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National minimum wage – even tougher penalties for non-compliance on the cards?

The recent report from the Resolution Foundation found here, makes for interesting reading, particularly in light of the recent announcement for the 2020/21 national minimum (6.2%) and living wage (6.5%) rises.

The report highlights how the average penalty levied for national minimum wage breaches in 2017/18 was 90%, a percentage level which for those of used to dealing with tax enquiry penalties is usually only reserved for the most serious of deliberate defaulters. In addition, the reality is that the 90% rate is suppressed because of relatively recent changes to the minimum wage penalty regime and some of the average penalties levied in 2017/18 would be based on the previous, and more lenient, penalty regime. The current regime starts with a 200% penalty, reducing down to a minimum 100% penalty, so we can expect the average penalty to rise in the coming years.

The report goes on to say that based on their estimation, HMRC were identifying only 13% of minimum wage underpayments in 2017/18 and that minimum wage underpayments have been on the rise since 2015/16 after many years of decline. The likely reason behind this is a combination of the increases in minimum wage in recent years well exceeding annual inflation, and the introduction of the national living wage for the over 25s which has added a significant cost to employers.

The report goes on to say “it is clear that the current NMW penalty and enforcement regime provides insufficient deterrence for firms contemplating underpayment”. As someone who has supported a wide range of employers through internal reviews of minimum wage compliance and through HMRC minimum wage enquiries, I would disagree that the current enforcement regime is insufficient as a deterrence. Good and diligent employers who look to comply with the legislation are often caught out by the complexities of minimum wage, but it would be wrong to say that this is intentional.

More recently, HMRC’s stance on denying employers the ability to self-correct minimum wage and challenging them on points of technicality, show an increasingly aggressive approach to enforcement and act to further deter employers from breaching minimum wage. Interestingly this has often been to the detriment of the employees, where well intentioned employers have looked to provide long term benefit to employees such as; pension salary exchange arrangements or savings plans as in the recent Iceland case (found here). These employee benefits are then challenged by HMRC, resulting in the employer being found to be non-compliant with minimum wage and suffering a large penalty and publicly named and shamed. The intended employee benefit is often then withdrawn and in the long run this is to the detriment of employee.

The Resolution Foundation’s report goes on to recommend a tougher stance be taken on minimum wage compliance, with tougher sanctions. While I agree there should be stronger powers to penalise employers who intentionally breach minimum wage, it is unfair to treat diligent employers – who can demonstrate an intention to comply with the legislation – in the same way. If the penalties and enforcement of minimum wage is to be reviewed, this needs to be done in a way that takes into account the behaviour of the employer – similar to the penalty regime we have in place for tax underpayments.

Should you have concerns with your national minimum wage compliance, PKF Francis Clark’s employer solutions team specialising in minimum wage compliance, please contact Scott Campbell or Steve Ashworth who head up the minimum wage team and they would be happy to support you.

FEATURING: Steve Ashworth
Before joining the Bristol office of PKF Francis Clark in July 2019, Steve started his career at HMRC over 30 years ago and then spent… read more
FEATURING: Scott Campbell
Scott provides advice on all aspects of employment and construction industry scheme taxes, as well as national minimum wage. He particularly enjoys navigating clients through… read more
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