Staff Accommodation and the Minimum Wage
From April this year, the new National Living Wage ('NLW') will come into force, meaning that workers aged 25 or above must receive a minimum of £7.20 per hour (a significant rise from the current National Minimum Wage ('NMW') of £6.70 for those aged 21 and over).
With this change looming ever closer, pay levels have once again become a topical issue, with HMRC working hard to clamp down on employers who fail to pay their staff the required hourly rate.
When calculating pay, employers would be well advised to remember that the policy behind the NMW (and the new NLW) is that workers should receive the NMW in the form of cash, rather than benefits in kind.
Of particular significance is the effect that the provision of accommodation to staff can have on that calculation. It is crucial to ensure that staff who are provided with accommodation as a benefit in kind, or who rent accommodation from the employer, are still receiving the NMW (or the NLW in due course) in their pay packet.
Why has this caused problems for employers?
Although it would seem logical that the market value of any accommodation provided to a worker could be deducted from their wages (on the basis that the individual is making a material saving in living costs), this is not in fact the case. In an attempt to avoid exploitation of low-level workers by unscrupulous employers, the NMW Regulations introduced a cap on the value that can be attributed to any accommodation provided to a worker. The cap is referred to in the Regulations as the accommodation 'off-set'.
What is the accommodation 'off-set'?
The value of accommodation provided to the worker is calculated by way of the accommodation 'off-set' allowance, which is currently set at the modest sum of £5.35 per day. This is the case regardless of the market value of the accommodation.
The effect on the NMW / NLW then depends on how much (if anything) you charge your staff for the accommodation.
What counts as an accommodation charge?
It is worth noting that the 'accommodation charge' includes not just rent itself, but any services provided in connection with the accommodation (e.g. utilities, laundry etc).
What is the effect on the NMW?
Employers can use the government's online national minimum wage calculator to work out whether a worker is receiving the NMW, but the basic principles are set out below, along with a couple of working examples.
The calculations are made by reference to the worker's ‘pay period’, i.e. the intervals at which they are paid (for example weekly or monthly).
1. If the employer provides accommodation free of charge – the employer can add the accommodation 'off-set' to the worker's pay.
e.g. John is paid £5.50 per hour, works 30 hours a week and is paid weekly:
John's total pay for the (weekly) pay period: £165 (£5.50 x 30 hours)
Plus weekly accommodation offset: £37.45 (£5.35 x 7 days)
= £202.45 - If you divide this by 30 hours, John's hourly rate becomes £6.75 (above the NMW)
n.b. the employer is this scenario is current complying with the NMW Regulations. However, once the NLW is introduced in April, the employer would be in breach and will need to re-calculate John's hourly rate.
2. If the employer charges the worker more than the accommodation 'off-set' rate - the excess is deducted from the worker's pay so as to reduce the pay for NMW purposes. This means that the higher the rent the employer charges, the lower a worker’s pay will be when calculating the NMW.
e.g. Jane is paid £7.00 per hour, works 40 hours a week and is paid every 3 weeks. Jane's employer charges £7.20 per day for accommodation. The difference between the accommodation offset (£5.35) and Jane's accommodation charge (£7.20) = £1.85
Jane's total pay for her (3-weekly) pay period: £840 (£7.00 x 120 hours)
Minus the difference between the accommodation 'off-set' and the accommodation charge for the pay period: £38.85 (£1.85 x 21 days)
= £801.15 – if you divide this by 120 hours, Jane's pay becomes £6.68 (below the NMW)
If an employer is operating a system involving the provision of accommodation, a re-calculation exercise may be needed after the NLW takes effect.
What if the worker simply pays rent back to the employer?
It is important to note that it makes no difference if the cost of the accommodation is taken from the worker's wages beforehand, or if the individual meets the rent after they get paid – the value of the benefit will be limited to the accommodation 'off-set' allowance of £5.35 per day.
Again, this is designed to prevent employers from avoiding the Regulations by not deducting the rent and utility costs at source, and instead receiving the monies as rent from the worker. Whilst it is clear that this system should prevent exploitation of vulnerable workers, it also creates the unsatisfying situation where an employer is essentially prevented from providing suitable accommodation for staff (perhaps at a discounted rate) for fear that the rent paid by the worker in question would need to be accounted for in NMW / NLW calculations.
Penalties for non-compliance
If an employer is found to be failing to pay the NMW, it may be ordered to pay the arrears to the worker and pay a financial penalty to the Secretary of State. The penalty can be up to 100% of the underpayment (set to rise to 200% next year), up to a maximum of £20,000 per underpaid worker.
Employers are therefore advised to review the wage levels of workers who receive the benefit of accommodation as part of their work.