Accidental underpayment of minimum wage

Underpaying the national minimum wage, even accidentally, is treated seriously in England and Wales. Here is the legal position and what you should do about it.

Legal position:

The National Minimum Wage Act 1998 and the National Minimum Wage Regulations 2015 require employers to pay at least the applicable minimum wage rate for every hour worked. There is no general defence of "it was an accident." The obligation is strict, meaning the underpayment is unlawful regardless of your intention.

The rates change each April, so a common cause of accidental underpayment is failing to update payroll promptly when rates increase. Other frequent causes include miscalculating working time, making deductions that bring pay below the minimum wage floor (such as uniform costs or till shortages), or misclassifying a worker's age band.

Consequences of underpayment:

1. HMRC is the enforcement body. If they investigate and find an underpayment, they will issue a notice of underpayment requiring you to pay arrears to each affected worker.

2. You will owe the arrears calculated at the current minimum wage rate, not the rate that applied at the time of the underpayment. This can significantly increase the amount owed.

3. HMRC can impose a financial penalty of up to 200 per cent of the total arrears, up to a maximum of £20,000 per worker. This penalty is halved if you pay within 14 days.

4. Since 2014, the government has operated a naming and shaming scheme. Employers found to have underpaid are publicly named, which can cause significant reputational damage. The current threshold for naming is arrears of £500 or more across all workers.

5. In the most serious or deliberate cases, criminal prosecution is possible under section 31 of the 1998 Act, carrying an unlimited fine or, on indictment, imprisonment. Accidental underpayment is very unlikely to result in prosecution, but repeated or negligent failures increase the risk.

6. Workers can also bring individual claims in the employment tribunal for unlawful deduction from wages under Part II of the Employment Rights Act 1996.

What you should do now:

1. Identify exactly which workers have been underpaid, for what periods, and by how much.

2. Calculate the arrears owed. Remember that HMRC calculates arrears at the current rate, so you should use the rate now in force, not the historical rate.

3. Pay the arrears as soon as possible. Prompt self-correction before any HMRC investigation significantly reduces the risk of penalties and naming.

4. Correct your payroll systems to prevent the issue recurring. If you use payroll software, check it has been updated for the latest rates. If you calculate manually, put a process in place for annual rate changes.

5. Review whether any deductions or salary sacrifice arrangements are inadvertently bringing pay below the minimum wage. Certain deductions, such as those for the employer's benefit, count as reducing pay for minimum wage purposes even if the worker agreed to them.

6. Keep clear records of hours worked and pay calculations. HMRC can request these, and a failure to keep adequate records is itself an offence and reverses the burden of proof so that the worker is presumed to have been underpaid.

Practical considerations:

If you self-correct quickly and pay the arrears before HMRC becomes involved, it is far less likely that you will face penalties or naming. HMRC tends to take a more proportionate approach where an employer has acted in good faith and remedied the problem voluntarily.

If HMRC has already contacted you or opened an investigation, you should respond promptly and cooperate fully. At that stage, taking specialist advice on the investigation is sensible, as the penalty calculations can be complex and there may be scope to challenge HMRC's methodology or argue for mitigation.

One important point that catches many employers out is that the arrears calculation uses the current rate. If the underpayment went on for a long period, this uplift can make the total owed substantially more than the original shortfall. The sooner you act, the less this compounds.