What next month's changes to wage rates and enforcement means for your business

Employers with lower-paid workforces (including workers near the minimum wage threshold), and those hiring in contract labour, need to be aware of two upcoming Government changes in April which raise new compliance and enforcement risks.

First, the statutory minimum wage rates are increasing substantially in April, with the potential to pull new employers into the ambit of the complex regulations and HMRC enforcement action. In addition, existing minimum wage employers often assume that setting the correct minimum wage rate is enough, often overlooking how it is applied in practice and the risks of shortfall. Accidental breaches in the way the rules are applied are increasingly resulting in significant and challenging HMRC enforcement action.

Second, the use of contract labour, where an individual is hired to provide personal services and invoices through an intermediary (typically their own limited company), became more challenging last year with the reform of the off-payroll, commonly known as IR35, legislation. Primarily aimed at tax collection by HMRC, the changes shifted more responsibility onto those hiring contract labour and increased their risk of tax liabilities and financial penalties. However, during the first year of implementation, HMRC has taken a ‘light touch’ to enforcement. That is set to end from this April, and we anticipate increased HMRC activity, particularly where organisations have not genuinely sought to understand and apply the reforms.

Avoiding costly minimum wage mistakes​

The National Living Wage (NLW) rises by 6.6% to £9.50 per hour from 1 April 2022 with the National Minimum wage (NMW) for 21-22 year-olds rising more steeply, by 9.8%. Rates for apprentices and 18-20 year-olds are also increasing.

Aside from affordability concerns, the first challenge for employers is to ensure that this increase is applied to their eligible workers. Having done so, many employers will assume that setting the correct minimum wage rate is enough and that they are compliant.

However, this overlooks how the complex NLW/NMW rules are applied in practice and our experience is that many employers are, inadvertently, applying them incorrectly. HMRC’s enforcement policy makes no distinction between deliberate and accidental minimum wage breaches and, following an increase in Government resourcing for enforcement, more employers are finding themselves caught up in HMRC investigations.

The stakes are high. A failure to comply with the NLW/NMW, whatever the reason, can lead to reputational damage (via the Government’s ‘naming and shaming’ policy); time and expense in responding to enforcement action; large financial penalties; and back-pay to affected workers for up to six years. In larger workforces, potential liabilities can run into the millions of pounds. With the growing focus on ESG factors and corporate social responsibility more generally, NLW/NMW breaches can also have negative repercussions amongst investors, the public, customers and other stakeholders.

Reducing the risk of errors​

Employers should review their minimum wage compliance for accidental breaches. First, hey should identify workers to whom the NLW/NMW applies. The rate is payable to most ‘workers’ (a broader category than ‘employees’). Given increasingly diverse working arrangements, rising self-employment and multiple jobs, eligibility may become obscured or misunderstood and should be checked.

The NLW/NMW is payable for the worker’s time spent working. Disputes can arise over what counts as working time, especially in relation to travel, waiting time, on-call time, the transition from breaks, and sleep-over shifts, and the rules vary depending on the type of work being performed. This area of the law is subject to particular focus by HMRC and ongoing legal development in the courts, bringing risk to established practices.

When considering what counts as relevant ‘pay’ for calculation purposes, mistakes are often made in the provision of: salary sacrifice arrangements; expenditure in connection with employment (for example, the purchase of workwear); flexible benefits and deductions from pay (for example, to pay for goods from the employer). For example, these arrangements may unlawfully drop pay below the NLW/NMW, despite the employee opting-in and receiving a broader benefit.

Beware of the potential pitfalls with annualised hours, pay averaging and time off in lieu arrangements. The NLW/NMW legislation providing for annualised hours and pay averaging arrangements are complex and employers are finding themselves in breach, even for workers whose pay far exceeds minimum wage rates when averaged over the course of a year.

IR35: beware April’s enforcement changes​

The IR35 rules are designed to ensure that individuals who provide their services via an intermediary but who work in a similar way to employees, such as some contractors, consultants and freelancers, pay broadly the same income tax and national insurance contributions as employees.

Government concerns over non-compliance with the IR35 Rules resulted in a reformed IR35 regime for the public sector in 2017 and for many organisations in the private sector in April 2021. In particular, organisations (referred to as ‘clients’) engaging the services of affected contractors were made responsible for deciding whether the IR35 rules apply and for deducting employment taxes, which must be paid to HMRC.

As with the minimum wage, making mistakes about IR35 can be significant. A failure to comply may result in the client being liable for the employment taxes due. In addition, IR35 penalties can reach 70% of the tax due if an error is considered to be deliberate and even careless errors can attract a 30% penalty. Once default is identified by HMRC, it is also likely in due course that employers will be ‘named and shamed’ in a regular online report.

HMRC stated that it would initially take a lenient approach to enforcement during the first year of implementation in the private sector, including a moratorium on penalties until April 2022, provided there was no deliberate or dishonest conduct. However, this is now set to end.
  

It’s not too late to act​

With the end of HMRC’s IR35 penalty moratorium approaching, organisations should conduct a compliance review, checking that reasonable care has been taken in status determinations and that IR35 processes are compliant. Where labour supply chains exist, the integrity of those within the supply chain should be checked, as well as contractual liabilities and indemnities.

The change is a useful reminder to review the processes put into place a year ago to implement an approach that works commercially and from a risk point of view, and remind managers of the importance of compliance. For example, the number of exceptions to process may have increased beyond what was originally envisaged or a one size fits all approach may have impacted the organisation’s ability to secure talent for highly competitive roles.

Similarly, with April’s hike in NLW/NMW rates, it is vitally important that employers are proactive and seek to address mistakes as soon as possible, certainly before a complaint is raised to HMRC, triggering formal investigation. A dummy audit of practices is often to be recommended.

Simon Rice-Birchall and Mark Hammerton are partners at global law firm Eversheds Sutherland​​