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UK HR E-briefing - Employers face minimum wage challenges as rates rise

  • United Kingdom
  • Employment law - HR E-Brief


The Government has confirmed that the top rate of the national minimum wage, known as the national living wage, will increase by 4.4% to £7.83 in April 2018. The new rate, which applies to workers aged 25 and over, will increase pay for typical minimum wage workers (working 30 hours per week) by just over £500 per year. Younger workers and apprentices will also see significant increases, as shown in the table below.


Current rate

Future rate (from April 2018)






21-24 rate




18-20 rate




16-17 rate




Apprentice rate




Accommodation offset




Significant increases are also on the cards for 2019 and 2020: the Low Pay Commission has indicated that the national living wage is likely to rise to around £8.20 in 2019 and around £8.60 in 2020.

Further details of rate rises can be found here.

Rising minimum wage rates are accompanied by stepped up enforcement action by HMRC. As a result, more and more employers are being told that they have failed to pay the minimum wage and face demands for up to six years’ arrears plus hefty fines and the ignominy of being publically named as a defaulter. Even blue chip employers known for fair treatment, and those who think they are paying significantly more than the minimum wage, are being caught in HMRC’s net, often due to the byzantine and ambiguous nature of the regulations.

Many employers may not appreciate how their established payroll practices make them vulnerable to inadvertent, technical breaches. In this note we look at some of the issues that, in our experience, are most likely to catch employers out.

Pay averaging – annualised hours – time off in lieu (TOIL) /time banking

Pay averaging (including annualised hours) and time banking/TOIL arrangements benefit both employers and workers by providing workers with a stable income whilst enabling working hours to be flexed to respond to an employer’s fluctuating needs or a worker’s availability. However, such arrangements risk breaching minimum wage obligations unless the work comes within the definition of ‘salaried hours work’ in the regulations.

The conditions for salaried hours work are, however, very strict and employers can find themselves falling foul of the law simply by adopting such innocuous seeming practices as paying a set amount for working a set number of hours per week; specifying that workers may have to work additional hours in some circumstances; paying shift or overtime premiums, commission or bonuses; or paying workers on a four-weekly or fortnightly cycle rather than monthly or every week.

Even if work does come within the definition of salaried hours work, it can difficult in practice for employers to operate flexible work arrangements because the minimum wage regulations require excess hours to be monitored by reference to a calculation year that depends on the date the worker starts work. In practice, employers with significant numbers of workers on this kind of contract are likely to have to monitor hours by reference to numerous different calculation years to ensure they are paying the minimum wage.

Expenditure by workers – uniforms, dress codes, tools, equipment etc

Payments from a worker to their employer or (without reimbursement) to a third party, and deductions made by the employer, in respect of a worker's expenditure in connection with their employment reduce the pay that counts towards the national minimum wage. In practice, therefore, to comply with the law an employer may need to reimburse such expenses in full, in addition to paying for work done at the required minimum wage rate.

It can be difficult, however, for employers to know which expenses are treated as reducing pay and which are not. HMRC’s position is that the line is drawn between, on the one hand, expenditure the worker incurs because of a requirement imposed by the employer and, on the other hand, expenditure that is ‘voluntary’. But the dividing line between ‘required’ and ‘voluntary’ expenditure can be very difficult to identify, particularly when it comes to dress codes and uniform policies, as several employers have found to their cost.

Furthermore, employers may not always know when a worker has incurred expenditure. As there is no obligation on a worker to notify the employer of any expenditure incurred, employers can find themselves unwittingly in breach of the law and facing extensive claims for arrears and penalties as well as the ignominy of being publically named as a defaulter.

Workers’ purchases from an employer

Some employers, particularly in the retail sector, operate schemes that enable workers to purchase items from them on account, with the cost then being deducted from the worker’s pay. The rules say, however, that such a deduction from pay must be treated as reducing the worker’s remuneration when calculating whether an individual has been paid the minimum wage.

To minimise or avoid the risk of default employers are likely to have to impose restrictions on who can participate in such schemes or the terms of participation, or avoid such schemes entirely, to the disadvantage of the whole workforce.

Deductions from pay on termination of employment for eg holiday pay and training costs

It is standard practice for employers and workers to agree in employment contracts that, on termination, workers must refund excess holiday pay paid if they have taken more annual leave than has accrued to them on a pro-rata basis. This is a practice operated across all sectors and is expressly permitted by the Working Time Regulations 1998. However, HMRC appears to take the view (based on case-law) that deductions from pay of this kind must be treated as reducing the worker’s pay for minimum wage purposes unless the worker voluntarily resigned their employment (or, perhaps, was dismissed for misconduct). To minimise or avoid the risk of default, some employers could decide to restrict workers’ flexibility to take holidays as and when they wish.

It is also common practice for employers and workers to agree that, if an employer agrees to fund a training course for the worker, the worker will repay a proportion of those costs if they leave their employment within a certain period. Again, however, HMRC appears to take the view that any such refund reduces a worker’s pay for minimum wage purposes if the termination of employment was outside the worker’s control.

Salary sacrifice and flexible/voluntary benefit schemes

Salary sacrifice arrangements and flexible and voluntary benefit schemes have gained in popularity in the years since the minimum wage was introduced. They can be a cost-effective way of flexing rewards to reflect the diverse needs and preferences of individuals in the workplace.

Such schemes enable workers to choose to exchange part of their pay entitlement for some other benefit. However, the minimum wage regulations provide that the value of benefits in kind cannot be counted towards minimum wage pay. Nor will ‘sacrificed’ pay count towards the minimum wage, assuming the salary sacrifice arrangement has been implemented effectively by way of a reduction in salary.

Some employers tell us they have decided to withdraw such schemes from the workforce as a whole, due to administrative difficulties associated with ensuring compliance with the minimum wage.

Identifying what counts as ‘work’

Although the regulations contain some deeming provisions covering travel, training, on-call time, industrial action, rest-breaks and absences, there is no general definition in the regulations of what constitutes work. This makes it difficult for employers and workers to be sure that the regulations are being complied with.

Examples of areas in which difficulties arise include sleep-in shifts and time before the start or after the end of a shift when an individual is on an employer’s premises but is not carrying out the duties of their job (eg when changing into a uniform before a shift begins, setting up their work-station or passing through security checks as they leave the premises).

We can help you to protect against errors and respond to allegations of underpayment. For further information please contact your usual Eversheds-Sutherland adviser or Simon Rice-Birchall, who leads our team of specialist National Minimum Wage advisers.

For those who would like to learn more about the minimum wage we are running a series of half-day briefings at which you can hear from our expert lawyers as well as speakers from the Chartered Institute of Payroll Providers and the Institute for Employment Studies. Full details can be found here.

For more information contact

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