National minimum wage: Employers beware

Is the national minimum wage (NMW) rises year on year this increases the importance of SMEs conducting a balancing exercise to ensure payment of sufficiently high salaries to enable recruitment and retention of quality staff, whilst at the same time seeking to minimise business costs as far as possible.

Nonetheless, all SMEs/OMBs must comply with their remuneration obligations to pay the NMW and this is particularly important in light of the government’s proposal to introduce a stricter enforcement regime.

The National Minimum Wage Act 1998 entitles nearly all UK employees to receive the NMW, which was intended to protect from rogue employers those groups of vulnerable employees who are likely to be exploited.

Overall, that aim has been achieved evidenced by clear business support for the NMW, but there also is increasing evidence of persistent failure by certain types of employers to pay the NMW, despite the current “adult” rate not being excessive at £5.35 (rising to £5.52 in October 2007).

To combat this, the government strengthened enforcement measures by introducing more stringent penalties.

HMRC enforces NMW legislation by way of  enforcement teams whose officers have the following rights: to enter premises, to inspect records and to demand explanations from employers. HMRC receives information of NMW breaches from employees by way of written complaints or via the HMRC Helpline.

The current focus for enforcement is the hotel industry, but in 2008 the wider hospitality industry will be under the spotlight.

At present, if HMRC finds that wages are illegally low an enforcement notice is issued ordering the employer to make payment in arrears to the worker. Failure to comply leads to a 7 day penalty notice.

If the employer fails to comply, HMRC may issue proceedings in the Employment Tribunal to recover arrears on the employee’s behalf. Of course, employees can themselves commence Tribunal proceedings if they are paid less than the NMW. Employees who so act are protected from being subject to a detriment or being unfairly dismissed by their employer.

Criminal prosecution

Any employer failing to comply with enforcement and penalty notices may also face criminal prosecution, risking maximum fines of £5,000 and a criminal record. Not only that, officers of a body corporate who are implicated in failing to pay the NMW (by way of “consent, connivance or neglect”) may also face criminal charges.

This tougher stance must be the correct approach for employers that knowingly breach the law, particularly when reference is made to an employee’s ethnicity, disability or the low hourly rate of pay requested by the (ill-informed) employee as a justification for paying less than the NMW.

However, the proposed new enforcement regime may mean that employers will have to immediately pay arrears and interest, as well as a fixed penalty fine. Those that fail to do so are likely to face prosecution in the Crown Court and, if found guilty, a further fine of up to £5,000.

Despite the obvious benefit of the NMW, there is some concern as to the balance between providing a fair hourly rate for employees and minimising business costs. Some groups believe that the NMW, where the annual increase is often above the rate of inflation, is detrimental for small businesses and further annual increases could lead to job losses.

Others suggest that the adverse impact of the NMW could be minimised if it was geographically specific, rather than being applicable nationwide, and that this is necessary for the UK’s competitiveness in the smaller business market not to be damaged further.

The only risk free option is for SME/OMBs to ensure they pay all employees the NMW.