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Pay and governance rules are complex, and failure to comply risks severe penalties. To help you put the right processes in place, Mike Herdman shares guidance from our latest workforce planning in practice webinar.
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In its first King’s Speech the new Government promised to introduce an Employment Rights Bill; banning zero-hours contracts, granting day-one entitlement to unfair dismissal, and removing age bands from the National Minimum Wage. As the bill hasn’t been introduced yet, it’s unclear how these intentions will translate into legislation, but the direction of travel is clear: employees, the public, and politicians expect organisations to treat their people fairly and follow the rules. And, of course, as well as damaging your reputation, non-compliance can attract substantial penalties.
That’s why we recently hosted a webinar for finance leaders, tax teams, and HR professionals to explain the key points of pertinent pay and governance requirements. Our panel explained the EU's posted worker directive, National Minimum Wage, holiday pay, and other hot topics on employers’ minds.
The posting of workers directive
This EU directive (96/71/EC) was introduced in 1996 and the core provisions have been amended several times over the years. Although it’s longstanding legislation, revisiting it is relevant now both because EU member states are increasingly focused on monitoring and enforcement, and because recent updates to the rules and the UK’s departure from the EU make the landscape more complex.
The purpose of the directive is to create a level playing field for businesses competing to offer services across the EU, and to protect employees working temporarily in other countries from exploitation. A majority of EU countries apply the rules to companies in both EU and non-EU countries sending employees to work in the bloc, so the provisions are still relevant for UK businesses. Switzerland and the EEA (Norway, Iceland, and Liechtenstein) have very similar rules.
What is a posted worker?
A posted worker is an employee working temporarily in an EU country, from another member state or elsewhere, dependent on the scope of laws in the destination, carrying out a service for a limited period:
under a contract for services
On an intra-group posting
Via hiring-out by an agency
The complexities arise from each country applying the rules differently, and the simple fact that most workers travelling for business will be carrying out a blend of activities that do and don’t meet the definition, for example a week undertaking training where a client meeting takes place (in which services are delivered). The consequences of not getting this right can be severe. Fines can run to hundreds of thousands of euros and there are non-financial penalties that limit a company’s ability to do business in the country where the breach occurred.
The specific rules differ between countries, but the general principles and processes across all countries can be grouped into four categories which can guide your approach.
Rights
A posted worker is entitled to a core suite of employment rights that are at least as generous as the rights applicable to local employees in the country in which they're temporarily working. Businesses need to understand workers’ rights in areas such as pay and working time in every country where they’re sending their employees.
Registration
The most widely known responsibility on employers is the requirement to register the posted worker with the authorities in the destination country before the travel takes place.
Representation
A named individual based in the host country is typically required as a contact for authorities. They can potentially be an employee of a group company in the destination, a client, employee, or third party, but they must typically be named on the registration and have ongoing responsibilities vis-a-vis the authorities, so need to be appointed before the posting starts.
Record-keeping
Unsurprisingly, should the authorities decide to investigate a posting they'll expect to find documentation evidencing that the employees’ rights aren’t being breached.
What increases the likelihood of inspections and penalties?
There are several risk factors that make a posting more likely to attract attention from inspectors:
Type of worksite
Sector
Host-country rules
Worker profiles
Ultimately, if you’re posting a worker to any EU or EEA country then you'll have to familiarise yourself with the rules for that jurisdiction, but being mindful of these categories can help you navigate the process.
Remuneration: National Minimum Wage and holiday pay
Deductions, overtime, and variable hours can make accidentally underpaying employees a real issue. HMRC makes no distinction between intentional and unintentional errors. The risk is only going to increase if the new Government proceeds with its plans to introduce a single enforcement body to ‘make work pay’ that will focus on the National Minimum Wage (NMW), as well as holiday and sick pay.
The Government has also announced that it’s appointing 5000 new HMRC compliance officers and a new geographical compliance approach (GCA) focused on different areas of the country. There’s also a continuing focus on sector targeting.
Having the right processes and controls in place can avoid breaches and reduce the likelihood of a penalty if they’re self-identified and corrected.
National minimum wage
There are common risk factors that make errors more likely:
Deductions
Salary sacrifice
Incorrect worker type
Salaried excess hours
If an employee complains about underpayment they can make a complaint to ACAS, which is then triaged and potentially passed to HMRC for review. The burden of proof always lies with the employer, so accurate time records are vital to show that you did pay all monies due to employees.
NMW Compliance is not as straight forward as employers often think, there is much more to consider than just an hourly rate of pay.
National minimum wage compliance – key errors to avoid
The key principle of holiday pay is that an employee should suffer no financial loss from being on holiday.
If their pay is fixed then it’s very simple because their monthly salary doesn’t change. If the worker’s pay varies, however, then the process can become complex. Examples include when an employee isn’t paid and isn’t on holiday, multiple pay rates which aren’t being taken into account, unaccounted regular additional overtime, bonuses, or commission. This is particularly true for casual, or seasonal employees, or people on zero-hours contracts. These situations are most likely to arise in retail, catering, hospitality, accommodation, construction, healthcare, transport, and the creative and entertainment industries.
The risk of incorrectly calculating holiday pay is exacerbated by assuming it’s being handled correctly by payroll software, which is often still calibrated on the 12.07% method. While this method is fine for employees with fixed weekly/monthly pay it will not be accurate for employees with variable weekly/monthly pay.
Employees can claim for backdated holiday pay, so using the correct method can avoid paying out large costs for claims.
Rolled-up holiday pay is once again lawful, but the new regulations require careful consideration to avoid errors.
The issues above are constant challenges that will always require diligence from employers, but new hot topics are arising every month. The panel talked through a few that are high on employers’ minds at the moment.
Employee tips
The Employment (Allocation of Tips) Act 2023 makes it mandatory for all tips to be passed on to workers without deductions. From 1 October 2024 employers are required to:
allocate qualifying tips, including service charges, to workers in a fair and transparent manner
pay qualifying tips to workers within one month of the end of the month in which they were received, subject only to authorised deductions (eg, PAYE or national insurance)
Have a written policy on allocating qualifying tips that is available to workers
Maintain records of all qualifying tips distributed and make this available to workers on request
The most efficient way to comply with these requirements is to review how tips are identified and collated, and ensure your policy and any tronc positions are fair and transparent to all employees.
Workplace childcare schemes
Workplace nurseries are in the news because of a warning issued by HMRC in July 2024.
"We have been alerted to a small number of scheme operators advertising their services with HMRC approval, where the partnership requirements are not met. HMRC will never give approval for a business to advertise that a scheme is tax compliant. If the conditions around the partnership requirements are not met, then the exemption will not apply."
What is a ‘workplace nursery’?
Workplace childcare schemes allow employees to pay fees via salary sacrifice. The conditions for qualifying schemes are clear. The nursery should either be on an employer’s premises, or the employer should collaborate with another company to finance and manage the scheme.
Employers must make a real and substantial commitment to financing the nursery, including accepting any financial risk. HMRC don’t consider the employer only paying fixed costs to be a ‘real and substantial commitment’ and expect them to have a significant role in managing the nursery, including appointing and monitoring staff.
If a nursery scheme fails to meet these requirements, the provision of childcare will generate tax and NIC liabilities. If a benefit-in-kind hasn’t been reported on P11Ds or payrolled, HMRC can go back six years to recover any unpaid tax and national insurance contributions, as well as applicable interest and penalties. In practice, this means employers will be asked to settle on their employees behalf, which can more than double the liabilities.
Staying complaint – new HMRC guidance on commercially marketed workplace nursery schemes explained.
Workplace nurseries: Are your arrangements compliant?
These issues are complex and the specific actions you need to take will depend on the requirements of your organisation, but there are common principles across this advice that you can apply to help meet your compliance obligations. Understand the rules, monitor risk factors, and, perhaps most importantly, keep appropriate records.
Workforce-planning in practice: pay and governance webinar
You can catch up on the full guidance our panel shared at any time by watching the recording on demand.
