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25 April, 2019 - 11:04 By News Desk

Is National Minimum Wage legislation due a reform?

EY Ian Thomas

Ian Thomas, associate partner at EY, explains the challenges National Minimum Wage legislation poses to businesses and whether it’s time for a reform of the law. 

National Minimum Wage (NMW) legislation has now been in place for 20 years and it’s been hugely successful in lifting the base pay of the lowest paid and most vulnerable workers. 

Despite its success, we still hear of cases where employers have broken the law by paying their employees less then minimum wage.

HMRC, which enforces NMW compliance, has significantly increased resources over the last few years to target these businesses through a combination of complaint-led and targeted enforcement activity – currently costing more than £26 million a year. 

If an employer has been found to have underpaid their employees, not only will they need to pay the money owed, but also they may face financial penalties. 

The Department for Business, Energy and Industrial Strategy (BEIS) may also add the employer to their ‘naming and shaming’ list on the Government website, where over 2,000 businesses have been named so far. 

However, some could question whether these businesses are ‘rogue employers’ or whether the complexity of the NMW legislation means some employers are unintentionally breaking the law. 

At EY, we recently held a number of roundtables to debate this topic. Our NMW team – which includes former HMRC investigators and employment lawyers – were joined by some of the UK’s largest employers from a range of sectors, including many from the East of England. 

Together we discussed a recent consultation document issued by BEIS on whether changes to the NMW legislation are needed. The consultation focused on NMW rules regarding salaried workers and the operation of salary sacrifice schemes in particular. 

We were also delighted to have a representative from BEIS who listened to the concerns that businesses had regarding the existing approach. 

Salaried contracts

Rob Riley, EY’s head of Employment Law, led the discussion on employment contracts. He highlighted that where a salaried contract is in place, the hours worked and pay for the full year will normally be taken into account for NMW calculations. This can benefit employees who want flexible work hours but still want certainty that they will receive a regular income. 

However, there are rigid definitions of what can be regarded as a salaried contract which includes, amongst other criteria, a requirement to be paid in either weekly or monthly intervals. 

In the absence of a salaried contract, workers are likely to be ‘unmeasured’ which means that all hours worked in a pay reference period (PRP) – such as daily, weekly or four-weekly – should be paid at NMW or more in that PRP or in the subsequent period. 

At the roundtable, we heard experiences of employees failing to be salaried because they are paid, for example, fortnightly or four-weekly. Therefore, they were unable to take advantage of arrangements which are more straightforward to apply to salaried workers, such as time off in lieu (TOIL) or have “term time only” arrangements which average pay across the year. 

Salary sacrifice schemes 

Salary sacrifice or salary exchange schemes are arrangements where employees’ contractual pay is reduced, often in exchange for a tax efficient benefit in kind such as childcare vouchers, cycle to work schemes and pensions. 

For any of these schemes, the reduced salary should not take employees below NMW as these benefits are not considered as pay. At the roundtable, we heard many examples of workers close to minimum wage being refused entry into a scheme because it would take them below NMW. 

In some cases, such as cycle to work schemes or childcare vouchers, the scheme must be generally available to all employees and therefore if the employer has a large proportion of workers close to minimum wage it might mean the employer cannot offer that scheme at all. 

At the roundtable there was a general agreement that the employee should have freedom to choose whether to be paid in cash or through a non-cash benefit as the value of the benefit should count as pay, although a lot of consideration would be needed in valuing the benefit.

NMW compliance has a really high profile at present and should remain forefront as businesses look to retain employees and balance employment costs during this particularly uncertain time for businesses. 

At EY, we remain committed to supporting and advising our clients in the region, and facilitating debate between business and government on key issues. 

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