John Lewis sets aside £36m after breaching national minimum wage rules

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The John Lewis Partnership has set aside £36m to cover potential back payments to staff after admitting it may have breached national minimum wage rules.

The employee-owned group, which include John Lewis and Waitrose stores, said the issue related to its practice of pay averaging, which ensures employees receive the same monthly salary year-round regardless of how many hours they work.

The retailer admitted that the error means all employees paid by the hour over the past six years could be due compensation, although it is not yet clear how many were affected

The pay error will come as an embarrassment for the company which has often been praised as an exemplary employer in the UK.

The group said in its latest annual report: "This arrangement was implemented to support partners with a steady and reliable monthly income, but we now believe this arrangement may not meet the strict timing requirements for calculating compliance with the national minimum wage regulations.

"Once we have completed our detailed review, we will make any retrospective payments required to current and former partners affected."

Chairman Sir Charlie Mayfield said the company was now working with HM Revenue and Customs to ensure its pay practices meet minimum wage and living wage rules.

He added: “Clearly this is very disappointing, not least because the vast majority of payments to affected Partners and former Partners relate to technical underpayments rather than actual underpayments of their contractual pay.”

As a result of the error John Lewis has revised its annual profit for the year 2016 to 2017 to £452.2m down from the £488.2m reported at its full-year results in January.

The group's annual report also showed that Sir Charlie has waived his bonus for the year, which would have seen him land a £66,000 payout.

John Lewis said aside from the under-payment error, it pays staff more than 20 per cent above the National Living Wage on average.

Anna Fletcher, director at the law firm, Gowling WLG, said: "Ethically-focused employers like John Lewis are exposed to this area of technical non-compliance because of 'pay averaging' where staff are paid the same amount each month even if the hours they've worked vary. Given that this practice aims to provide more certainty and financial stability for workers, it is ironic that it may inadvertently result in the retailer paying less than the minimum wage for the actual hours worked in a given month.

"It is possible that this could be the case even in circumstances where, strictly speaking, the worker will eventually have received all the money they are entitled to albeit not in each pay reference period."

Additional reporting from agencies