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22nd March 2018

Legal Issues – The national minimum wage and offending companies

The National Minimum Wage (NMW) is set to rise again from 1 April 2018, with the rates for all workers increasing. In particular, the rate for those aged 25 or over (often referred to as the national living wage) is rising from £7.50 to £7.83, as part of the government’s (now unlikely) plan to increase the NMW for that age group to £9 by 2020.

The basic tenet of NMW law is pretty simple: a worker must be paid no less than the statutory hourly rate that applies to their age (with the possible exception of their age being irrelevant in the first year of an apprenticeship).

However, the law is rarely as simple as it sounds, and that is no less the case with the NMW. There are complex rules on what pay and benefits count towards the NMW, those that do not count, and what must be deducted from the total pay when determining whether the NMW has been paid.

For example, basic pay or salary, bonuses, commission and other incentive performance payments count towards the NMW. However, benefits in kind, pension payments and redundancy payments do not count. Notably, any premium attached to overtime or shift work also doesn’t count towards the NMW. For example, if a worker earns a basic rate of £8 per hour but is paid £10 per hour for overtime, all of their hours (including overtime) must be valued at £8 per hour.

Another important exception is that tips, gratuities and service charges cannot be included when calculating whether the NMW has been paid. That is the case even if the tips are paid via payroll in relation to sums received (such as from card payments) from customers.

To make the matter more complex, there are also sums that must be deducted from the total pay given to workers when calculating whether they have received the NMW. This means that the minimum hourly rate must still be met after those deductions have been made, or the employer will have fallen afoul of the legislation.

Perhaps the most significant of these is that a deduction must be made in relation to any expenditure related to the employment. This could be where a worker has had to buy tools or equipment, or if they are expected to buy and/or clean a uniform for their role. A deduction must also be made in relation to the cost of any meals that a worker is required to pay for in connection with their employment.

In essence, if an employer pays the statutory minimum, but deducts the cost of meals or expects employees to purchase a uniform, those costs are likely to bring the worker’s rate of pay below the NMW.

As can be seen from the above, some of the more nuanced areas of NMW law are particularly relevant to the hospitality industry, and a lack of understanding of the intricacies can lead to problems. One of those problems is the possibility of being ‘named and shamed’ as an employer who isn’t paying the correct rate, which could have consequences in terms of being able to attract and retain staff, as well as putting off potential customers.

Two major companies in the hospitality sector currently being lambasted for failing to pay the NMW are Wagamama and TGI Fridays, with Wagamama stating that it misunderstood the rules on uniforms and how it should be calculating the NMW.

Of course, major high street chains are always going to be better fodder for public scandal than independent eateries, but it’s important to bear in mind that being named as an offending employer is only one potential outcome.

Workers who aren’t receiving the correct rate of pay can also bring claims of unlawful deductions from wages, with awards being backdated for significant periods. Fines can also be levied against those employers. Indeed, in the current tranche of cases, employers are set to pay out £1m in compensation to workers and £1.3m in fines.

As can be seen, there is a potential (and likely) cost to both revenue and reputation from a failure to correctly pay the NMW, and the government appears to be sticking to its promise to deal with this issue with an iron fist. On that basis, an understanding of how the NMW is calculated is essential for employers, particularly where the work involves a uniform or other deductions being made in relation to the employment.

If you have any questions on any of the issues mentioned in the above article, please contact Seanpaul McCahill.

22nd March 2018