HMRC carries out enquiries into NMW compliance and has the right to visit employers it suspects may not be paying the NMW. HMRC is permitted to see employers NMW records and to ask them or their workers to explain them. If HMRC believes that an employer has failed to pay the minimum wage to a worker, it may serve an enforcement notice. This will require the employer to start paying the NMW and to make up for the previous underpayments for each named worker.

If the employer ignores the enforcement notice, it may be served with a penalty notice of twice the minimum hourly rate for each named worker and day from the time the penalty notice was issued that the outstanding NMW has remained unpaid. If the above steps do not result in the employer complying with the enforcement notice, the enforcement officer can take a case to a tribunal or county (sheriff) court on behalf of the worker, or prosecute the employer. Deliberate refusal to pay the minimum wage is a criminal offence.

Guidance

The Department of Trade and Industry( DTI) guidance on the NMW states that it does not apply to company directors unless they have contracts which make them "workers". Company directors are classed as "office holders" in common law and can do work and be paid for it in that capacity, This is true no matter what sort of work is done or how it is rewarded. So, it is unlikely that a director will have an implied contract which makes him a worker. However, company directors who have employment contracts will need to be paid the national minimum wage. If you are a director and are unsure whether you have entered into an employment contract with your company it would be advisable to take legal advice. 

The DTI have also confirmed that if there is no written employment contract or other evidence of an intention to create an employer/worker relationship they will not seek to contend that there is an unwritten or implied employment relationship between a director and his company. As H M Revenue & Customs (HMRC) administers NMW as agents for the DTI they will adopt the same policy.

In summary both the DTI and HMRC have agreed not to impose a hypothetical employment contract where no written contract exists between a shareholder/director and his company, for the purposes of the NMW. It is also clear that there is no need to have a letter in place to say there is no employment contract. 

IR35     

The above rules are not consistent with those of IR35, the personal services tax legislation. This requires the hypothetical contract between the worker and the final customer to be considered.  This does not mean that if IR35 applies the director must pay himself at least the NMW, because it is the contract between the director and his own personal service company that is important for the NMW, not the contract between the worker and the client. However if IR35 does apply it would be sensible for the director to pay himself at least a living wage, as this will reduce the amount of deemed salary that must be subject to PAYE at the year end.  

Proposed changes