Last November, the Government announced it accepted in full the Low Pay Commission's recommended increases to the National Minimum Wage (NMW) rates, including the National Living Wage (NLW), to apply from 1 April 2021.
This is a standard annual announcement that often attracts little comment, with employers simply ensuring payroll rates are adjusted appropriately as required.
But this year, employers should take note of two 2021 features, full details of which are set out below:
- A NLW expanded age band which will see the NLW extended to 23 and 24 year olds; and
- Interaction with Coronavirus Job Retention Scheme (CJRS) claims until the closure of the CJRS on 30 April 2021.
Getting NMW payments correct is important. Employers who get it wrong for any (including inadvertent) reason face HMRC enforcement, including penalties and 'naming and shaming'.
The April 2021 rates
In setting the April 2021 rates, the chair of the Low Pay Commission (LPC), said: "Recommending minimum wage rates in the midst of an economic crisis coupled with a pandemic is a formidable task…there are strong arguments concerning both low-paid workers - many performing critically important tasks - and the very real solvency risks to which small businesses are currently exposed. In these unprecedented conditions, stability and competence are prime requirements."
In its report, the LPC states that its approach for this year was to recommend rates that minimise any 'significant risk' to employment prospects - a NLW rate of £8.91 being "modestly higher than the increase in prices, meaning low-paid workers' living standards should be protected".
The increases in the minimum wage rates that will apply from April 2021 are:
|National Living Wage
|21-22 Year Old Rate
|18-20 Year Old Rate
|16-17 Year Old Rate
Extended age band
The LPC press release leads with announcing a NLW increase of 2.2%. But it is not only the NLW rate that will change.
The NLW was introduced in April 2016, as the statutory minimum wage for workers aged 25 and over. From April 2021 the NLW is being extended to benefit 23 and 24 year olds. Accordingly, while the NLW increase for those aged 25 and over represents a 2.2% increase, for those aged 23 and 24 it represents a substantial 8.7% increase.
Ensuring internal systems are able to identify those workers who will become eligible to the NLW from April 2021 will be key to avoiding inadvertent breach and the sanctions that may follow. In addition, employers should ensure that systems identify workers as they turn 23 to ensure that their pay is automatically increased to the NLW.
Interaction with CJRS
It remains the case that, at the least, NMW rates must be paid for all hours worked. However, furloughed workers can be paid the lower of 80% of their wages (subject to the £2,500 cap) for furloughed hours even if, based on their usual working hours, this would be below their appropriate NMW rate. This is because workers are only entitled to the NMW for the hours they work. Key to being able to claim a grant under the CJRS is that the worker is not 'working' for the employer or associated employer in relation to the claimed furlough hours.
This is subject to a caveat regarding work-related training, which is not classed as 'working' for CJRS purposes, but is classed as 'work' for NMW purposes. As set out in the HMRC guidance, 'Steps to take before calculating your claim using the Coronavirus Job Retention Scheme', "employers will need to ensure that the wages and furlough payment provide sufficient monies to cover all working time including these training hours. Where the pay is less than the appropriate minimum wage entitlement, the employer will need to pay additional amounts to ensure at least the appropriate minimum wage is paid for both working time and 100% of the training time whilst furloughed".
As the CJRS has been extended until 30 April 2021 with growing calls to extend it further, do the NMW 1 April 2021 increases change the above position? Will furloughed employees on NMW get an increase in the pay they received for furloughed hours? Well, no.
When calculating furlough pay:
- Fixed rate workers: for those who were eligible for furlough under the original scheme, whether or not they were actually placed on furlough (Group 1), the calculation is based on their wages payable in their last pay period on or before 19 March 2020. For those who are only eligible for furlough under the extended scheme (Group 2), such as recent joiners, the calculation is based on the wages payable in the last pay period ending on or before 30 October 2020 (Group 2).
- Variable pay workers: for Group 1 workers the calculation is based on the higher of the wages earned in the corresponding calendar period in the tax year 2019 to 2020, or the average wages payable in the tax year 2019 to 2020. For Group 2, the calculation is based on the period between the start date of their employment or 6 April 2020 (whichever is later) and the day before their CJRS extension furlough period begins.
It is already the case that the furlough pay of Group 1 workers on NMW is calculated by reference to the applicable NMW rate pre 1 April 2020 and the furlough pay for Group 2 workers on NMW is calculated by reference to the applicable NMW rate since 1 April 2020 and so will be higher. Unless the rules of the CJRS are amended, which seems unlikely, these will remain the applicable NMW rates used in the furlough pay calculations despite the NLW/NMW increases coming into force on 1 April 2021.
However, employers need to be careful not to use the NMW rate used for claiming the CJRS grant when working out the appropriate rate for time spent working (including work-related training), which must be compliant with the applicable NMW (not forgetting any age band changes) at the start of a particular pay reference period. Currently, for both Group 1 and Group 2 workers on NMW that is the rate since 1 April 2020 and that will increase for both groups on 1 April 2021.
What if an employer gets it wrong?
…well, significant legal enforcement action, penalties and adverse publicity.
In addition to potential tribunal claims from individual workers, HMRC is responsible for enforcing the NMW. Where HMRC concludes that the NMW has not been paid, a notice of underpayment will be issued setting out the arrears of NMW to be repaid by the employer to the worker together with a requirement for the employer to pay a financial penalty to the Secretary of State within 28 days of service. The reason for the error is not taken into consideration.
As regards a financial penalty, if the level of arrears for a worker is less than £100 then a minimum penalty of £100 will apply. Above that level and a penalty equivalent to 200% of the arrears up to a maximum of £20,000 per worker will apply. For arrears of pay, these are calculated on the relevant NMW rate in force at the date of determination. This means that the worker will be repaid any arrears at the higher rate if the NMW has increased since the underpayment. This is designed to compensate workers for the length of time that the arrears have been outstanding. However, where the employee has changed age band since the underpayment, the arrears should still be paid according to the age band that applied at the date of the underpayment.
In addition to financial penalties and arrears, HMRC can publicly name and shame employers who fail to pay the NMW. The naming and shaming scheme which had been suspended back in July 2018 was reinstated last year with a list of 139 employers published on 31 December 2020.