Earlier this month, John Lewis was forced to make a £36m provision for potential costs of paying the national minimum wage, after discovering that its systems may not comply with regulations.
The issue related to the calculation of average pay across the year to make sure staff on variable hours contracts received the same take-home pay each month. Unfortunately for John Lewis, it was not as simple as it sounded, as its payroll system did not take into account times when staff exceed their average working hours each month, which led hourly rates to sometimes dip below the minimum wage.
Under the Employment Rights Act 1996 and national minimum wage regulations, it is irrelevant that staff are paid the correct amount over the course of 12 months. This is because minimum wage calculations are based on the ”pay reference period” – that is the period of time for which an individual’s wage is actually paid (weekly or monthly). So even if on average staff are paid above the minimum wage over the year, if they have not been paid the minimum wage for a given pay period, there is a breach of the regulations, which an employer must rectify.
John Lewis is not alone in making underpayment errors. Debenhams, Peacocks, Argos and Tesco are just some of the big names that hit the headlines following the government’s “name and shame” campaign introduced in 2013 to identify underpaying employers.
Both John Lewis and Debenhams blamed payroll technology for unintentional underpayment problems. But this will not wash with Revenue and Customs. It is simply not a valid excuse for big employers – or any employers – not to invest in fit-for-purpose pay systems to cater for pay calculations when employees work differing hours over a prior rolling reckoning period of 12 weeks to arrive at a week’s pay and to check whether minimum wage is being paid.
If employers want to avoid breaching legislation, they should consider using the traditional hourly timesheet method or setting up a payroll system that monitors the number of hours worked and sends an alert when an individual approaches the relevant threshold.
The minimum- and living-wage rules are clear. It is up to employers to make sure that these are not flouted. The penalty for failing to do so could be a fine of up to 200% of the total underpayment, and the most serious cases of non-compliance could lead to criminal prosecution. If John Lewis wants to remain the most sought-after employer in the UK (as shown by a recent LinkedIn survey), it cannot afford to fall foul of minimum wage legislation again.
Nick Hobden is head of employment at law firm Thomson Snell & Passmore