National minimum wage compliance

National minimum wage compliance

Common errors to avoid

National Minimum Wage (NMW) compliance is not as straightforward as employers might think and is not just limited to having the correct hourly rates of pay. On this page we have outlined the common risk areas of inadvertently created underpayments by businesses.

Where employers have underpaid their workers, they must pay back any underpayments owed to the employee. There is also a large fine of up to 200% of arrears capped at £20,000 per worker which may need to be paid to HM Revenue and Customs (HMRC).

The number of businesses being investigated by HMRC for NMW compliance in recent years has significantly increased. According to HMRC, in 2019/20 263,000 workers were underpaid and £18.5m of penalties were issued . However, if employers identify these underpayments themselves, they can ‘self-correct’, paying arrears to workers and notifying HMRC to avoid incurring penalties.

In our experience the most common pitfalls and risk areas for hospitality businesses are as follows

  • Deduction from pay for deposits such as rent, locker keys, swipe cards
  • Deduction from pay for uniform provision
  • Unpaid working time at start or end of shifts such as time spent for changing into uniform
  • Apprentices and shift workers
  • Deductions from pay for purchase of good or services from employer
  • Accommodation charges
  • Incorrect worker classification for NMW purposes
  • Salary sacrifice deductions including pensions
  • Administrative charges and fees
  • Clothing
  • Unpaid trial shifts
  • Incorrect use of apprentice rates

Deductions from workers’ pay

It is common for employers to process deductions from worker’s gross or net pay to recover some costs, however, such deductions from worker’s pay can potentially be an issue when it risks reducing the worker’s pay below national minimum entitlement. As per the example above, the common deductions that impact worker’s NMW wage are uniforms, salary sacrifice schemes, rent deposit, staff accommodation, admin fees, worker purchases.

For example, if you provide your workers with accommodation and deduct a rent deposit from their pay, this deduction might reduce their pay below minimum legal entitlement. Even if the deposit is refunded to the worker at a later date, the payment would fall under the different pay period and therefore wouldn’t offset the underpayment in the previous pay period.

Middlesbrough Football Club lost their tribunal appeal with the HMRC on national minimum wage underpayments relating to employee deductions for season tickets. The club operated a payroll deduction arrangement allowing its employees to agree to buy football season tickets by instalments. In some cases, these deductions took the pay received by employee below the NMW. HMRC therefore issued enforcement notices requiring the club to make up the shortfall of wages and pay statutory penalties.

The frozen food giant Iceland is facing a £21m back wages bill levied by HM Revenue & Customs due to its operation of an incentive it had considered it was doing to help its employees.  Iceland was deducting amounts from net pay for those wishing to participate in the Christmas saving club. Iceland argued that they acted as a third-party saving club by placing the funds into a separate account which is overseen by an independent trustee, however, the HMRC claimed that the deductions reduced workers’ pay below NMW despite the fact that the money will eventually come back to the employees.

Tesco is another well-known company that failed to pay their staff the NMW and was named and shamed for underpaying 140,000 workers a total of £9.7m. An internal review of Tesco’s reward system found that some employees were being left with a base salary below the national living wage after making voluntary salary exchange contributions for benefits such as pensions, childcare vouchers, and bikes-for-work schemes. Although the retailer identified the underpayments and notified HM Revenue & Customs of the error, they were still added to the list of named and shamed employers.


Another very common mistake includes clothing policies, when an employer asks their workers to wear specific uniforms – black/white shirt, black trousers and shoes. In 2018 the restaurant chain Wagamama was one of nearly 180 employers named by the government for not paying the NMW. Staff uniform deductions was the reason for noncompliance.

A spokesperson for the restaurant chain blamed its underpayment on an “inadvertent misunderstanding” of how NMW laws apply to staff uniforms. Front-of-house staff are required to wear black jeans or a black skirt with their branded Wagamama top. The government argued that this was equivalent to asking staff to buy a uniform. Wagamama had to repay an average of £50 to 2,630 employees.

Incorrect worker classification

Incorrect worker classification for NMW purposes can also lead to inadvertent underpayment of NMW. HMRC differentiates four different types of work – time work, salaried, unmeasured and output work. For work to be categorised as salaried, employment contracts must specify the number of hours a worker needs to work in return of an annual salary, alternatively this type of work won’t be considered as such.

One of the most respected retailers, John Lewis Partnership, was accused of underpaying nearly 20,000 staff by a total of £941,356 for breaching minimum wage laws between 2011 and 2018. The issue arose due to retailer’s policy of “pay averaging”, whereby workers’ annual pay is calculated and then paid in equal monthly instalments regardless of variations in hours worked in a particular month. Employers who wish to use a policy of pay averaging should consider engaging workers on a salaried basis rather than on an hourly rate.

Unpaid shift hours

Argos was fined £1.5m by the HMRC after asking staff to attend staff briefings and carry security checks outside their paid working hours. The issue had been uncovered as part of a routine visit and the retailer was fined for underpaying more than 12,000 workers.

How we can help

The above cases demonstrate that compliance mistakes can often occur inadvertently, and some sectors are more vulnerable to falling into non-compliance than others. It’s vital that employers review their compliance and eliminate any potential underpayments, or they risk being penalised.

Our experts can help you conducting an internal compliance review, spot any potentials risks and provide assurance on NMW compliance. Our experts include a former Inland Revenue/HMRC Inspector who have previously conducted enquiries, so we can offer you the practical advice and support you need to allow you to concentrate on running your business.

Get in touch with our National Minimum Wage services team to find out more about how they can help you.

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