Since it was announced in the July 2015 Budget, the National Living Wage (NLW) has received much comment, both negative and positive.

Notably, HMRC has also recently taken a more pro-active stance to auditing companies to ensure that the NLW standards are being adhered to. This has left some employers with difficulties, as the law surrounding “working hours” for NLW calculations is far from straightforward.

Failure to Pay

As the NLW was only introduced from 1 April 2016, we have yet to see an overall picture as to the extent it will increase the number of cases of employers failing to pay. However, previous records of failures to pay the National Minimum Wage (NMW) (the predecessor to the NLW), shows this remains a thorny issue.

The Department of Business, Energy and Industrial Strategy regularly publish lists of employers who have been found not paying the NMW. To appear on this list an employer will already have been issued with a Notice of Underpayment and have had the chance to appeal. If there are ongoing civil/criminal proceedings, their name will not appear on the list at this stage (and leaves open the possibility at this stage of prosecution for the most serious cases, e.g. repeated failures of paying the NLW/NMW and/or keeping necessary records).

In August 2016 the list named 197 companies who owed their staff a total of £465,291. The August 2016 list is the largest list produced to date and reflects the increased involvement HMRC are taking towards enforcement action. Since the inception of the lists in October 2013, 687 employers have been named as failing to pay the NMW (or NLW as it has now become for workers aged 25 and over).

In the February 2016 list, 92 employers owed a total of £1,873,712. Interestingly 93% of February’s figure was owed by just one company, Total Security Systems Ltd, who owed £1,742,655 to 2,519 employees, the firm claim that they have been painted in a “misleading light” and the arrears were created by failing to implement a change in the law concerning a salary sacrifice scheme they operated.

The employer who has probably received the most publicity for failure to pay minimum wage is Sports Direct. Staff at their distribution centre in Derbyshire had to go through searches at the end of their shift, but this time was unpaid. In addition, staff were also docked pay if they arrived late (even if only by a couple of minutes). This resulted in the rates of pay for a large section of the workforce falling below the minimum requirements. Currently under the media spotlight, Sports Direct are reported to be reaching an agreement with unions and HMRC to pay arrears dating back to 2012 and worth up to £1,000 to some employees.

Given the increase in wages brought about by the NLW (which is likely to further increase gradually up the Government’s pledged rate of £9.00 per hour in 2020), HMRC will need to expand their resources so at to maintain effective enforcement.

“Evading the spirit”

Faced with increased wage bills, many employers, including some of the UK’s largest, have looked at ways of cutting costs but staying inside the law.

Employers will be aware that it is not just staff on minimum wage who will receive an increase in pay but also those staff, such as supervisors, who were already paid more than their colleagues on minimum wage who may require an increase to maintain pay differentials. 

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There have been a number of stories of firms such as B&Q, Tesco and John Lewis cutting paid breaks, overtime and bank holiday rates, leading to a cut in pay for many employees. B&Q faced public condemnation (a petition against their cuts attracted 140,000 signatures) and were compelled to increase one off payments to those staff who faced losses in the future so that it covered two years rather than only one. Café Nero also received negative publicity for withdrawing free lunches to staff who are on shift.

There are suggestions that workers under 25 (who are exempt from the NLW rates) may become more attractive to employers, but those already employed may see their wages lowered.

These attempts to work around the legislation in light of the increased headcount cost has brought condemnation from politicians.  Former Chancellor of the Exchequer, George Osbourne, responded to the cutting of perks by saying, “It’s not the spirit of the law. Companies should be much more careful about their reputation”. However, government pressure and public criticism may be less compelling than the actual threat of legal enforcement.

It is likely to be hard to accurately measure the full impact of the NLW on the economy in the next few years due to the economic uncertainty following “Brexit”. Indeed, 16 trade bodies have already urged the government to reconsider the NLW due to the expected economic slowdown while the UK exits from the European Union.

Employers though may find that in the long run cuts to conditions demotivate staff, increase staff turnover and make employees less willing to support voluntary overtime. Instead employers may be better trying to get the most out of employees through training and greater responsibility.

For support with NLW calculations for working hours please contact our employment lawyers on employment@clarkslegal.com.

For further information on how we can support you to motivate staff through training please contact contact@forburypeople.com.