Navigating the changing landscape of minimum wage: Compliance challenges and strategic responses

The Government has confirmed that, from April 2024, the national living wage ("NLW") – the minimum wage rate for over 23s – will rise from its current rate of £10.42 per hour to £11.44, an increase of 9.8%.

The national minimum wage ("NMW") rate for 21 and 22 year-olds will also rise to the top figure of £11.44 per hour from its current rate of £10.18, representing a 12.4 per cent jump, and the rate for 18 to 20 year-olds will rise 14.8 per cent from £7.49 to £8.60. There will be a rise of more than 20 per cent in the rate paid to 16 to 17 years-olds and apprentices, going from £5.28 to £6.40 per hour.

These increases will exceed the current rate of inflation, boosting the earnings of the country’s lowest-paid workers.  They may also have the knock-on effect of higher wages for more senior employees, as companies seek to maintain the pay differential between these individuals.

NMW / NLW Audits

In conjunction with the April 2024 increases, another challenge for employers is the enhanced focus on NLW / NMW compliance from HMRC.  The number of HMRC inspectors and employees working on NLW / NMW audits has increased significantly over the last few years.

Unfortunately for employers, paying the NLW / NMW is far more than simply making sure hourly rates of pay are at the right level.  There are a number of pitfalls for employers to be aware of:

• Absorbing certain payments into wages in order may not count towards the NLW / NMW;
• Some allowances cannot be included in pay calculations for NLW / NMW purposes;
• Banked hours / 'TOIL' arrangements can inadvertently lead to NLW / NMW breaches where the time off is taken at a later date;
• Some time spent outside of 'normal' working hours should be included in the calculation for NLW / NMW (e.g. travelling time, practices such as bag checks, clocking in and out);
• With the exception of accommodation, benefits in kind such as private medical insurance, meal vouchers etc. cannot count towards NLW / NMW;
• Costs incurred by workers as a result of a job stipulation by the employer must be deducted from calculations for NLW / NMW.
• Deductions for the employer's own use and benefit (even if consensual) reduce pay for NLW / NMW purposes; and
• Salary sacrifice schemes, such as for pension contributions, also reduce pay for NLW / NMW purposes.

This has resulted in a number of organisations facing investigations from HMRC to assess compliance in respect of:

• Charges to employees for uniforms / locker keys and other incidentals which result in a reduction in salary;
• Deductions for lateness where such deductions may take an employee below NLW / NMW;
• How companies define employees' annual hours;
• Company processes for increasing wages when an employee reaches a new NLW / NMW age bracket; and
• Salary sacrifice – what do companies do when an employee who is in a salary sacrifice scheme has their take home pay reduced below NLW / NMW.

All of these issues present potential risks for employers to be alive to.  In relation to salary sacrifice, employers often find themselves failing foul of the NLW / NMW rules as a result of technical irregularities, despite the employer's intentions being good and the practice benefiting staff.

Salary Sacrifice

Many employers enter into contractual agreements with their staff to alter the terms of the original employment contract, in order to reduce a cash salary payment in exchange for some form of non-cash benefit, such as enhanced pension contributions.  This type of contractual change, known as salary sacrifice, can have advantages for both the employer and employee, in the form of reduced national insurance contributions.

It is vital that any type of salary sacrifice agreement does not reduce an employee's cash earnings below the NLW / NMW rates.  All workers are entitled to be paid at least the current hourly rate of the NLW / NMW that applies to them.  Employers must therefore put procedures in place to cap salary sacrifice deduction and ensure NLW / NMW rates are maintained.

Employers should be aware that changing benefits, including those provided by way of salary sacrifice, amounts to a contract variation.  Such variation can be achieved in a number of ways:

• Rewriting the document in part or whole.
• Setting out agreed changes in a separate document that is attached to the main contract.  This may be a letter or a pro-forma.
• Informing employees of proposals to make changes by the employer.  The employer may specify that if an employee has not indicated their wish not to participate in the changes by a certain date, the absence of an "opt out" will be regarded as an "opt in".  This approach is often used when wholesale changes to all employees’ terms and conditions are proposed.  For example, changes to the employer’s occupational pension scheme.

The first two points are easily recognised as effective changes as the employee will usually signify their agreement by signing the document.  The third arrangement will also be effective if the employees:

• Have been fully informed of the proposals.
• Are given a specified date by which the "opt out" must be made.
• Continue working after the opt out date.
• Continue working after the first pay-day when the changes have been implemented without protest.

Provided these conditions are satisfied, the employees have indicated their agreement to the variation by their conduct and the revised agreement is legally binding on both parties.

Upcoming General Election

The next general election must be held by January 2025 and the current polls suggest that we will see a change in government.  While there is still a chance that these polls might alter, it seems more and more likely that the Labour Party will soon be in power.

In October 2023, the Labour Party made a number of employment pledges on workers’ rights and committed to introduce legislation within 100 days of power by bringing forward an Employment Rights Bill.  Labour’s stated aims are to address pay, job security, inequality and discrimination and to improve employment rights in each of these areas.

In relation to the NLW / NMW, Labour's key proposals are to expand the remit of the Low Pay Commission so that the NLW / NMW takes account of the real cost of living.  Labour will immediately raise the lowest rate of the NMW to at least £10 per hour – the size of knock-on effect this will have to the higher rates and the NLW is currently unclear.

Labour also plans to establish a single enforcement body to enforce workers’ rights.  Not only will this likely also include other aspects of remuneration, such as holiday pay, but the body will be given extensive powers of inspection and enforcement – any mistakes made in NLW / NMW calculations will be laid bare.

Moving Forwards

While there are clear challenges for businesses to overcome, there is also the possibility of this bringing benefits.  For example, to tackle the increased wage bill, companies can look at efficiencies through investment in technology to reduce reliance on employees, reduce costs and increase productivity.

A further evolution might be increased diversification in the outsourced workforce, such as couriers, cleaners and security staff.  Companies can engage these individuals on a self-employed contractor basis, where no minimum wage applies, rather than as employees.  There has already been a significant shift toward this kind of arrangement among certain areas of the workforce (most notably, couriers), but recent case law around worker status, which has included Uber and CitySprint, demonstrates that such an approach is not without risk.

Whether it is a review of workforce numbers, changes to shift patterns, reductions in supplementary benefits or even the introduction of new technology to increase efficiencies, businesses should look into these steps now, before the NLW / NMW increases apply and bring significant risks with regard to compliance.

Employers must not forget their obligations to employees, whether that is formal redundancy consultations pending site closures or workforce reductions, or informal consultations on changes to terms and conditions or working practices.  All give rise to both legal and employee relations considerations. The increased focus on NLW / NMW compliance from HMRC also demonstrates that employers cannot afford to take risks in this area.

At Fieldfisher, we have undertaken various processes with large and small employers, across a variety of scenarios, including:

• classifications of workers for NLW / NMW calculation purposes;
• changes to contractual terms;
• revisions to pension plans and salary sacrifice arrangements;
• provisions of uniforms, accommodation and accommodation services (such as utilities and food);
• deductions from pay for lateness, misconduct or damage to company property; and
• recommendations on strategic options and reducing risk going forwards.

If you would like to discuss any concerns you may have with the NLW / NMW, or to explore ways of reviewing your pay structures, we would love to speak with you.