Employers risk financial, brand and reputation fall out over National Minimum Wage

Employers risk financial, brand and reputation fall out over National Minimum Wage


Author: Charlie Barnes

Applies to: UK wide

Before Christmas, a national newspaper reported that staff working in Sports Direct's warehouses might not be being paid the National Minimum Wage ('NMW') due to the time it was taking for compulsory security searches to be carried out after each shift.

Undercover reporters for the newspaper found that the searches sometimes added up to 15 minutes per day after the member of staff had clocked out of their shift and that staff were not being paid for this time.

The case law concerning the National Minimum Wage Regulations 2015 ('the Regulations') suggests that where a worker is paid on an hourly basis, any time spent by the worker at their employer's disposal is likely to be deemed as working time for the purposes of calculating whether the worker is being paid NMW.

The newspaper reported that Sports Direct's workers were being paid £6.70 an hour (the current NMW for individuals aged 21 and over). However, once the total time spent undergoing the security checks after clocking out was considered, Sports Direct's workers were effectively being paid at a rate of £6.50 an hour. If the time spent carrying out the security checks was held to be working time for the purposes of calculating NMW because the workers were still at Sports Direct's disposal, Sports Direct could possibly be in breach of the Regulations.

The current sanctions that can be imposed by HMRC for failing to pay NMW under the Regulations are:

  • Requiring the employer to pay NMW and making up any past underpayments to each worker;
  • A financial penalty equivalent to 100% of the underpayment of NMW for each worker* (subject to a maximum of £20,000 per worker);
  • Naming and shaming under the government's naming scheme; and
  • Criminal penalties in the most serious cases.

(*From 1 April 2016, the financial penalty will be increased from 100% to 200% of the underpayment due to each worker but will still be subject to a maximum of £20,000 per worker. The government is also considering introducing a new sanction of disqualifying directors of companies for up to 15 years for the company's failure to pay NMW; however, no further details have been released as to whether this sanction will be introduced and if so, when it could be introduced)

Since October 2013, the government has regularly published details of those employers who have failed to pay NMW under its naming scheme, including how much has been underpaid and how many employees were affected. So far over 400 employers have been named, with total arrears of £1,181,000 and financial penalties of £513,000. The latest list, published in October 2015, revealed 150 employers who had failed to pay employees NMW. This list included other well-known high street retailers.

In the days following the undercover investigation being reported, Sports Direct's share price fell by 16%, wiping around £600 million off the Company's stock market value. Whilst other contributing factors have been cited, including disappointing financial results, it has been suggested that negative publicity over the Company's relationship with its employees was a key factors behind this drop in value.

It is clear from the heavy criticism aimed at Sports Direct that public perception is a vital consideration for employers when setting working practices which may potentially infringe the Regulations. Employers should never underestimate how a possible breach of the Regulations may affect their business, not only in terms of the penalties for non-compliance, but also the negative impact on their brand and reputation.

The National Living Wage ('NLW')

Employers also need to keep in mind the future impact of the NLW, which will be introduced from 1 April 2016 for workers aged 25 and over. The NLW will be set at £7.20 per hour, possibly rising to £9 per hour by 2020.

Interestingly, since the undercover investigation was reported, Sports Direct announced in the New Year that it will be increasing pay above the NMW for all staff, and above the NLW when it is introduced.