The pitfalls of national minimum wage

Ensuring that the national minimum wage (NMW) is paid sounds straightforward. Simply pay employees at least the rate set by HMRC. In practice, however, the process is far more complex. Businesses can fall into non‑compliance without ever intending to and the consequences can be severe.

Working time

A common pitfall is determining what counts as working time. Many employers assume only the hours an employee spends actively performing core duties need to meet minimum wage. In reality, working time can include training, mandatory meetings, travel between work sites, waiting time and even time spent putting on required protective equipment.

If an employee works additional time to meet a deadline, this counts as working time that must be considered when performing minimum wage calculations – even if not instructed by their employer to do so. When these additional minutes accumulate, the effective hourly rate can fall below the legal threshold, despite salaries appearing to be far from the lower end of the scale.

Complicating matters further, the way NMW is calculated depends on the type of worker and how they are paid. There are four key worker types:

• Paid by the hour (time work)
• Paid an annual salary, under a contract for a basic number of hours each year (salaried hours)
• Paid by the piece – the number of things they make, or tasks they complete (output work)
• Paid in other ways (unmeasured work)

Deductions and salary sacrifice

Deductions are commonly misunderstood areas of NMW compliance because they feel like administrative decisions rather than pay‑related risks.

Even deductions that are mutually agreed can push pay below the legal NMW threshold. For example, requiring employees to buy branded uniforms, safety boots, or specialist clothing can reduce their effective hourly rate if the cost is deducted from their wages. The same applies to tools, equipment, or even optional social events that are paid for through payroll.

Accommodation deductions are also often widely discounted. Employers who provide housing to employees may not be aware that if they charge over a certain amount (set by HMRC), the excess can be offset against the employee’s minimum wage. This potentially brings them below the legal rate.

Salary sacrifice arrangements (where an employee agrees to a reduced salary amount in return for a benefit such as a company car or additional pension contributions) can create complications for NMW compliance because it reduces an employee’s contractual cash pay.

While these arrangements are entirely voluntary, NMW is assessed against the employee’s reduced cash earnings, disregarding the value of the benefit they receive. This means that even a small sacrifice can push an employees pay below the legal threshold if their base salary is close to NMW.

As a result, employers must monitor these arrangements carefully, ensuring that benefits do not accidentally create underpayment risks.

Contractors

Another area is employment status. Misclassifying workers as contractors is one of the most significant and costly risks in minimum wage compliance.

Many businesses assume that if someone prefers flexible hours, uses their own equipment, or works on a project basis, they can safely be treated as self‑employed.

In reality, employment status is determined by several factors. If the nature of the relationship resembles employment, the individual is likely to be a worker or employee, regardless of what the paperwork says.

The danger is that contractors are not entitled to NMW, paid holiday, or other statutory protections. If someone is incorrectly classified, every hour they have worked may retrospectively be judged against NMW requirements. Misclassification can trigger hefty back pay, penalties, and tax liabilities, especially when multiple workers or years are involved.

Another complication is that many businesses rely on industry norms or informal practices when deciding status. In sectors like hospitality, logistics, care, or the creative industries, it’s common to see arrangements that have been used for years without challenge. But if the working relationship is indicative of employment, the employer is responsible for ensuring NMW is paid, even if the wider industry behaves differently.

Platform‑based or gig‑style work adds further uncertainty as arrangements often blur the lines between independence and control. A worker who chooses their shifts but must follow strict procedures, wear branded clothing, or accept penalties for declining work may not be as independent as the business believes. As case law continues to evolve, businesses must regularly review these arrangements to ensure that they remain compliant.

Technology

Technology can help but also introduces its own risks. Payroll systems, time‑tracking software, and automated scheduling tools are only as reliable as the data and rules they operate on. A single outdated NMW rate left unchanged in the system can lead to widespread underpayment. Similarly, if job roles, pay bands, or allowances are mis‑categorised, the system may apply the wrong rate entirely.

Time‑tracking tools can create their own problems. If employees forget to clock in or out, or if the system rounds time in a way that disadvantages workers, the recorded hours may not reflect reality.

Integration between systems can also be a risk area. When scheduling software feeds into payroll, or when HR databases sync with timekeeping tools, even a small mismatch in data formats or timing can cause hours to be lost or misreported. These errors often go unnoticed because the systems appear to be functioning smoothly on the surface.

As such, the biggest risk is likely overreliance. Automated systems can create a false sense of security, leading employers to assume accuracy without regular checks. In reality, these tools require ongoing auditing, updates, and oversight. Without this, errors can compound quietly in the background and may only come to light long after significant underpayments have occurred.

Fair pay agency

The fair pay agency is a new public body launching in April 2026 to ensure fair treatment at work. It will oversee compliance with NMW, holiday pay, overtime, equal pay, and standards like working hours and worker classification.

Intended to regulate and address directly areas like the gig economy and zero-hours contracts, it will have inspectors and enforcement powers to investigate complaints and require employers to fix issues or face penalties.

Consequences

The penalties for NMW non‑compliance are among the most severe in employment law.

Any arrears must be paid at the higher of the rate at the time and the rate of NMW when the error is corrected, and from April 2016, penalties can be levied at up to 200% of the arrears due (to a maximum of £20,000 per worker). The penalty can be reduced by 50% if all the unpaid wages and 50% of the penalty are paid in full within 14 days.

Beyond financial penalties, the reputational impact can be even more damaging. HMRC have a public ‘name and shame’ list for employers who were caught not complying with NMW, even accidentally. Being named publicly for NMW breaches can damage trust with customers, employees, and the wider community. Even accidental underpayment can leave a lasting negative impression.