These are difficult times for all businesses, with exponential cost increases to contend with, not least in relation to staff costs. This is being felt particularly hard in the Food & Drink sector where there is an ever-increasing squeeze on profit margins.

One of the contributory factors to a sharp increase in staff costs is the inflation-busting uplift to National Minimum Wage (NMW) rates on 1 April. Government policy, influenced by the Low Pay Commission, in striving to reach a target of NMW being two-thirds of median earnings by October 2024 is to be commended in making work affordable for all. However, from the employer side these increases are becoming increasingly difficult to absorb each year as the annual uplifts become more significant to reach this ambitious target.

But paying at least the statutory pay rates to all staff is not the only challenge with NMW for Food & Drink employers. HMRC’s current stance on sector specific issues in relation to NMW continues to be a cause for concern for employers, advisers, and industry bodies UK-wide and is contributing to an unfair picture that bad and illegal pay practices are commonplace within the industry. HMRC compliance checks and routine audits of employers can result in penalties in specific areas in relation to NMW for what we call ‘technical breaches’. These can result in financial and reputational damage to businesses, which can appear to be out of proportion to the original intentions of the law.

Working time

Many of the ‘technical breaches’ HMRC are challenging relate to employees not being paid for all time worked. This often applies to shop-floor workers who tend to be at the lower end of the pay scales. Common issues include:

• Not including time for staff to change into/out of specific workwear required to perform their work, for example when handling food products;
• Not including time to prepare/clean workstations at the start and end of the shift;
• Clocking in/out equipment being placed at the wrong locations (so not reflecting the true time being incurred at work), or being used incorrectly, or being configured to round down to the nearest minute/5 minute/15 minute period; or
• Not paying for all overtime minutes.

In the majority of cases, the time involved is usually immaterial in isolation but when considered collectively over an entire pay period it can be enough to trigger a NMW breach.

Deductions from pay

This is another problem area, caused in part because of some of the unique and old traditions that still exist within many businesses across the sector. For example:

• Employees purchasing in-house products (whether discounted or full price) and paying for these via a deduction from pay. HMRC is of the view that paying for goods separately is okay but via payroll is not;
• Staff savings club deductions. This was a highly publicised issue for a well-known food retailer recently following an HMRC audit and such schemes are commonplace for the more established food and drink manufacturers;
• Deposits for lockers; and
• Lotteries, sweepstakes, or other games of chance that are facilitated by the employer through nominal deductions from pay.

HMRC’s view, which many consider is against the spirit of the NMW legislation, is that such deductions are for the employer’s ‘own use and benefit’ and therefore reduce pay for NMW purposes, regardless of whether the employee is actively choosing to incur such costs.

Clothing

The final area that can be particularly problematic in the sector is clothing costs.

HMRC’s current view is that the following scenarios impact pay for NMW purposes:

• Where an employee is required to contribute or pay for specific clothing (or equipment) necessary to do their job, for example safety boots, aprons, gloves, etc; and
• Where the employee is required to wear specific clothing when at work and they are required to organise and pay for these items personally.

Employees who are paid near to NMW levels do not have much “buffer” to accommodate any mistakes on their pay and this is where HMRC is having success in the sector in penalising employers who have some of these arrangements in place.

The biggest issue for employers is the fallout if HMRC consider there has been a breach of the law because of these technical points as the measures are deliberately punitive:

• The employer is required to rectify the underpayments of pay at the current rate of NMW regardless of the rate at the time of the error;
• The underpayments usually cover a six-year period and applies to ex-employees;
• There is a standard penalty charge of 200% of the collective underpayment, restricted to £20,000 per employee. This penalty can be reduced to 100% for prompt payment; and
• The employer is automatically named publicly where the collective underpayment of wages exceeds £500.

The common view is that HMRC’s application of the law and the detrimental impact this is having on employers generally, but especially within the Food & Drink industry, is not in keeping with the original intentions of the law. However, employers should be aware of the potential consequences of ‘technical breaches’ and take advice to avoid errors arising from misunderstandings of the rules. 

Johnston Carmichael’s specialist NMW team advises Food & Drink employers on all aspects of NMW compliance and so please do not hesitate to contact me here for further information.