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  • National Minimum Wage – how might salary sacrifice affect this?
Article:

National Minimum Wage – how might salary sacrifice affect this?

05 April 2022

Original content provided by BDO United Kingdom

For some years salary sacrifice arrangements, such as pension salary sacrifice, cycle to work and childcare vouchers have been introduced by employers, to benefit their employees, by providing a cost-effective benefit in exchange for giving up salary. However, to be effective, salary sacrifice involves a change in an employee’s terms and conditions of employment, which contractually reduces their salary resulting in lower NIC costs for both employers and employees.

It is this reduced salary, which must be considered for the purposes of establishing whether or not the employee is receiving pay of at least the National Minimum Wage (NMW) level. As a result, participation in salary sacrifice can lead to employers inadvertently breaching NMW.
 

Processes and monitoring

It is important that employers have processes in place to identify, at the outset, whether the employee can participate in salary sacrifice arrangements without breaching NMW and that pay is monitored regularly to ensure there is no breach of NMW in the future, ie when rates increase.

Clearly, the risk of breaching NMW is higher where employers offer a suite of salary sacrifice arrangements to their employees – it is the aggregate of all salary sacrifices in the pay reference period that must be monitored. Employers must also manage employee expectations and make clear to that the arrangements are only available where it does not result an infringement of the NMW rules for the employee.


Unexpected consequences

Even one-off salary sacrifices can lead to a breach of NMW where employees, on the face of it, are paid far more than NMW. Consider, for instance, someone who is categorised as an unmeasured worker paid £50,000 per annum. Many employers would consider such employees to be low risk for NMW purposes. However, if the employee decides in March that they would like to take advantage of sacrifice salary in exchange for a lump sum employer pension contribution of £3000 into their pension scheme, this could give rise to an inadvertent breach of NMW. Earnings for March before the salary sacrifice are £4,166. Once the salary has been reduced by the sacrifice earnings are £1,166 giving rise to an underpayment of NMW based on 23 working days in the month and 7.5 working hours per day.

Even though the employee has requested this, and it helps them to save towards their retirement, the fact that they have been paid less than NMW leads to consequences for the employer – it will be required to make good any underpayments that may have arisen.


Penalties?

Apart from making good underpayments, there is the issue of penalties to consider. Helpfully, in 2020, the Department for Business, Energy, and Industrial Strategy (BEIS) issued guidance on the circumstances in which employers will not be issued with penalties for NMW breaches related to salary sacrifice arrangements. Penalties will not be issued where the following conditions are met:

A) All of the underpayment relating to the worker for the pay reference period is attributable to one or more of the following:

  • a reduction by the employer of the worker’s pay in accordance with a salary sacrifice scheme, unless the sacrifice is made to comply with a requirement imposed by the employer in connection with the worker’s employment.
  • an amount deducted by the employer from the worker’s pay as respects the purchase by the worker of goods or services from the employer, unless the purchase is made to comply with a requirement imposed by the employer in connection with the worker’s employment.
  • an amount deducted by the employer from the worker’s pay under the terms of a savings scheme operated by the employer for the benefit of the worker and in accordance with which all amounts deducted are subsequently paid or to be paid to the worker.

B) No part of the underpayment when it relates to condition one relates to deductions as respects a worker’s expenditure or as respects living accommodation

C) The worker has consented to the reduction or deduction.

D) The worker has received the relevant goods or services, or the benefits envisaged under the relevant salary sacrifice scheme, or the repayment of monies under the relevant savings scheme, in full or in part and, where in part, in full compliance to date with the relevant terms or arrangements.

However, it should be noted that employers that have been convicted of NMW offences, been party to a labour market enforcement undertaking or order, or who have been issued a Notice of Underpayment in the past six years will still suffer penalties even if they meet the conditions listed above.


Conclusion

It is vital that employers consider whether their salary sacrifice offerings for employees could lead or have led to a breach of NMW. Whilst no penalties may be charged, subject to the conditions listed above, any underpayments must be repaid as soon as possible, and future breaches avoided by the introduction of good monitoring processes to ensure you protect your compliance record with HMRC.

It is also worth considering that the effect of the ministerial direction was due for review in 2021, so this is now overdue and is yet another reason to consider reviewing your arrangements to ensure that they are in compliance with National Minimum Wage regulations.

If you have any questions regarding your NMW position and require assistance, please do not hesitate to get in touch with Geraldine Browne.