John Lewis revealed yesterday that it is setting aside £36m to deal with the potential fall-out from not complying with national minimum wage rules.
The group ascribed the shortfall to its practice of “pay averaging”, which it introduced in 2006.
Under this policy, John Lewis pays employees the same amount each month in spite of fluctuations in the number of hours worked
For example, an employee working weekends might be paid the same for both March and April, despite working eight days in March and 10 in April. The group implemented the policy in order to “support partners with a steady and reliable monthly income”.
Unfortunately, this legitimate aim means that businesses may be falling foul of The National Minimum Wage Regulations 2015 if – as appears to have been the case for John Lewis – in averaging pay, it reduces the amount paid to employees below the minimum threshold for particular months in which they have worked longer hours.
That will be the case even if pay in subsequent months comfortably exceeds the minimum pay threshold.
”The group implemented the policy in order to ’support partners with a steady and reliable monthly income’”
The reason is that the regulations contain narrow and inflexible timing requirements for calculating employee pay.
Average hourly pay is calculated in respect of an employee’s ‘pay reference period’, rather than across a full year.
An individual who is paid monthly has a pay reference period of one month and employers must ensure that the average hourly pay of such an employee does not fall below the national minimum wage in any given month.
Potential costs to John Lewis far exceed those recently incurred by other retailers.
Tesco and Argos
In March, Tesco set aside £9.7m to cover breaches stretching back six years.
“The obvious potential for financial and reputational harm will likely result in significant changes to future pay practices in the sector”
The company identified calculation errors in respect to employees who elected to convert part of their income to non-cash benefits such as childcare vouchers, cycle to work schemes and pensions, and therefore received pay cheques which fell below the minimum wage.
In February, Argos was fined £1.5m by HMRC and ordered to pay £2.4m to more than 37,000 current and former employees after it emerged that workers had not been paid for time spent conducting security checks and attending staff briefings.
John Lewis’ revelation serves as yet another reminder of the importance of close scrutiny of pay practices to ensure compliance.
While pay averaging plans may be administratively less burdensome, the severity and frequency of retailer “naming and shaming” for non-compliance and the obvious potential for financial and reputational harm will likely result in significant changes to future pay practices in the sector.
Hannah Edmonds and Matthew Beech are in Covington & Burling’s international employment team