A review of the proposed changes to and reintroduction of the BEIS Naming Scheme and HMRC’s approach to National Minimum Wage enforcement announced on 12 February 2020.
The Department for Business, Energy and Industrial Strategy (BEIS) scheme for naming employers who fail to pay the National Minimum Wage (NMW) was introduced in October 2010 as a deterrent to employers and to raise awareness of NMW enforcement. Employers were referred to BEIS following an NMW investigation by HMRC and the issuing of a notice of underpayment. The naming scheme was revised in October 2013 and finally suspended in July 2018, due to heavy criticism about how the scheme operated.
BEIS has now published revised guidance (12 February 2020) which states that the naming scheme will be reintroduced in 2020 with the following changes:
- The threshold for HMRC to refer employers to BEIS for consideration under the naming scheme will be increased from £100 to £500 (subject to certain exceptions);
- BEIS will publish details of employers who have failed to pay the NMW more frequently than was the case prior to the suspension of the scheme;
- In respect of those employers named, BEIS will publish detailed reasons for the underpayments; and
- BEIS will publish a quarterly education bulletin highlighting common reasons for underpayments.
The increased threshold of £500 to name employers means that employers who have a notice of underpayment for an amount below this can repay the underpayments to employees without the associated reputational damage of the naming scheme. Prior to the suspension of the scheme, employers were named for any underpayments over £100, meaning few employers escaped the naming scheme.
BEIS appears to be keen to help educate employers about the reasons why they have failed to comply with NMW legislation through bulletins, providing detailed reasons for the underpayments and a review of the current guidance to provide three levels of support to employers – a user friendly manual, detailed topical guidance and in-depth guidance on NMW.
The revised guidance clarifies the process that is followed once employers are referred to BEIS by HMRC. It also sets out limited exceptional circumstances where BEIS will not name employers, following an employer’s written representations to this effect. These exceptional (and to be frank, highly unlikely) circumstances are:
- Naming carries a risk of personal harm to an individual or their family;
- There are national security risks associated with naming; or
- Other factors which suggest it is not in the public interest to name the employer – the employer would have to provide details to BEIS in this respect. However, this is viewed restrictively as it is the employer’s responsibility to ensure that they are compliant with NMW legislation.
Alongside the guidance, the Secretary of State has provided circumstances in which a notice of underpayment should not impose a penalty and/or the employer should not be named under the BEIS naming scheme, in a direction on 12 February 2020, which are below. It applies to all notices of underpayment issued after 11 February 2020.
- If an employer has followed written or published guidance obtained from a government department or its agency, about the employer’s compliance with NMW and this guidance is incorrect (subject to satisfying certain criteria);
- There will be no penalty on the notice of underpayment, where part of the underpayment was attributable to time when the employee was working but permitted to sleep and this occurred in a pay reference period prior to 26 July 2017.
- Where an underpayment is as a result of certain employer deductions from pay, such as salary sacrifice or deduction schemes which deliver benefits to participating employees and, in practice, these employees suffer little or no detriment as a result, there should be no financial penalty imposed on the notice of underpayment.
The revised guidance explains that employers may be able to use the self-correct process. Self-correction is where the HMRC compliance officer will exercise discretion. For example, to only include current employees on the notice of underpayment and allow the employer to self-correct in respect of ex-employees (provided none of these falls within the same pay reference period as the current employees who have received underpayments). As such, the amount of the penalty will be calculated on the underpayments included on the notice of underpayment (and therefore the penalty will be reduced). Under the self-correct process, the employer would still be expected to repay any underpayments to ex-employees. Self-correction is offered where the employer: has engaged co-operatively with the HMRC compliance officer throughout the investigation; is taking steps or will take steps to ensure NMW compliance; and has not had a previous NMW breach in the past six years.
The revised guidance does however highlight that HMRC compliance officers have discretion as to whether to issue a notice of underpayment (which in effect triggers the BEIS naming scheme). Whether this discretion is exercised will vary but it is an incentive - to employers who are concerned about the reputational damage of being named under the scheme; and to increase co-operation during the investigation to try and avoid being named.
In reality, many large employers will exceed the new £500 threshold, despite the actual underpayments per employee being minimal, and as such these employers will still be subject to the BEIS naming scheme. As highlighted above, this increased threshold does not apply in certain situations and instead the £100 threshold will apply. This lower threshold applies where: the employer has been issued with a notice of underpayment in the past six years; the employer has been subject to an outstanding labour market enforcement order or undertaking as set out in Part 1 of the Immigration Act 2016; or the employer has previously been convicted of a NMW offence which is not spent.
The limited exceptional circumstances in which an employer will not be named by BEIS are so limited that, in practice, almost every employer issued with a notice of underpayment will be named under the naming scheme. Even when an employer is able to demonstrate that an exceptional circumstance might apply, this is still subject to BEIS being satisfied that an exceptional circumstance applies.
To qualify for the protection in the Secretary of State’s direction in respect of salary sacrifice or employer deduction schemes, there are several criteria that the employer must satisfy. The Secretary of State’s direction states that no financial penalty should be applied to the notice of underpayment, where all five of the criteria are satisfied in respect of each employee and each pay reference period, mentioned on the notice of underpayment, which are as follows:
- The underpayment is a result of a salary sacrifice or an employer deduction in respect of a purchase by the employee of goods and services or the deduction is under an employer’s savings scheme for the benefit of the employee unless the sacrifice or deduction is made in order to comply with a requirement imposed by the employer in connection with the employee’s employment or all amounts deducted under the employer’s savings scheme are subsequently paid or to be paid to the employee;
- No part of the underpayment can be attributable to a deduction or payment in respect of an employee’s expenditure (defined in Regulation 13 of the NMW Regulations) or living accommodation (defined in Regulation 14 of the NMW Regulations);
- The employee consented to the deduction;
- The employee has received the relevant goods or services, or benefits envisaged or the repayment of monies in full or in part (if in part, provided this is in full compliance with the terms of the scheme to date) under the relevant savings scheme;
- To rely on this exception, the employer must not have been convicted of an offence under the NMW Act 1998 which remains unspent; must not have received a labour market enforcement order which relates wholly or partly to NMW, that is still outstanding; or if the employer has received a notice of underpayment in the past six years, it was in respect of underpayments below £500 or the notice of underpayment was withdrawn and not replaced or the notice of underpayment is subject to an appeal.
Under the revised scheme where a notice of underpayment remains unpaid after 28 days and the employer has not appealed, HMRC is able to refer the employer’s name to BEIS at the stage when HMRC instructs solicitors to begin the recovery action (this is an earlier stage than before the suspension of the scheme).
The even worse
BEIS will be naming those employers who fail to pay the NMW from the date the naming scheme is reintroduced (which has not yet been confirmed but we suspect this may coincide with the NMW rate changes on 1 April 2020). BEIS will also be including those employers who were issued a notice of underpayment during the period in which the naming scheme was suspended.
While there is no further explanation contained in the Secretary of State’s direction, we suspect that all the underpayments - in respect of all employees across all pay reference periods - would need to satisfy the five criteria in respect of salary sacrifice schemes and employer deductions to prevent the naming of the employer under this direction. To this extent, the direction is of little help to employers where the HMRC investigation officer finds there is an issue with NMW compliance beyond salary sacrifice schemes or employer deductions. Despite there being little or no incentive to making a written representation to BEIS, on the basis that the exceptional circumstances are unlikely to apply, in order for an employer to receive advanced warning about being named by BEIS they will need to make such written representations – if not, no prior warning will be given. This seems arbitrary and a waste of resources to review written representations that have no merit, however, it will be essential if advanced notice of being named is required.
The BEIS naming scheme will be reintroduced with more detail on the reasons for the underpayments and it will be published more regularly than before. We are expecting further clarification in respect of the revised guidance, the Secretary of State’s direction and when the scheme will be resumed. All employers who have been subject to an NMW investigation during the suspension period or are currently undergoing an investigation should be prepared for the reputational impact of the naming scheme and attempt to gain advanced warning by making a written representation to BEIS, even if none of the exceptional circumstances apply. The revised guidance highlights that HMRC and BEIS are keen to educate employers on NMW compliance and we hope that the revised guidance provides further clarity to employers on NMW legislation and compliance.