09 June 2016

It has been widely reported that the founder of Sports Direct, Mike Ashley, has admitted to a committee of MPs that the business has broken the law by failing to pay staff the national minimum wage (NMW). Staff were reportedly paid less than the NMW because they were held back at the end of their shift, searched by security before leaving the company’s warehouse and docked 15 minutes pay for being one minute late for work. The organisation is now facing a multimillion pound bill in fines and back pay.

Failure to pay NMW can be costly for business and can lead to significant reputational damage, discouraging workers from wanting to join organisations and discouraging businesses from wanting to conduct business with them. Last year, the clothes retailer Monsoon was ordered to pay more than £100,000 to its employees as a result of underpayment of the NMW and was named by BIS as a NMW offender. With such high stakes, it is imperative that organisations ensure that they understand their legal obligations and pay their workforce correctly.

Right to a minimum wage

With effect from 1 April 1999, all qualifying workers (i.e. those working or ordinarily working in the UK who are over compulsory school age) became entitled to the national minimum wage (NMW), following the introduction of the National Minimum Wage Act 1998.

There are five different rates of NMW for different ages of worker, including the new national living wage, which applies to workers aged 25 or over, which was introduced on 1 April 2016. All employers in the UK are obliged to pay the NMW, irrespective of their size.

Has NMW been paid?

Whether a worker has received the NMW will depend on their average hourly rate of pay. This is calculated on the basis of:-

• The total pay earned over the relevant pay reference period;
• Divided by the total number of hours worked during that period.

If the worker’s average hourly rate of pay is less than the applicable rate of NMW, their wages must be increased to at least the NMW for that period.

What is the “pay reference period”?

The “pay reference period” is the period used for calculating hourly pay. It is one month or, if the worker is paid by reference to a period that is shorter than a month, that period. Therefore, workers who are paid weekly, daily or hourly will have a pay reference period of one week, one day or one hour respectively.

Calculating total remuneration

Total remuneration in the relevant pay reference period consists of gross pay before deductions for income tax and NI less payments and deductions that count towards the NMW. It includes basic pay, incentive payments (including commission), bonuses, and accommodation allowances. It does not include advances of wages or loans by the employer or any premium paid for overtime or shift work. Pension payments, lump sums on retirement, redundancy payments, rewards under staff suggestion schemes, tribunal or settlement awards, any allowances or payments that are not attributable to the worker’s performance (e.g. London weighting or an on-call allowance) and some payments in respect of absences are also excluded.

Calculating the total number of hours worked

Once the total pay which can count towards the NMW in the pay reference period has been calculated, it is necessary to identify the number of hours that have been worked (or deemed to have been worked) during that period. There are 4 different types of work: “time work”, “salaried work”, “output work” and “unmeasured work”. The rules and calculation of hours differ depending on the type of work that is being undertaken.

“Time Work”: This is work which is paid by reference to the time that a worker works, for example hourly paid work. The hours of work that are relevant for the purposes of the NMW for a time worker are those hours when the worker is actually working. There are specific rules that cover hours spent travelling on business, in training or whilst on-call at or near a place of work. Hours spent travelling between work and home, rest periods, periods when the worker is absent from work (e.g. on holiday/sick leave or engaged in industrial action) do not count as time work.

“Salaried hours work”: This is work whereby the worker is paid for a set basic number of minimum hours per year and is paid an annual salary in equal weekly or monthly instalments. The actual number of hours worked per month may vary, however, what matters for NMW purposes is the basic number of hours in the year averaged out over the applicable pay reference period.

A salaried hours worker is treated as working when he or she is at work or is available for work, otherwise than at home, and is required to be so available. As with the time worker, time which is not counted is time spent by the worker travelling between home and work and time when the worker is engaged in industrial action. However, time spent absent from work is treated as working time, provided the worker is paid their normal pay while absent. Therefore, rest breaks, holidays, sick leave and maternity leave will count if they form part of the worker’s basic minimum hours under the contract.

“Output work”: This is work that is paid according to the worker’s productivity (e.g. on the basis of the number of pieces of work that they produce or the number of tasks performed). This means that their hours of work are not fixed by their employer. Employers can chose whether to pay an output worker for every hour that they work (in which case output work should be treated as if it is time work) or a “fair piece rate” for each piece produced or task performed, provided certain conditions are met. Time spent travelling for the purpose of performing output work will be included except time spent travelling between home and work (unless the output worker works from home). Time when the worker is engaged in industrial action is excluded.

“Unmeasured work”: This category catches workers who work unspecified hours and those who do not fall into the other three types of work (i.e. where there are certain tasks to be done but no specific hours or time when they must be done). Often this includes domestic workers with no set hours, output or annual salary (e.g. live in care workers). Time when the worker is travelling for the purpose of unmeasured work will be treated as time spent doing unmeasured work. A worker will not be treated as performing unmeasured work when he or she is engaged in industrial action.

Time on stand-by or on-call

In certain circumstances, a worker will be treated as doing time/salaried work even when they are not actually working, for example when they are “on-call” or “on-standby” outwith normal working hours, or overnight when they may be allowed to sleep. Such time will only count if the worker is available (and required to be available) at or near a place of work for the purposes of doing such work, subject to the following:-

• Where the worker’s home is at or near the place of work, time the worker is entitled to spend at home is not treated as working time; or
  
  
• Where the worker is entitled to sleep at or near their place of work and is provided with suitable facilities for sleeping, only time when the worker is awake for the purpose of working will be treated as working time.

Crucially these rules only apply if the worker is “available for the purposes of working” not if they are actually working. If the worker is in fact working, all of the time (including the hours spent asleep) must be included. Often this is not an easy distinction to make.

Penalties for failure to pay NMW

Failure to pay NMW can be costly to an organisation and can lead to serious reputational damage.

The NMW is enforced by HMRC. This can be initiated either by a complaint from a worker, a third party or as result of targeted enforcement of a particular low-paying sector. Enforcement officers can carry out inspections at any time, without providing a reason and can require employers to produce records, allow access to premises and provide information in order to determine whether or not there has been compliance. They also have the power to copy any relevant documents and can remove such records in order to do so.

Where it is concluded that the NMW has not been paid, the enforcement officer can issue a notice of underpayment requiring the employer to comply with the NMW. This notice sets out the arrears of NMW to be repaid by the employer together with a requirement for the employer to pay a financial penalty to the Secretary of State within 28 days of service. Arrears of pay are calculated by taking into account the rate of NMW which is in force as at the date of determination which could mean that a worker will be repaid at a higher rate if the NMW has increased since the underpayment was made. The current penalty is 200% of the total underpayment of the NMW and the overall maximum penalty is £20,000 per unpaid worker. If an employer fails to comply with a notice of underpayment, the enforcement officer can issue civil proceedings or prosecute the employer. Additionally, once a notice of underpayment is issued, HMRC will refer the case to BIS to consider naming the employer.

Potential claims

A worker who does not receive the NMW to which they are entitled will be able to bring a claim in an Employment Tribunal alleging that there has been an unlawful deduction of wages (or where the employment has ended, a breach of contract). An unlawful deduction of wages claim must be brought within three months (subject to the limitation period being extended by ACAS Early Conciliation) of the date of the failure to pay the NMW (or the last date in a series of unlawful deductions). A breach of contact claim will need to be brought within three months of the date of employment terminating. Alternatively, the worker can pursue proceedings in the civil courts to recover sums due. Breach of contract claims can be brought in the civil courts for up to five years after the breach in Scotland. In all cases it will be assumed that the worker has not been paid the NMW unless the employer can prove to the contrary.

Additionally, if the employer dismisses the worker or takes some other action against them for asserting their right to NMW, or dismisses/victimises the worker because they will become eligible for NMW, the worker may also bring an unfair dismissal or a detriment claim in an Employment Tribunal.

Conclusion

This area of law is far from being straightforward. Failure to pay staff NMW can give rise to expensive claims, lead to reputational damage and damage workplace relations. Are you sure you are complying with the complex rules in this area? Contact one of our employment law specialists to help you manage the risks in this area. Making sure you are following the rules in this area may prove to be a sound investment.

Contact: Lesley Grant, Associate ljg@bto.co.uk T. 0141 221 8012