Many small business owners will be aware that increases to the National Living Wage and National Minimum Wage rates will take effect from 1 April. However, some employers will be asking themselves what this means in practice.

It is essential to know the levels of increase for each age bracket to avoid accidental underpayments and the consequences that could follow.

An essential breakdown

To ensure staff are paid correctly, here is a breakdown of increases from the current hourly rate set in October 2016:

National Minimum Wage increases

• Apprentices (entitled to the apprenticeship wage if they are either under 19 years old, or aged 19 or above and in their first year of apprenticeship) – the rate of pay per hour will rise by 10 pence from £3.40 to £3.50
• Under 18s – a rise of five pence per hour from £4.00 to £4.05
• 18-20 years old – a rise of five pence per hour from £5.55 to £5.60
• 21-24 years old – a rise of 10 pence per hour from £6.95 to £7.05

National Living Wage increase

• 25 years old and above – a rise of 30 pence per hour from £7.20 to £7.50

The increases should be seen by workers in the first full week or month following the introduction of the new legislation on 1 April. This will depend on when a company’s pay reference period falls.

But what happens if employers are found to be underpaying workers and, therefore, failing to adhere to these new rates?

The consequences

If a worker discovers that they have been underpaid, the first step they may take is to speak to the employer on an informal level to try and resolve the issue.

However, if the request to correct any underpayment is ignored, workers are within their right to claim for unlawful deduction of wages. They might also claim breach of contract – the legislation says that, for any period during which a worker is paid less than the minimum wage, they will be deemed to have been entitled to the minimum wage, so whatever their contract states is irrelevant.

For the worker, there are advantages and disadvantages to each type of claim, so whichever claim they bring will depend on the circumstances.

An unlawful deductions from wages claim will often be the easiest type of claim to be made, as it is brought in an employment tribunal and requires few formalities. However, it must be brought by the worker within three months of the last deduction. In addition, since 2015 a claim for a series of unlawful deductions can now only go back two years, although that limit does not apply in Northern Ireland.

The employer may, therefore, think it can use delaying tactics to reduce any claims, knowing that its workers are in a precarious position and are probably worried about taking any action. Think again. Because the claim can be brought as a breach of contract claim, on the basis that the deemed contractual rate is the minimum wage, workers can make claims for underpayments going back six years.

In addition, the HMRC can investigate possible minimum wage underpayments, either on its own initiative or when prompted by a disgruntled worker. If the worker’s complaint relates to non-payment of the National Living Wage, and HMRC discovers there has been an underpayment, it can enforce hefty fines of 200 per cent of the amount owed if it is not paid to the worker within 14 days.  

In any case of underpayment, HMRC can issue a notice of underpayment as well as a fine. And if the employer refuses to pay the notice of underpayment, the HMRC can bring either a contractual claim or an unlawful deductions from wages claim on behalf of the worker. In the most extreme cases of non-payment, business owners could face a fine of £20,000 per worker.

If any legal case does arise, it will be determined on the facts, but in any case, it’s very important for employers to get their sums right from the beginning!

Workers entitled to minimum wage and the exemptions

Part-time workers, casual workers, trainees, agency workers and offshore workers are all entitled to the minimum wage.

Those that are truly self-employed will not be entitled to the minimum wage. But for this purpose, worker is defined quite broadly. If the person is subordinate to the business, or using the business’ platform, he or she is likely to be considered a worker.

In addition, workers living under the same roof as the employer – whether family members or genuinely treated as such and not charged for food or accommodation – are not entitled to the minimum wage.

New rates are imminent

With the new rates set to take effect so soon, it’s important to be prepared. Knowing your responsibilities to your workers will help to avoid disputes and make for a happy workplace environment.

Raphael Prais is an employment lawyer at LHS Solicitors.