HM Revenue & Customs (HMRC’s) change of policy and automatic naming and shaming means it’s time to review procedures for any business with employees paid at National Minimum Wage (NMW) rates.

HMRC have today released their latest list of businesses found to be in breach of the National Minimum Wage Regulations. Each of them has been required to repay underpayments to staff together with HMRC penalties.

The High Street group Wagamama topped the list of publicly-shamed businesses. HMRC revealed that they owed in excess of £130,000 to over 2,600 employees and the story has been picked up by newspapers, the BBC, and other media outlets. As might be expected, the company has come in for criticism as a “bad employer”.

So how did a large and respectable business with a public reputation to consider find itself in such a position? The answer is down to a change in HMRC’s policy and legal interpretation of the rules which could have implications for all businesses with employees whose rates of pay are at NMW rates.

Wagamama provided their staff with a branded top to wear at work at no cost to the employee. So far, so good. However, they also instructed staff to wear black jeans or a black skirt. Also named and shamed on the same list were TGI Fridays, who instructed their staff to wear black shoes.

In both cases, employees were free to purchase any brand of clothing from any retailer they chose – they didn’t have to purchase it from their employer. This is a scenario that very many hospitality operators will be familiar with in their own businesses.

Until a couple of years ago this policy would not have raised eyebrows, but HMRC have now changed and extended their interpretation of the relevant Regulations, despite no new legislation or legal precedent in a Court or Tribunal.

Employers at risk from a re-interpretation

HMRC’s view now is that this requirement to wear a particular colour or style of clothing constitutes a dress code. The cost to an employee of complying with that dress code means that their level of pay will fall below the legal minimum (currently £7.50 per hour rising to £7.83 from 1st April) if their pay is set at NMW rates. Hospitality businesses should remember that NMW is calculated on basic or house pay only and it makes no difference if, or how much, tronc may be paid on top of basic pay.

This means that for any employee paid at NMW rates who is subject to a dress code involving them having to supply, at their own expense, a particular style, colour or brand of clothing, a breach of the statutory NMW rates now exists.

Eye-watering penalties

The penalties for breaching NMW rates are severe. Employers will be required to reimburse all affected staff from the last six years (including leavers) using today’s NMW rates rather than the (lower) rates that would have applied at the time. On top of this, penalties are charged at a rate of up to 200% of the underpayment.

As we have seen today, businesses will be publicly named and shamed whenever the total underpayment exceeds £100. Finally, in the worst cases, a risk of criminal prosecution exists.

More areas of risk

Clothing is not the only area currently being targeted by HMRC. Other common issues include:

  • Staff paying a deposit for employer-provided clothing, locker keys, swipe cards and similar which is returned when they leave or return the item
  • Shift pay rates which do not reflect the actual hours worked (and bearing in mind that the average duration of a shift will often vary depending on which service and which days of the week an employee is rota’d for)
  • Staff working through breaks, working longer hours than in their contract, or where no record of time worked is maintained
  • Staff purchasing items from their employer (such as drink) where the cost is recovered through payroll regardless of whether the employer makes a profit or not
  • Contracts of employment for salaried staff which are not worded correctly for NMW purposes
  • Staff “living in” where rent is paid to the business through payroll where:
    • the rent is in excess of the permitted offset rates, or
    • the employee has further deductions from pay in addition to rent to cover utilities, cleaning and similar.

Peter Davies, Partner at WMT Chartered Accountants, commented:

the latest naming and shaming list shows that HMRC are determined to enforce their harsher interpretation of the law in respect of staff clothing and other issues which they believe lead to breaches of the Minimum Wage Regulations.

All businesses with staff paid at Minimum Wage rates should now review their processes, policies, procedures and record keeping to make sure that they are not fined and publicly named by HMRC. The costs and reputational risk of overlooking this are too severe to ignore.

For help and advice on the National Minimum Wage, contact our Employment Tax Director Rob Ennis on 01727 838255 or email rob.ennis@wmtllp.com.