In one of our previous blog posts, we explored the updated government National Minimum Wage (NMW) rates and shared tips on how businesses can remain compliant. It’s crucial to stay on top of these new rates, not just to avoid unnecessary penalties levied, but also because it’s surprisingly easy to get it wrong.

While the NMW primarily focuses on hourly rates, many employers mistakenly believe that non-compliance only occurs through direct underpayment. In reality, businesses can unintentionally find themselves non-compliant in more indirect ways. We will discuss below what these are and how they can impact your business. 

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Understanding the National Minimum Wage

The National Minimum Wage is the minimum pay per hour that most workers are entitled to by law. As of April 2025, the rates are:

• Apprentices: £7.55 per hour
• Under 18s: £7.55 per hour
• 18-20 year olds: £10.00 per hour
• 21 & over: £12.21 per hour

Failure to comply with these rates will result in fines and back pay for affected employees. 

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Common practices leading to NMW breaches

1. Misclassification of workers: classifying employees as self-employed to avoid paying minimum wage.
   Consequences: misclassification can result in costly legal battles and claims for unpaid wages.
   Solution: regularly review worker classifications, ensure everyone is correctly categorised based on recent legislation. If you’re not sure, speak to a payroll provider, such as Folio Partners.
   
   ‍Case Study: in 2021, the UK Supreme Court ruled that Uber drivers are workers rather than self-employed contractors. This landmark decision granted drivers the right to minimum wage and other benefits, forcing Uber to change its pay structure.

2. Deductions from wages: employers sometimes deduct costs for uniforms, tools or other work-related expenses from employees’ wages. If these deductions bring an employee’s pay below the NMW threshold, it results in a breach.
   ‍Consequences: legal action and claims for unpaid wages.
   ‍Solution: always ensure that any deductions made from wages do not cause the pay to fall below the NMW. 
   
   ‍Case Study: WH Smith was found to have underpaid 17,607 workers due to a misinterpretation of the statutory wage regulations related to uniform policies. Employees had to purchase specific clothing items, such as trousers or skirts in designated colours, which reduced their pay below the minimum wage. Following an investigation by HMRC, WH Smith reimbursed affected employees an average of £58 each, amounting to over £1 million in total.

3. Failure to pay overtime: employers are required to compensate employees for all time spent at work, including overtime, training sessions, and travel time between work locations.
   Consequences: legal action and claims for unpaid wages.
   Solution: implement clear policies regarding overtime and ensure all working hours are accurately recorded and fairly compensated to remain compliant.
   
   ‍Case Study: Holland & Barrett lost a case against an employee who was required to perform additional tasks, such as opening and closing the store, which extended beyond his contracted hours. The tribunal ruled in favour of the employee, ordering Holland & Barrett to pay £1,019.75 in compensation for the unpaid overtime.

4. Incorrect calculation of hourly rates: miscalculating hourly rates for term-time only staff, such as nannies and teachers.
   Consequences: legal action and claims for unpaid wages.
   Solution: ensure that hourly rates are calculated correctly, taking into account all paid holidays and other entitlements.
   
   ‍Case Study: In the case, Ms. Lloyd’ v Elmhurt School, Ms.Lloyd’s hourly wage fell below the National Minimum Wage (NMW) when her paid holidays were factored in. The Employment Appeal Tribunal ruled that her hourly rate must include all paid holidays. As a result, the school was required to adjust her pay to ensure compliance with NMW regulations.

5. Failure to account for salary sacrifice payments: employers must ensure that salary sacrifice arrangements, such as pension contributions, do not reduce an employee’s pay below the national minimum wage.
   ‍Consequences: legal action and claims for unpaid wages.
   ‍Solution: to mitigate this risk, it’s important to implement a payroll process that could flag a potential breach. If you don’t already have a system in place, you can download our template here.
   
   Case Study: A report by RSM UK highlighted the potential risks of salary sacrifice arrangements on national minimum wage compliance. 

6. Non-payment of holiday period: employees taking annual leave must receive pay that meets or exceeds the minimum wage.
   Consequences: legal action and claims for unpaid wages.
   Solution: ensure holiday pay calculations are accurate, reflect the minimum wage, and account for all relevant allowances to avoid breaches. 
   
   ‍Case Study: In a landmark 2023 ruling, the Supreme Court sided with over 3,300 police officers and 364 civilian employees of the Police Service of Northern Ireland (PSNI), who had been underpaid holiday pay. The court required the PSNI to revise its holiday pay calculations and provide back pay to affected employees.

7. Inaccurate record keeping: employers must keep proper records of hours worked by employees.
   Consequences: financial penalties and mandatory implementation of proper record-keeping practices.
   Solution: keep detailed and accurate records of all employee working hours and conduct regular audits to ensure compliance with wage regulations.
   
   ‍Case Study: A construction company faced penalties after an audit uncovered poor documentation of employee hours, revealing that several workers had been underpaid. The firm was fined and required to adopt proper record-keeping practices.

8. Ignoring age-based minimums: employers are obligated to pay employees the correct minimum wage based on their age.
   Consequences: legal action and claims for unpaid wages.
   Solution: ensure all employees are paid according to the appropriate age-based minimum wage rates that we outlined earlier in this article.
   
   ‍Case Study: the supermarket chain Tesco failed to adhere to age-specific minimum wage rates, paying all staff the same wage. After a young worker filed a complaint, the supermarket was fined and required to address the pay discrepancies.

9. Failure to Inform Employees of Rights: employers must clearly communicate minimum wage rights to all new hires.
   Consequences: legal disputes and claims for unpaid wages.
   Solution: this is unique to each business, but make sure that there is either the necessary paperwork or training that outlines the rights of your employees.
   
   ‍Case Study: a company neglected to inform its employees about their rights regarding minimum wage and working hours. Following a labour inspection triggered by employee complaints, the company was required to implement a manager training program and compensate affected employees with back pay.

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Best practices for ensuring compliance

To reduce the risk of breaching National Minimum Wage (NMW) regulations, employers should follow these best practices:

• Conduct regular audits of payroll processes to identify and address any discrepancies.
• Establish clear policies on working hours, overtime, and deductions.
• Provide comprehensive training and resources to ensure HR and payroll teams are well-versed in NMW regulations.
• Ensure employees close to minimum wage don’t voluntarily work over their contracted hours.

Failing to comply with NMW laws can result in significant financial penalties and harm to an employer's reputation by being put online on the ‘name and shame list’. By understanding common breaches and implementing these best practices, employers can maintain compliance and safeguard their business operations. Take the time to review your payroll practices today to ensure you meet legal obligations and provide fair compensation to your employees. If you need help reviewing your payroll system to check whether they are compliant, get in touch.

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