Managing Your Cash Flow

How to ensure you're paying your staff correctly – and avoid heavy penalties

7 min read

09 October 2015

With paying staff correctly being one of the most important aspects of maintaining a happy and healthy working relationship with all employees, Nathan Combes, senior associate of employment at Lupton Fawcett Denison Till, reveals what employers need to know.

Failure to pay workers in accordance with UK legislation can have a significant impact on morale and productivity, not to mention leaving your business facing heavy penalties for breaking the law.

According to the Department for Business, Innovation and Skills, 74 per cent of employers are either completely unaware of the penalties, or do not know how much a potential fine could be. The government is currently naming and shaming companies that fail to pay workers correctly, making now a good time to ensure that you are handling pay issues swiftly and accurately.

What are workers entitled to?

Anyone who works under a contract of employment is entitled to be paid the National Minimum Wage (NMW). The amount workers are paid is dependent on their age and whether they are an apprentice or not. There are no exceptions, and any company found in breach of regulations will have to pay back arrears of wages at the current working rate – as well as a fine of up to £20,000.

In addition to the NMW, workers must be paid equally irrelevant of gender and in accordance to the terms and conditions in their employment contract. Terms and conditions should include details on basic pay, overtime rates, performance-related benefits, contracted hours, holiday entitlements, access to pension schemes, and any non-monetary benefits, such as cycle to work schemes and free gym membership.

There are two systems for paying workers. The first is time-rated pay, which is when employees are paid a basic rate over a set amount of time. For example, £9 per hour, £350 per week, £1,200 per month or £25,000 per annum. The second is determined by performance. This can be judged either on the amount of work they complete, on selling a certain amount of goods or services (commission), or as a bonus for achieving a particular goal or for rewarding hard work completed over a period of time.

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Additional payment arrangements should also be considered depending on your business. These include:

(1) Expenses, which can be used to recompense workers for any charges incurred while carrying out their role, for example, travel costs;

(2) A payment scale, which can be utilised to reward employees who acquire new skills or take on more responsibility in the same role. In some circumstances, a more experienced or qualified worker may receive a higher starting salary than others; and

(3) Tips or a gratuity is sometimes paid by a customer directly to a worker – this is separate from a wage and should only be handled by employers if it is agreed that all tips are collected and distributed evenly across the team.

It is important to remember that any payment systems should be agreed on by both the employer and the employee, and these are should be outlined in the Written Statement of Terms and Conditions of Employment.

What happens when an employee leaves?

When an employee leaves, a notice period must be agreed by them and their employer. One week is required if they have worked continuously for one month, while those who have worked longer must serve one week for every year of service. During the notice period, employees should receive pay and benefits as normal. Final payment will also include any outstanding pay, any accrued holiday entitlement, a P45 and “week in hand” payment if that is how employment began.

There are certain factors that may affect the amount they are entitled to, and care should be taken to ensure that their final payment is actioned fairly. These factors include:

(1) Absences during notice period – if employees have been made redundant, are incapable of working through sickness or pregnancy, or on annual leave, they should receive payment as normal. If they are absent for any other reason, then you do not have to pay them;

(2) Garden leave – if an employee is not required to be in work during their notice period, they should still receive their normal salary;

(3) Payment in lieu of notice (PILON) – if there is a clause in the employment contract, a lump sum can be paid to the employee rather than them working their notice period.

How can I ensure that workers are kept happy?

It is vital that all employees receive regular pay slips even if they are paid the same each month. These should be given out on or before the pay date and can be distributed electronically or in hard copy. Pay slips, or itemised pay statements, should detail gross pay, variable deductions such as income tax, National Insurance and pension contributions, fixed deductions including union subsidies or an attachment of earnings order issued by a court judge to pay off debts.

If there are any discrepancies, it is important to be open and encourage staff to discuss payment issues with you, as according to research from the Department for Business, Innovation and Skills, 81 per cent of employees do not feel comfortable approaching their bosses to discuss pay.

Holding regular staff meetings is a great way to combat this problem as workers know they are being given the time to express any concerns about their pay. Enlisting the help of a law firm to carry out an audit is a smart way of checking to see if all staff are being paid correctly as they can provide unbiased support for both employees and employers.

Nathan Combes is senior associate of employment at Lupton Fawcett Denison Till.