Last reviewed 25 March 2022

National Minimum Wage (NMW) was first introduced on 1 April 1999 by the National Minimum Wage Act 1998. In the years since, hourly pay has increased the fastest for the lowest paid, reversing the previous norm that saw these earners with slower than average growth.

Initially set at £3.60 per hour for those aged 22 and over, and £3.00 per hour for 18–21-year-olds, it has increased both in terms of nuance, with now five different pay bands established, including national living wage, and a lower band for 16–17-year-olds, and value, with the 2021/2022 national living wage increase the biggest one yet. According to research by the Low Pay Commission, on 1 April 2019 the main minimum wage rate, the National Living Wage (NLW), reached £8.21. If instead it had risen in line with average earnings, it would be £6.54, and if it had risen with prices, it would be £6.31 (RPI) or £5.39.

Clearly, its importance cannot be overstated. And yet, simply having the legislation in place is not enough to ensure compliance. An effective enforcement regime is essential if these rights are going to be guaranteed for all workers. This article examines the enforcement regime in place and what employers could face should they get this wrong.

Enforcement

The Government has made it clear that anyone entitled to be paid the national minimum and living wage (NMW/NLW) should receive it and that robust enforcement action will be taken against employers who do not pay their staff correctly. Since 2015, the budget for minimum wage enforcement has doubled with the Government having ordered employers to repay over £100 million to 1 million workers.

Enforcement actions are undertaken by HMRC.

Civil enforcement

HMRC investigators, on being alerted to a possible underpayment of NMW/NLW, either by an employee or a third party, have powers to investigate organisations and see their records of pay made to their employees.

Notice of underpayment

Should they find an instance of NMW/NLW not being paid, they can issue a notice of underpayment which sets out both the arrears owed and a financial penalty that must be paid within 28 days.

Calculating arrears of pay

When calculating if there was an underpayment of NMW/NLW, investigators will use the rate in place at the time of the underpayment. However, in order to compensate underpaid workers for the time without their full pay, the arrears is then calculated by dividing the underpayment by the minimum wage rate in place at the time, then multiplying that by the current minimum wage rate suitable to the worker’s age at the time of the underpayment.

Financial penalty

Historically, the financial penalty associated with failure to pay NMW/NLW was only issued if the employer failed to pay the arrears of pay within 28 days of being told to do so. However, in 2009, this was combined with the requirement to pay the arrears and both are now issued at the same time.

Calculating the penalty

The penalty for failing to pay minimum wage has changed over the years. Prior to 7 March 2014, it was 50% of the total underpayment (subject to a maximum of £5000 per notice). This was increased to 100% of the arrears until 25 May 2015. From 26 May 2015 to 1 April 2016, the maximum penalty was £20,000.

Since 1 April 2016, the maximum penalty has been 200% of the total underpayment (still subject to £20,000 maximum). This can be reduced by 50% where it is paid within 14 days of issue.

Failure to pay

Should an employer fail to pay the financial penalty, they can face either civil proceedings or criminal prosecution.

Naming and shaming

Since 2011 (first revised in 2013 and put on hold in 2018, recommencing in February 2019 with the first list under the revised scheme published in January 2021), the Government has operated a scheme of “naming and shaming” employers who have breached the NLW/NLW. This scheme publishes a list, on a quarterly basis, of all of those businesses that have been identified as having underpaid NMW/NLW and names them, including their registered address, information on their business sector, how many employees they underpaid and the total arrears owed.

This scheme relies on the social and economic implications on businesses of their failure to pay NMW/NLW, rather than a financial penalty, however financial penalties and criminal sanctions remain in place.

Who might be named?

For most employers, they face being included on this list (subject to any appeals) where they have been issued with a notice of underpayment and the total arrears owed is over £500. Where the employer has been issued with another notice within six years, was subject to an outstanding Labour Market Enforcement Order or Undertaking, or has a previous unspent conviction for failing to pay NMW/NLW, the minimum threshold is lowered to £100 total arrears.

Criminal offence

The National Minimum Wage Act 1998, s.31, makes the following a criminal offence.

  • Refuse or wilfully neglect to pay the NMW.

  • Fail to keep the required records.

  • Keep false records.

  • Provide false records or information.

  • Intentionally obstruct or delay an enforcement officer.

  • Refuse or neglect to answer questions or provide information to an enforcement officer.

Criminal enforcement is saved for the most serious of cases, as civil proceedings are generally felt to be enough. However, where there is a case of persistent non-compliance or non-co-operation, then this might spark a criminal investigation. This will also be the case where evidence of falsification of records is found.

HMRC has its own Criminal Investigations Division that undertake these investigations and will investigate cases deemed serious. The outcome of such investigations could be criminal prosecution resulting in a fine, not only for the company but also an office of the company who permitted this to happen, either by neglect, consent or connivance.

Worker claims

However, workers do not have to wait until HMRC investigate this matter. It is possible for the individual to bring claims directly against their employer, either through an unlawful deduction of wages claim or a breach of contract claim. Both of these can lead to financial restitution through payment of the arrears. Should the worker suffer a detriment or dismissal as a result of raising this issue, they are also protected and can bring a claim in the employment tribunal for this treatment.

Conclusion

There are a number of ways employers can face enforcement action as a result of failing to pay at least minimum wage. Ignorance of the law is not an excuse, so employers must ensure they have a proper understanding of all of the issues with minimum wage and that this is used to pay their staff what they are due.