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So you think you are paying the national minimum wage?

How to avoid a nasty surprise if HMRC comes knocking

We know from the annual “name and shame” list issued by HMRC that even the largest, most well-known employers fail to pay their lowest paid staff the National Minimum Wage (NMW).

Could you unwittingly be one of them? And if you are, don’t you just have to repay the underpayment?

No. Unfortunately, it’s not just the underpayment. The cost rises with time because:

  • arrears payments are uplifted to current National Living Wage (NLW) and National Minimum Wage rates (not the rates applicable at the time of the “error”)
  • additionally, there are (subject to some limited exceptions) penalty payments which are calculated as a percentage of arrears.

Whilst there is an overall cap, that cap is £20,000 per affected employee.

And remember HMRC will go back up to six years in its investigations so the potential for significant fines is considerable. To set it in context the last name and shame release confirmed that employers were ordered to repay circa 12,000 workers and face penalties of nearly £2 million.

So, what are the most common pitfalls you need to avoid?

Making deductions from an employee’s pay that reduce their pay to below the minimum wage pay

For example, do your staff comply with a dress code? If an employee has to supply any element of their own uniform, then the cost of their purchasing this will be deducted from an employee’s pay when calculating NMW pay, unless the employer reimburses the cost (or intends to do so).

HMRC’s manual gives the example of an employee working in a hairdresser’s who has to wear a plain white t-shirt and black trousers. If these are bought from the employer – even at a discount – the cost to the employees is treated as deducted from their pay before then working out if the employer has met the NMW minimums.

This could potentially apply even where the wearing of uniform by the employee is not mandatory, but only discretionary, because it does not have to be “necessarily incurred nor wholly or exclusively incurred” provided that the uniform is acquired “in connection with their employment”. This opens up an array of possibilities, so employers need to be aware that ‘uniform’ is defined very broadly in this context.

Failing to pay for all “working time” such as trial shifts, obligatory training, or travel time (but not commuting time)

What is “working time”? Whether an employee has been paid the NLW/NMW depends on the pay received versus the hours worked. However, what amounts to ‘working time’ is not straightforward.

For example, do your employees have to go through any checks or undertake any obligatory steps before they can start (or leave) work? Security searches, drug and alcohol tests, handovers, and changing for work on site, are all ‘working time’ for which they need to receive the minimum wage. Do your staff ever work through unpaid breaks? If so, that is working time for which they are not being paid.

Failing to pay apprentices the correct rate

Failing to pay NMW in line with government rises or paying the wrong minimum wage

For example, paying a 21-year-old employee the 20-year-old rate, because you have overlooked their birthday. Do you have a system for flagging the dates of NMW rate rises and birth dates?

Salary sacrifice

If your employees are members of a salary sacrifice scheme, eg for additional pension contributions, cycle to work schemes, childcare vouchers or employer contracted childcare, additional holiday etc., then this must not reduce their average hourly pay below NMW.

As far as NMW is concerned an employer does not receive any “credit” for the value of the benefits for which the salary has been exchanged.

What this has sometimes meant is that the lowest-paid are in practice denied the benefit of the tax breaks usually delivered by a salary sacrifice scheme. If as an employer, you are caught out in this way, the only concession is that if you are paying below the NMW for this reason (alone) you would not be subject to a penalty. But you still face the risk of being named and shamed and the underpayments are still due.

Travel schemes

If you offer discounted travel cards to your employees and then spread the cost of that card out over time, with a series of deductions from employees’ pay, you are at risk of these deductions reducing what pay counts towards the NMW. Again, therefore, an employer receives no ‘credit’ for the value of the travel card – nor the discount applied.


Employers are required under the NMW regulations to maintain records sufficient to show that the NMW has been paid – and it’s a criminal offence if you fail to do so. There is no particular format the records need to take (payroll records may be sufficient); however, you might become unstuck where you have salaried employees whose hours of work you do not record and so you cannot evidence what hours they have actually worked. Bear in mind that there is a presumption that an employee has not been paid the NMW – unless an employer can prove to the contrary, so ensure you keep proper records for six years.

“Making the minimum wage a genuine living wage” is a manifesto pledge for the Labour Party, so if Labour is successful at the forthcoming election, expect to see considerably more focus on this area.

What actions should you take to avoid potential breaches?

  • Undertake a review to identify any staff who are paid close to the NMW, or who participate in significant salary sacrifice or deduction schemes.
  • Ensure your records are thorough and up to date and that all deductions are properly tracked and compliant. Does your system flag when staff change age bandings and is it updated with the new NMW rates each April?
  • Keep up to date with government guidance which include scenario examples on salary sacrifice schemes to help understanding on how the rules work in practice.
  • Finally, it is really important to seek advice as soon as possible if you do become aware of a potential breach.

Clarke Willmott’s national employment team can provide specialist advice and support to you and your business. For further information or for advice on any of the matters discussed above, please contact Sharon Latham on 0345 209 1332 or


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