New minimum rates of pay come into effect on 1 April. Are you ready and how will this impact your business?

Smaller companies, in particular companies in the hospitality and retail sectors, are disproportionately affected:

  • In the UK, small companies account for 35 per cent of the adult workforce but 52 per cent of Britain’s minimum wage workers.
  • Hospitality and retail account for 46.5 per cent of all minimum wage jobs.
  • Competition and lack of alternatives reduces the scope for off-setting increases in pay e.g. with price rises.

Keeping up with labour law can be a challenge for any small business and even for larger ones with HR teams in the absence of a dedicated legal expert. So here’s the first in a series of guides through the regulatory minefield.

National Minimum Wage and National Living Wage

Let’s start with the basics. HMRC (HM Revenue & Customs) can take employers to court if they do not pay the National Minimum Wage (NMW) or the National Living Wage (NLW).

The National Minimum Wage is the minimum pay per hour for (most) workers under the age of 25, while the National Living Wage (NLW) is the minimum pay per hour that most workers aged 25 and over are legally entitled to.

The actual rate depends on a worker’s age and if they are an apprentice.

Rates are reviewed annually by the Low Pay Commission and the new rates coming into effect on 1 April 2019 are:

  • £8.21 per hour for ages 25 and over
  • £7.70 per hour for ages 21 to 24
  • £6.15 per hour for ages 18 to 20
  • £4.35 per hour for school leaving age to 17
  • £3.90 per hour for apprentices

These new rates do not apply automatically on 1 April – rather, they apply to the next pay reference period or when an employee reaches a new age bracket.

For example, if employees receive their pay on the 28th of each month, then the new rate of pay applies from the 29 April 2019.

Of course, if a worker receives a rate of pay that is already above the National Minimum Wage, there is no legal obligation on an employer to increase their pay when the NMW rate increases.

By the way, as well as the National Living Wage, which is a statutory requirement, you may have heard of the “Living Wage”.

This is set independently by the Living Wage Foundation based on the current cost of living: £10.55 per hour in London and £9.00 in the rest of the UK. It’s entirely voluntary but many employers report benefits in terms of reputation, staff motivation etc.

What happens if you do not comply?

If you do not pay the required NMW or NLW an employee has the right to complain, without fear of any repercussions. If you fail to resolve the issue, the employee can then raise a formal written complaint, also known as a grievance.

If the situation is still not resolved internally your employee could choose to make a complaint either to an Employment Tribunal or (anonymously, if the employee wishes) to HMRC, which will investigate.

If your employee refers the case to an Employment Tribunal, your best course of action (for both of you) is probably to seek early conciliation, for example with the arbitration service, Acas. That way you can avoid the hassle and expense of a tribunal.

If you lose a case before a tribunal, in addition to compensating to the employee you could face a penalty of 50% of the amount of compensation, up to a maximum of £5,000, though there is a 50% discount for employers who pay within 21 days.

Alternatively, your employee could report you directly to HMRC. This is a place you definitely do not want to be: if the HMRC finds that you haven’t paid the NMW, it can send you a notice of arrears plus a maximum fine of up to £20,000 per worker.

On top of that, employers who fail to pay the NMW can be banned from being a company director for up to 15 years.

Exemptions

There are a few exemptions to the NMW/NLW.

One of the most significant exemptions in the hospitality business is “family members”. This is not limited to blood relatives, spouses etc. Anyone who lives in the family residence, without paying the employer for accommodation and meals, and shares household duties, can be regarded as a family member and, as such, is not eligible for NMW/NLW.

The second important exemption is students who are gaining work experience. However, be careful. Renaming work an internship or work experience does not mean it ceases to be work.

Essentially, the exemption applies only where students are required to undertake a placement for less than one year, as part of a further education or higher education course.

Otherwise, so long as the person is required to show up for a certain period of time and complete set tasks, they are working – and you are required to pay the National Minimum Wage.

A third exemption is the self-employed. Again, be careful here. According to HMRC, a person is only genuinely self-employed if they run their own business and are responsible for its success or failure. If by contrast you can tell a person when, where and how to work, and what work has to be done, then the person does not qualify as “self-employed” and is entitled to NMW/NLW.

Bear in mind that the burden of proof is on the employer. That means, if someone you claim is self-employed makes a complaint about minimum wage entitlement it is up to you to prove that you don’t employ them as a worker and that they are not entitled to it.

And note that workers on so-called “zero hours contracts” – and there are quite a few in the hospitality business, often covering temporary staff shortages or events organised at the last minute – are not exempted from NMW/NLW.

Mitigation strategies that may backfire

For the owner of a small chain of hotels, bars or restaurants with low profit margins, it is of little comfort to know that the NMW/NLW is part of a government strategy to break the UK out of the “low pay, low productivity” trap.

Business is business, and hospitality is a business that requires the human touch. However, beware of taking any of the following measures to mitigate the effects of minimum wage legislation:

  • Relabelling employees as apprentices. The apprentice rate applies only to employees under the age of 19 and employees over 19 who are in their first year of apprenticeship.
  • Relabelling people as self-employed: HMRC are really cracking down on this.
  • Cutting back on certain expenses and “benefits”. Among other things, HMRC will take a dim view if you require staff to pay for their own uniforms. There have been recent cases where, for example, HMRC has required employees to be compensated for the purchase of black shoes required at work.
  • Taking away established benefits and bonuses such as overtime pay.

The positives

Labour costs are high and are rising fast at the lower end of pay scales.

It’s challenging but paying staff a wage that they can live on has upsides: it reduces staff turnover and increases employee satisfaction and motivation.

It may also prompt you to look for ways in which you can automate aspects of your business.

For example, order and pay apps, as pioneered by Wetherspoon, save customers the trouble of queuing at the bar, while self-service check-in reduces the need for reception staff in hotels.

Finally, it may prompt you to analyse your staff scheduling to identify ways to improve efficiency and productivity without imposing additional work on your employees.

You might find ways to introduce more flexible terms so that hours worked can vary without requiring overtime. You can find out more about scheduling here.

Please note that the information provided in this article and on this website is provided for informational use only. It does not, and is not intended to, constitute legal advice.

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