Author: Taj Rehal
In August 2016, Sports Direct admitted breaking the law by failing to pay the National Minimum Wage (NMW) following pressure from the media and a widely publicised and damning report by the Business, Innovations and Skills (BIS) Select Committee in the Summer. The CEO resigned, followed by the CFO, and the company group share price has dropped by nearly two-thirds over the last year. Here are some of the employment issues that Sports Direct found itself in hot water about and is a timely reminder for all employers to check their working conditions and practices.
In December 2015 an investigation by The Guardian reported that Sports Direct fined staff for late clocking on, did not award overtime for late clocking off and regularly made staff wait unpaid for security check at the end of shifts.
Under the National Minimum Wage laws, employees, workers including agency workers are entitled to receive at least the NMW (or the higher National Living Wage (NLW) of £7.20 per hour for all workers aged 25 and over) for each hour that they work.
A difficulty arises when employees are not actually working but they are required to be at work e.g. they are on standby or on call. The law recognises a distinction between where employees are available and are required to be available at work, which is considered working time, and where they are close to home or can sleep at work, where such time may not be working time.
It is reported that Sports Direct required employees to wait at their place of work, in some cases for not inconsiderable times, in order for security checks to be carried out. This would seem to fall into the category of working time and so should have been included in calculations on whether they were receiving the NMW. Sports Direct’s admission has meant it has had to make back payments to employees, has had to deal with HMRC who investigate NMW breaches and has had considerable adverse publicity.
Employers are reminded that a failure to pay the NMW or NLW can mean financial penalties, fines and orders to pay arrears of wages to underpaid workers. Criminal sanctions can also apply to individual directors who approve of or consent to any breaches. From October 2013 BIS began a practice of “naming and shaming” employers that fail to comply with their obligations to pay workers the NMW (not that this was really needed for Sports Direct!). Employers would be well advised to carry out an audit of their pay structures now to avoid the risk of adverse publicity and penalties that might follow otherwise.
The press and the unions also reported that at the Sports Direct HQ and distribution centres there was extensive use of agency workers and also employees on zero hours contracts. Under these contracts the employer does not guarantee any work and pays the worker for only the hours that they work. Since 2013 until relatively recently zero hours contracts and their exploitation by employers has been a constant news story. The focus had been on those employers who require “exclusivity clauses” in their contracts so that the workers could not work for anyone else and yet the employer only provided little work. As a result, new legislation was brought in to give zero hours employees protection by giving them the right to bring claims as a result of any “detriment” or dismissal arising from a failure to comply with an exclusivity clause.
The Government has reserved the right to bring in new legislation in this area and the Commons Select Committee on Business Energy and Industrial Strategy (formerly BIS) has just launched an inquiry into the rights of workers including the use of zero hours contracts. It looks like the controversy over zero hours contracts is here to stay and if employers are using these they should consider their use and their terms as well as to watch for developments.
A third issue that came to light with Sports Direct was the matter of corporate governance. The BIS Select Committee report was highly critical of management, and in particular Mike Ashley, saying that either he turned a blind eye to goings-on or there were serious corporate governance failings. For a listed company such as Sports Direct these types of criticisms and their consequences are very public – there were the public criticisms from corporate shareholders, a falling share price and well reported adverse publicity in addition to the risk of fines and additional costs. For all employers, management are accountable to the board and the board to owners/shareholders. Adverse publicity, HMRC investigations, fines and costs are matters that can and do lead to change at boardroom level. The Sports Direct story is direct evidence of this and a reminder that companies and their owners should review their corporate governance duties and responsibilities, establish who is responsible for what areas and make sure there are the right people in the right positions to try and ensure matters are picked up and addressed before these types of risk materialise. It is well worth reviewing director and management areas of responsibility regularly.
Taj Rehal, Partner, Fladgate LLP (firstname.lastname@example.org)