Employers Need To Keep Their Wits About Them To Keep Up With Changes In Legislation

Each new tax year brings with it a raft of changes in employment taxes legislation and this year is no different.

There are a number of changes that employers need to contend with this year, including: changes to the reporting requirement regarding benefits in kind paid under Optional Remuneration Arrangements; taxation of termination payments; how PAYE Settlement Agreements are agreed with HMRC; the increase in Auto Enrolment contribution rates; and, of course, increases in the National Living and National Minimum Wages.

Whilst getting it wrong can have financial consequences in all areas of employment legislation, possibly the most damaging penalty regime concerns failure to pay the National Minimum Wage. In addition to paying the employees the amount of wage underpaid, this regime not only involves a financial penalty, but also involves the potential reputational damage for the employer through being “named and shamed”.

The publication of the list naming and shaming employers who have not complied with the minimum wage requirements serves as a reminder, not just of the increases in National Living and National Minimum wage rates from 1 April 2018, but also of how easy it can be to fall foul of the legislation.

Whilst it is relatively simple to set hourly pay rates that comply with the regulations, the complications generally arise in other areas such as non-statutory deductions from wages, the impact of salary sacrifice arrangements and, perhaps most problematic of all, the classification of employees as either salaried, time workers, or unmeasured workers. In the flurry of press releases following the latest list, at least one of the employers suggested that the underpayments related to a technical inaccuracy in worker classifications.

It is easy to make incorrect assumptions without a detailed knowledge of the definition of salaried worker under the regulations. It could be assumed that any worker who is paid an annual salary equally over 12 months is a salaried worker and, provided the annual salary divided by the actual hours worked is equal to or more than the relevant minimum wage, there isn’t a problem.

However, it isn’t that simple. It is necessary to refer to the individual’s contract to determine whether an individual is, in fact, a salaried worker for this purpose. One of the determining factors is whether the worker is paid under the contract for an ascertainable number of hours per year.

For example, if the contract says the individual is contracted to work a number of hours per week and expected to work additional hours according to business needs, the National Minimum Wage Unit will take the view that the actual hours for the year cannot be ascertained under the contract. 52 weeks at seven days a week is equal only to 364 days rather than 365, therefore, it is not possible to determine how many extra hours will be required at the start. That may seem overly pedantic to most readers, however, this is the consistent stance taken by the National Minimum Wage Unit when dealing with reviews.

But why is this important? It’s because each of the employee classifications has its own method of calculating pay for National Minimum Wage purposes. In order to satisfy the minimum wage requirements it is essential to pay the worker at least equal to the relevant minimum wage for every hour worked in a pay period. These detailed calculations are outside the scope of this article but here’s a simple example. A worker is paid an annual salary in 12 equal instalments, but incorrectly classified as salaried, and paid at or close to the minimum rates. This employee will be paid over the National Minimum Wage in a pay period covering a four week month when 160 hours are worked, but under the National Minimum Wage in a pay period covering a five week month when 200 hours are worked.

Employers should review their worker classifications in order to ensure that this does not create a problem for them.