National Minimum Wage – a guide for 2024

We are continuing to see an increase in HMRC’s NMW Enforcement activity and the volume of enquiries they undertake each year, meaning your NMW compliance is more likely to be checked by HMRC. Highlights of current HMRC enforcement activity include:

• Sector Targeting – most recently in the Motor Industry and across Hospitality and Retail.
• Geographical Targeting – HMRC confirmed in the December 2023 employer bulletin that they have undertaken action in 10 areas. We are currently aware of ongoing activity by HMRC in Bradford, Birmingham, Glasgow and Cardiff.
• Repeat visits – revisiting employers who have previously had a HMRC NMW enquiry in the last five years.
• Mainstream media coverage via social media, text messaging to targeted audiences and instigating the help of celebrities.
• Acting on worker complaints – read more detail below

No. Recent reports show that the second most commonly enforced amount by HMRC for NMW was between 1p and 5p per hour. This highlights how seriously HMRC take NMW compliance. Typically, in our experience these underpayments are not due to paying below the legal rates, but instead due to a misinterpretation of the legislation and a lack of robust controls and processes in place. 

You may be aware of HMRC issuing letters to employers in respect of the common issues/areas employers get wrong with their NMW compliance. For example, letters issued to employers in a region as part of stage 1 of their geographic compliance enforcement.

However, you might not be aware that HMRC also communicates directly with both current and former workers encouraging them to contact HMRC or ACAS if they believe they have been underpaid. Most commonly, this is done via letters to workers, but we are aware that HMRC send text messages to targeted populations, such as low paid workers in receipt of benefits administered by HMRC.

HMRC must investigate every complaint made directly by a worker or referred to them by ACAS. In our experience, this can lead to a costly and time-consuming investigation being undertaken by HMRC. Not only do they need to investigate the complaint, but also whether this could apply to other workers employed in the last six years. Even when the complainant themselves may not be due any arrears, these reviews often identify NMW arrears due to other workers.

HMRC check many areas during an enquiry: the areas list below commonly lead to potential NMW arrears arising and are often detailed as causes of underpayment in the Government’s public naming and shaming scheme.

• Deductions from pay (or expenses) for employment-related items, including salary sacrifice and items workers have voluntarily elected to deduct from pay.
• Whether workers are paid for all time worked, e.g. time to get ready for shift, clocking off/queues at clocking machine etc.
• Paying correct NLW/NMW rates e.g. when a worker’s age changes.
• Apprentices e.g. ensuring the agreement covers the whole period of engagement and study time.
• Record Keeping – to demonstrate all working time is paid; in the absence of records HMRC rely on worker testimony to demonstrate all working time is paid.
• Work type – a salaried worker may not be a salaried worker for NMW purposes, and this will impact how the NMW calculation needs to be performed.

Employers must ensure that any safeguards implemented consider the correct NMW calculation. For example, when assessing what working time and pay counts for NMW purposes, it is key to understand which of the 4 ‘work types’ an individual worker is undertaking as different calculation methods apply for each.

While it is important to consider the impact of the increase, it is worth remembering that NMW compliance is more complex than simply paying at the correct rates. A good starting point to check your NMW compliance is considering the following:

• Do your payroll exception reports consider deductions which reduce pay for NMW purposes?
• Do your payroll exception reports consider pay that doesn’t count in the NMW calculation?
• Is your payroll department aware of all working time happening within your organisation to aid accurate NMW checks? And is this information received timely, i.e. no later than the next payroll period?
• Could you implement additional controls when workers request to be enrolled into benefit schemes?
• Do your overtime or time off in lieu (TOIL) policies cover all additional time outside of basic contractual hours?
• Do you make any payments to volunteers/interns? Further information around this can be found here
• Do you ensure that you are not including tips and service charges in your NMW pay calculations? Do you also ensure no deductions from pay are made as result of tips/service charges? (further information can be found here in relation to the new ‘Allocation of Tips’ rules from 1 July 2024)

HMRC can pursue NMW underpayments for a period of six years for both current and ex-workers. HMRC can also seek penalties from the employer (up to 200% of the underpayment paid to workers) and employers found in breach of NMW rules are publicly named.

Any underpayments to workers are required to be paid at the NMW age rate in the year it is made good, not the NMW rate applicable at the time the breach occurred. The NLW rate effective 1 April 2024 is around 33% higher than the rate in 2018, meaning a mistake made in 2018 could cost an employer 233% more in 2024 just for the payment of arrears.

It is also worth bearing in mind that the NMW arrears payments could be pensionable, and they will most likely be treated as earnings for National Insurance Contributions purposes as well. These additional employer costs should not be forgotten when factoring into budgets.

With more frequent naming rounds being published, being proactive can have both financial and reputational benefits.