Complying with low pay and the national minimum wage

While most businesses act in good faith when paying employees, genuine errors and oversights can still result in substantial fines and reputational damage. As co‑operative businesses operate on principles of fairness and social responsibility, it’s vital that they understand and adhere to National Minimum Wage (NMW) and National Living Wage (NLW) regulations, not only to comply with the law but also to protect workers and uphold their ethical commitments.

N.B. For the purposes of this article, the term National Minim Wage and the associated acronym NMW will refer to both the National Minimum Wage, which applies to those aged 20 and below, and the National Living Wage, which applies to those aged 21 and above.

Why is it important?

An estimated 370,000 workers were underpaid in April 2024, despite it being a criminal offence for employers to fail to pay at least the NMW under the National Minimum Wage Act 1998. With the Low Pay Commission estimating an increase of the NMW to £12.71 per hour for those aged 21 and over, from April 2026, more employees/workers will fall within the scope of HMRC’s enforcement activity. 

Certain sectors are particularly exposed to NMW compliance risks, including retail, social care, hospitality, and agriculture. Co‑operatives operate across these industries and, whether small or large, must take proactive steps to ensure full compliance. 

Enforcement and penalties

The penalties for non‑compliance are significant:

• Fines are 200% of the underpayment, capped at £20,000 per worker
• HMRC publicly names non-compliant businesses, which can damage reputation and consumer trust
• HMRC has a six-year enforcement window, meaning businesses may be liable for historic underpayments
• Over 5,000 additional compliance officers are being recruited to increase enforcement

In the latest HMRC press release, over 500 businesses were publicly named for breaching NMW laws, including well-known brands such as British Airways PLC, Capita Business Service Ltd, Lidl Great Britain Limited and several co‑operative societies. This highlights the risks faced by all employers, including co‑operatives. 

During the 2022/23 tax year, HMRC closed over 3,000 cases, with: 

• More than 900 cases involving NMW arrears
• £13.66m in arrears identified for over 100,000 workers
• 750 penalties issued, totalling £13.72m

Common causes of NMW underpayment 

Many employers inadvertently breach NMW rules due to unintentional miscalculations or policy oversights. Some common pitfalls include:  

• Salary sacrifice schemes (e.g., pension contributions, cycle‑to‑work schemes) that reduce take‑home pay below NMW
• Deductions for work-related expenses, including:
  • Uniform costs (even if reimbursed later). This was the case with Wagamama, as their policy effectively reduced employees’ pay below the NMW threshold. Wagamama had to repay an average of £50.00 each to over 2,000 employees
  • Training costs, especially for online training completed at home without pay – this accounted for 29% of breaches in a 2019 to 2022 government press release
  • Unpaid travel time between work locations – this also made-up part of the 29% figure set out above

The Low Pay Commission has raised concerns that salary sacrifice schemes, often used in good faith to provide employee benefits, may inadvertently push wages below NMW, exposing businesses to financial and reputational penalties. 

Co‑operatives using salary sacrifice schemes must ensure that employees’ take-home pay is not reduced below the NMW by participation in these schemes. Where take home pay is reduced below the NMW limits, alternative arrangements must be made to avoid this. 

Best practice for co‑operatives 

To mitigate risk and ensure compliance, co‑operatives should take the following steps:  

• Do not ignore HMRC letter prompts requesting internal reviews, as these may provide early opportunities to resolve compliance concerns
• Conduct regular payroll audits to identify potential underpayments
• Review salary sacrifice arrangements
• Implement clear policies on deductions (e.g., uniforms, training, travel)
• Train HR and payroll teams on NMW regulations
• Engage employees in discussions about pay to identify and resolve concerns early

With increased enforcement, harsher penalties and greater scrutiny, co‑operatives must take a proactive approach to NMW compliance. By conducting internal reviews, educating employees and staying informed about legal obligations, co‑operatives can avoid financial penalties, protect their reputations and uphold their ethical commitments to fair pay. 

If you have any further questions about the National Minimum Wage, or would like support in ensuring your continued compliance with the regulations, please contact the Co-operatives UK Advice team at [email protected].