to an uplift based on the current rate of national minimum wage, so effectively, you revalue those arrears at the current rate of national minimum wage. Then, for many employers, the worst thing is the naming and shaming which is not a direct financial penalty but, obviously, has a big reputational impact.”

Joe Glavina: “Can I ask you about the Revenue’s attitude towards breaches because often these are inadvertent mistakes? Does the Revenue have the discretion and, if so, how do they exercise it in your experience?” 

Jon Fisher: “In theory they have a discretion but they very rarely seem to exercise. In the most recent round there was a specific statement from the government when they issued the naming and shaming list that many of these breaches were not intentional, but that's no excuse and that's very much the attitude they take, that this list is supposed to be educational for other employers, as well as being punishment for those who've actually breached. There’s one small exemption which is specifically written in regarding salary sacrifice. So, as long as you meet certain conditions, which include that you've not been penalised before, found guilty before of breaches of national minimum wage, and if the only breach is related to salary sacrifice deductions, they won't name and shame you and they won't subject you to a financial penalty but you will have to pay the arrears and pay the uplift.”

Joe Glavina: “Can we turn to the types of mistakes being made. What are they, typically?”

Jon Fisher: “In the most recent list they said 40% of the arrears were due to deductions being made which shouldn't have been made. Another 40% seems to be just admin errors. Then 20% were down to failure to pay the correct apprenticeship rate. The most common error we still see, still, relates to salary sacrifice. So, HMRC will look at pay after the salary sacrifice when it comes to assessing where the national minimum wage has been paid, and payroll systems really seem to struggle to cope with this. So, because national minimum wage is assessed on a pay period by pay period basis, just because you comply in one pay period doesn't mean you have done the next, and payroll systems seems to struggle to monitor whether people on low earnings have sacrificed salary below that national minimum wage level. So, that's the most common error. Other ones simply are errors being made in payroll, just more general errors, people just not being paid the right amount in the right month, working time errors, that's people not being paid properly for all the hours they work because there's extra time that they work which hasn't been properly recorded and therefore paid. Uniform is another one, and that's where there are uniform requirements but a uniform isn't provided by the employer. So, effectively, the employee needs to go out and buy some item of clothing, or shoes, in order to wear to comply with uniform policy, and the cost of that can be taken off their pay before you start assessing national minimum wage compliance. So, if you're a low paid worker working part time in retail, for example, and you have to go and buy a pair of shoes to comply with the uniform policy, that will almost certainly bring you below national minimum wage for that period. As a result many employers are changing the uniform policy, and relaxing the uniform policy, such that people just wear clothing that they will already own rather than to specifically buy something in order to comply with that policy.”

Joe Glavina: “Appearing on the list, being named and shamed, is obviously bad press so is there any sort of appeal process to avoid that outcome if the mistakes are simply admin errors?”

Jon Fisher: “There is, for what it's worth, but I've never heard of a successful appeal against naming and shaming because as I said before, whether it's intentional or not doesn't seem to matter. So, it's a technical breach, it was unintentional, it was a payroll error, our headline rates are far above national minimum wage. None of that would be considered a relevant factor when it comes to whether you got named and shamed or not. So, it's not something you rely on in terms of being able to avoid the naming and shaming. If there has been a breach, and it's not salary sacrifice related, you should just assume that you're going to be named and shamed. You can try with an appeal, but I would have no confidence it would actually succeed.”

Joe Glavina: “So, if there’s one key point for the viewers to take from this what would it be?” 

Jon Fisher: “I think salary sacrifice is the big message. I've already mentioned it, but it's still the most common factor in any of this and it seems perverse because, obviously, salary sacrifice is beneficial to employees for the most part, as well as to employers, and other lower paid employees shouldn’t be punished by not being able to take advantage of it but, nevertheless, it's the thing that requires a lot of scrutiny and, remember, as soon as HMRC start to investigate, then any corrections you make after that on a voluntary basis are effectively ignored. So, if on day one of the investigation there is a breach, you are going to be penalised and you are going to be named and shamed for that breach. So, you need to sort these things out before HMRC get in contact with you and sort it out properly and fully and only then would you be safe in the event of any future audit.”

Jon has written about this in some detail in his Out-Law article. That’s: ‘Autumn Statement 2023: UK minimum wage rises announced’ and we’ve put a link to it in the transcript of this programme for you.

LINKS

- Link to Out-Law article: ‘Autumn Statement 2023: UK minimum wage rises announced’