In light of the substantial increase in the National Living Wage (NLW) and National Minimum Wage (NMW) rates From April 25, it is crucial for employers to understand the implications and risks. Jeni Morris, Head of EY National Minimum Wage Technical Team, explores the key risk areas and identifies who might be most vulnerable.
Employers are familiar with the annual adjustments to the National Living and National Minimum Wage, which the government determines based on independent Low Pay Commission (LPC) recommendations. However, in addition to this year’s huge 10% increase, the government has confirmed further inflating busting increases from April 25, ranging between 6.7% to 18%.
This significant rise demands close attention from employers, as it will bring more employees closer to the minimum wage threshold, increasing the likelihood of accidental breaches.
Understanding the Changes
Effective 1 April 2025, the wage rates will increase as follows:
- National Living Wage:
- Applies to those aged 21 and above.
- Increased from £11.44 per hour to £12.21
- National Minimum Wage:
- For 18 to 20-year-olds, increased from £8.60 per hour to £10.00.
- For 16 and 17-year-olds (and apprentices under 19 in their first year), an 18% increase from £6.40 to £7.55.
- Daily Accommodation Offset:
- Increased from £9.99 per hour to £10.66.
There is no qualifying period for these rates, and exceptions are extremely limited.
Shrinking Safety Net
For workers paid at the NMW, it is essential that employers implement the annual increase immediately. Ensuring compliance can be complex, especially when considering additional hours worked and pay deductions.
HMRC regularly name and shame employers for failing to pay their staff at these statutory minimum levels. Many of these breaches are inadvertent, arising from the complexity of the underlying rules, such as additional working time and deductions that inadvertently reduced pay below the NMW threshold.
The significant increase in the NMW rates next year is likely to bring more workers into the danger zone, necessitating heightened vigilance from employers regarding common risk areas that can result in underpayment. However, contrary to popular belief, it is not only those paid at, or close to, NMW rates who are at risk of falling foul of the rules and regulations. The emerging risks that HMRC are taking a closer look at (and issuing enforcement notices) are those performing salaried work, particularly those in middle management.
The foundation of NMW governance is the NMW Worker Category
Incorrect Work Category: Employers should determine whether workers are 'salaried', 'time', 'output' or 'unmeasured' as fundamental to ensuring compliance with NMW regulations for each pay reference period.
Actions
- Understand the danger zone for each role and monitor additional hours worked.
- Maintain accurate records and conduct regular compliance checks.
Ensure Time Off In Lieu (TOIL) policies align with pay reference periods to avoid NMW breaches.
Salaried workers – what’s the risk?
Surely salaried employees present no NMW compliance risk, right? There's no need to monitor them as closely as those employees whose hourly rate is closer to the NMW, correct?
Wrong. Overlooking this could prove to be a costly mistake.
Many employers assume that salaried workers present a low risk of NMW non-compliance because their headline salary exceeds £40,000 per annum (even greater if they have a salary sacrifice agreement). However, the legislation governing NMW calculations for salaried workers is fraught with complexities that must be navigated to ensure effective monitoring and compliance.
Failing to pay at least the NMW can result in back pay to affected employees, penalties of 200% of the underpayment and the reputational damage of being publicly named for the failure.
Why are salaried workers a particular risk?
For salaried hours workers, NMW compliance is generally assessed over a 'calculation year', meaning the worker must receive at least the NMW for their total hours worked over that period. While most salaried workers may not breach NMW for each pay period where additional hours are worked, a breach can occur when considering the full year. This yearly review involves a particularly complex calculation that can cause even higher-paid salaried workers to fall below the NMW.
For example, a worker earning an annual salary of £50,000, contracted to work 40 hours per week, who works just one hour of unpaid overtime each day, will breach NMW by month 11 of their calculation year.
Employers often ask salaried workers to be flexible about their working hours based on role requirements and, as such, do not closely monitor their working time. While this flexibility can benefit both the employer and worker, failing to monitor hours across the calculation year can lead to significant risks of inadvertent and technical NMW breaches.
The need for robust systems and processes
There is a real need for robust systems and processes to monitor NMW compliance for all categories of workers, including salaried workers. Employers must review NMW compliance regarding all potential risks that might reduce pay or increase working hours.
Salaried worker time records
Often actual working time is not monitored or recorded for salaried workers due to the flexibility their roles permit. However, there is a requirement to measure actual working hours and reliable processes are rarely in place. Recent HMRC webinars have emphasized the need for employers to keep accurate time records for salaried workers.
Employers must identify and cumulate salaried workers' basic contractual hours across the calculation year to determine when they have exceeded their annual hours and need an excess hours calculation. Once excess hours accrue, the employer must calculate whether pay should be topped up.
Key considerations for compliance
As you review compliance for salaried workers, consider the following question: How can you demonstrate that you have assigned the correct worker type and therefore have assurance on the processes and controls for monitoring NMW compliance for your workforce?
By addressing these complexities and implementing effective monitoring systems, employers can mitigate the risks associated with NMW compliance for salaried workers and avoid costly penalties and reputational damage.
Employers can avoid reputational and financial damage by identifying and remedying NMW breaches before HMRC does. Seeking advice from specialist technical NMW advisors in addition to conducting regular audits of pay policies and practices is essential to ensure compliance.
By staying vigilant and proactive, employers can navigate the complexities of the NMW regulations and avoid costly penalties.
Jeni Morris, National Minimum Wage Specialist
Head of EY’s NMW Specialist Team
