"The office dog ate the payroll records" … and other reasons for failing to pay National Minimum Wage

By Merrill April, Sarah Martin and Emily Parker, Memery Crystal

In February the government released a list of 360 businesses which have failed to pay their workers either the National Living Wage (NLW) or the National Minimum Wage (NMW). Debenhams’ name as a prominent retailer hit the headlines, with other big offenders being those in the hairdressing, hospitality and retail industries. Only last week Tesco needed to send an apology to staff for underpayment of wages, having paid some staff less than the NLW.

HMRC also recently published a list of the ‘most bizarre’ excuses made by companies which had underpaid its staff. These included:

  • “The employee wasn’t a good worker so I didn’t think they deserved to be paid the National Minimum Wage”
  • “She doesn’t deserve the National Minimum Wage because she only makes the teas and sweeps the floors”
  • “My accountant and I speak a different language – he doesn’t understand me and that’s why he doesn’t pay my workers the correct wages”.

With the Office for National Statistics estimating that 362,000 roles did not receive the NMW in April 2016, the underpayment of staff remains an issue. But is this solely a question of ‘disgraceful’ and ‘unscrupulous’ employers flouting their legal obligations, as the more dramatic headlines suggest?

Current NMW and NLW rates

The current NMW hourly rates of pay for 2016/2017 are:

• Workers aged 21 – 24: £6.95
• Workers aged 18 – 20: £5.55
• Non-apprentices aged 16 – 18: £4.00
• Apprentices (under 19 or over 19 and in their first year of apprenticeship): £3.40

These rates are set to increase on 1 April 2017:

• Workers aged 21 – 24: £7.05
• Workers aged 18 – 20: £5.60
• Non-apprentices aged 16 – 18: £4.05
• Apprentices (under 19 or over 19 and in their first year of apprenticeship): £3.50

The current NLW, the ‘top-up’ for workers aged 25 and over, is £7.20 per hour (to increase to £7.50 per hour on 1 April 2017). It is intended that the NLW will rise to at least £9 per hour by 2020.

The new pay rates will affect a worker’s pay from their first full pay reference period after 1 April 2017.

Why can businesses fail to calculate NMW and NLW correctly?

Whilst Debenhams blamed their underpayment on a “technical error in its payroll calculations” and reportedly Tesco found that its new payroll system had been erroneously contributing salary to pensions, childcare and cycle to work schemes for some staff, other businesses may have been caught out due to simply not knowing, or being confused by, the law.

Calculating NMW and NLW is not necessarily as straightforward as looking at an individual’s time sheet and multiplying the number of hours spent on the shop floor or behind the bar by the applicable rate. Factors to bear in mind in calculating NMW/NLW:


  • Including an element of pay that should not be included in the calculation of pay rates will skew the figures and incorrectly suggest that NMW/NLW has been paid. Such elements include:
  • any premium pay element (i.e. pay above basic rate pay for working particular shifts, overtime, weekend/bank holiday work, on call, etc.)
  • a separate payment for London weighting
  • pension payments
  • tips, gratuities, service charges
  • advances on wages
  • benefits in kind (although special rules may apply where a worker is provided with accommodation)
  • redundancy payments
  • any expenses or allowances
  • There are also numerous deductions that employers cannot make if in doing so it would reduce a worker’s pay overall to below NMW such as:
  • requiring staff to pay for uniforms out of their wages
  • requiring staff to pay for their lunch provided at work or pay for transport laid on by the company (even if the worker can choose to buy those goods/services independently)
  • making deductions from salary in order to cover the cost of work events

Deductions, for example, to recover accidental overpayment of wages or an advance of wages do not reduce NMW pay.

Hours worked

  • There can also be confusion as to what time constitutes ‘working time’ to calculate the number of hours worked for NMW/NLW. Measurement varies depending on whether the worker is engaged on time work, salaried hours work, output work or unmeasured work. Time which can be considered to be ‘working time’ includes:
  • compulsory time at the workplace such as for searches or to attend pre and post-shift briefings, etc. (something which both Argos and Sports Direct fell foul of recently)
  • where a worker is unable to work (e.g. machine breakdown), but is still required to remain in the workplace
  • where a worker is required to be available for work on call or standby, either at or near to the workplace
  • sleeping time where, for example, there is a statutory requirement that the worker be present at the workplace or it would constitute misconduct for them to leave
  • where a worker works from home, their time spent travelling from home to other work premises
  • time spent by apprentices training or studying as part of their apprenticeship

Consequences of non-compliance

In addition to the damage caused to the brand by naming and shaming, businesses are required to pay the underpayments to the relevant workers. Employers who fail to pay NMW or NLW may also be ordered to pay a penalty to the Secretary of State of 200% of the underpayment (subject to reduction for accelerated payment) up to a maximum penalty of £20,000 per worker. HMRC is able to carry out on-site inspections of an employer’s records at any time, so workers do not have to bring a claim in order for their employer to be held accountable.

Looking behind the headlines, genuine mistake and miscalculation can feature prominently as a reason why some employers are underpaying staff…even the major brands can get it wrong.

Given the possible consequences of non-compliance, businesses should ensure they have accurate and up-to-date tools, information and records to be able to pay what they need to.

Merrill April

Merrill April

Memery Crystal LLP, London, United Kingdom
T: +44 20 7242 59 05
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Merrill is Head of Employment at Memery Crystal. She advises on contractual and other employment issues that arise throughout the employment relationship and on transactions, especially in relation to TUPE. She frequently works with owner managers setting up their employment and HR structures, drafting contracts and policies and working with HR and in-house lawyers in delivering the HR/employment law service to their business. She also represents in the High Court in relation to contractual disputes and business protection.
Sarah Martin

Sarah Martin

Emily Parker

Emily Parker


Published: June 2017 l Photo: Colourbox.de

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