National Minimum Wage – At risk of committing a criminal offence?

NMW Compliance in the Food and Beverage sector

From 1 April 2022, minimum wage for workers aged 23 and over rises by over 6.5% to £9.50, potentially pushing more workers closer to the national minimum wage threshold. Coupled with complex rules on deductions, working time and different rates of pay across age groups, it can be alarmingly easy for employers to inadvertently pay workers below national living wage and national minimum wage rates (collectively referred to here as NMW rates).

The Food and Beverage Industry has weathered many challenges due to the pandemic and there are many external pressures that continue to impact the sector, not least: increasing energy costs; disruptions to the supply chain; labour retention and shortages; plastic packaging tax and allergen regulations. On top of these bigger storms, compliance with NMW can sometimes pale into insignificance and seem like a small cloud on the horizon, but it is important to be prepared for a storm. To best prepare, you need to understand the nature of the risks involved and take steps to minimise them.

The risks

• Target sector – The food processing and packaging sector is considered by the Director of Labour Market Enforcement as one of the sectors at highest risk of being impacted by non-compliance. As a result, HMRC actively targets the sector for investigation and enforcement action.
• Criminal offences – The following failures to comply with NMW laws are criminal offences:
  • Refusing or wilfully neglecting to pay the NMW;
  • Failing to keep the required records;
  • Keeping false records;
  • Providing false records or information;
  • Intentionally obstructing or delaying an enforcement officer; and
  • Refusing or neglecting to answer questions or provide information to an enforcement officer.
• HMRC resources – HMRC’s annual budget for investigating NMW compliance is around £26m and it has more than 450 enforcement officers. HMRC’s NMW investigations are driven by both responding to complaints about underpayment, and proactively targeting employers where they judge there is a high risk of non-compliance, such as the food and beverage, manufacturing and agriculture sectors. In other words, HMRC can initiate a far-reaching NMW investigation of a business at any time, even if no complaints have been made by the workforce. Sometimes, investigations may stem from a routine PAYE compliance check. Generally, HMRC takes civil enforcement action, but it may pursue criminal enforcement action where there is persistent non-compliance or a refusal to cooperate. Civil investigations can last several years and HMRC will typically review compliance over the previous six-year period.
• Record keeping – Employers are required to keep records for six years to evidence compliance with NMW laws. HMRC has wide-ranging powers to require the production of records, other information or access to the workforce check entitlement to and payment of NMW. It is a criminal offence to refuse inspection of records.
• Financial costs – In addition to the cost of management time in dealing with an investigation, where HMRC finds that workers have been underpaid, it will require employers to pay arrears to affected workers at the rate of NMW in force at the date arrears are determined by HMRC, ie if the underpayment occurred in May 2020 but a notice of underpayment was issued by HMRC in May 2022, arrears are based on the NMW rates in force in May 2022, which will usually be higher. In addition to the underpayment, a penalty will usually be imposed by HMRC of 200% of the total underpayment, subject to a maximum of £20,000 per underpaid worker.
• Reputational damage – Since January 2011, the Department of Business, Energy & Industrial Strategy has named and shamed employers who have failed to pay NMW, which usually attracts negative media attention.
• Tribunal claims – Individual workers can also bring claims in the Employment Tribunal or civil courts.

Minimising the risks

HMRC compliance investigations tend to focus on particular areas, so it is helpful to understand where issues can arise and how to manage those issues:

• Unpaid working time – Often workers clock in and out or work specific shifts, so employers may assume workers are paid for all the hours they work. However, this may not be the case where workers:
  • attend meetings before or after their shifts;
  • do not take uninterrupted rest breaks required by law,
  • come in early or stay behind late to set up at the start of the day or tidy up at the end of the day;
  • go through security checks on entry before clocking in or after clocking out when leaving; or
  • undertake trial shifts, product sampling or training offsite or outside of their working hours.

Sometimes managers may require workers to do these, but often workers believe they are just “helping out” their employer. In each case the manager and the worker may not understand they are exposing the business to breach of NMW laws.

Time and attendance systems are not the sole answer to these issues. There is often human error with clocking in and out. There must be ways to ensure workers are correctly clocking in and out and ways to verify records with both managers and workers able to update shift records, thus ensuring overtime is paid, especially for those paid close to NMW levels. Policies and practices must make sure managers do not require workers to perform unpaid work and understand HMRC’s wide view of “work”.

• Deductions – Breaches can arise inadvertently where there is a deemed or actual deduction from pay:
  • Clothing and equipment requirements - If workers are required to wear specific clothing (not paid for by their employer) or buy specific equipment for their work, these are deemed to be deductions from pay for NMW purposes. This applies whether costs are deducted from wages by the employer, the workers must provide the items themselves or buy them from a third party. For example, HMRC and the courts consider the following to be deductions from pay.
    • requiring workers to wear black trousers, leggings, skirts or footwear; and
    • requiring a worker to have a car for work, where no company car or car allowance is provided, regardless of whether the worker owns a vehicle or chooses to hire one.

In relation to clothing requirements, several high-profile employers have been named and shamed for this issue.

• Salary sacrifice arrangements - If a worker gives up a portion of their salary for a benefit, such as childcare vouchers or pension contributions, the sacrificed portion of their salary will not count towards their pay for NMW purposes. This means that a salary sacrifice arrangement that reduces pay in exchange for the provision of a benefit will breach the NMW legislation if the worker's reduced pay is below the relevant NMW rate.
• Contractual deductions – Deductions will not reduce NMW pay where these are in connection with the worker’s conduct or “any other event”, provided there is a clear contractual right to make the deductions. Till shortfalls or breakages at work would be permitted, where there is a right to deduct for these. However, employers are likely to be in breach of NMW if they seek to recoup the cost of mandatory training or security passes obtained in connection with employment.
• Accommodation – The value of accommodation provided to workers, such as seasonal staff, can be taken into account when calculating the minimum wage. Employers will need to be careful to offset accommodation costs against pay according to the accommodation rates set by the government each April. Calculating accommodation costs can be particularly complex in cases where a worker is provided multiple occupancy accommodation or where an employer seeks to offset related costs.
• Payroll issues – The importance of checking compliance at payroll cannot be underestimated, including the following key areas.
  • Rates – The hourly NMW rate depends on the age of a worker and whether they are an apprentice. The rates from 1 April 2022 are below, along with current rates. Employers should review pay rates in March, so that pay rates effective from 1 April comply with the new NMW rates.

• Ages – Employers should also monitor the ages of workers to ensure their pay continues to comply with the NMW when they move into a different age band or complete the first year of their apprenticeship.
• Exclude premiums – Employers must also ensure they do not include any overtime or shift premium when calculating whether a worker receives NMW. These premiums are excluded from NMW pay.
• Categorising the type of work - If an employer incorrectly classifies the type of work being done by the worker, they will not use the appropriate method for calculating whether the NMW has been paid. For example, if an employer believes that a worker is a salaried hours worker, an annualised calculation of hours worked may suggest that the NMW has been paid. However, if that employee is in fact an hourly paid worker, the calculation for whether that employee’s NMW has been paid is dependent on the actual hours worked in each pay reference period, which may yield different results.
• Record keeping – Payroll tends to have the greatest responsibility for record keeping. Employers will commit a criminal offence if they do not keep records of hours worked and payments made to their workers. From 1 April 2021, these records must now be kept for a minimum of six years (previously three years).

Top Tips

To assist your business in avoiding a NMW storm:

• Ensure managers are aware of what counts as working time and they require workers take uninterrupted rest breaks
• Review any scope for deemed and actual deductions from workers’ pay to arise, which might trigger breach of NMW.
• Highlight the issues to payroll and ensure systems are in place to monitor compliance for each pay period.