The problem was highlighted in 2016 annual report and accounts, just released by the company, which also owns Waitrose supermarkets, and is structured as a partnership whereby all full-time employees are partners in the business. 

John Lewis stated: ‘While the partnership's contractual hourly rates of pay have never been below the NMW, it intends to work with HMRC to understand if all its arrangements meet the specific criteria of what are some quite complex regulations.

‘The partnership is specifically looking at its practice of pay averaging which aims to smooth out a partner's pay over a year to ensure a consistent amount is paid to them each month in respect of their basic pay.

'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 NMW regulations.’

The retailer says it is now completely a detailed review, after which it will make any retrospective payments required to current and former partners affected.

Partners will, over the course of a year, usually have received the correct pay, in some months where greater than average hours are worked they will have been paid less than the hourly rate stipulated in the NMW regulations. The exceptional charge principally relates to payments over the last six years.

John Lewis said: ‘There is a wide range of potential outcomes and so we have made a provision of £36m as an exceptional charge for the year ended 28 January 2017. The total provision is to cover any payments that might become due, along with employer's national insurance, pension costs and other associated costs.’

Charlie Mayfield, chairman of John Lewis Partnership said: ‘HMRC are aware and we intend to work with them in order to resolve some of the key points regarding the way the NMW regulations apply to our pay arrangements and practices. We expect to do this as quickly as possible. However, it is likely these discussions will take some time to be completed.'

In its annual report, John Lewis described the development as ‘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.’

The report went on to state: ‘Nevertheless the NMW regulations create a strict liability regime and these payments are therefore required to be paid even in cases where partners have over the course of a year been paid the correct contractual amount.’

 The retailer said national minimum wage regulations are very complex to apply in practice, but that this had not been helped by the complexity in its rota and payroll systems as well as multiple pay elements.

According to the annual report, the current average non-management basic hourly pay rate at John Lewis is £8.67 per hour, £1.47 (20.4%) more than the national living wage, and partner pay as a % of sales is 13.9%. Following the April 2017 pay review, the average hourly rate of pay for non-management partners is £8.90.

The national minimum wage error follows an accounting mistake identified in 2013, when John Lewis discovered it owed employees an additional £40m in holiday pay, after failing to take account of higher rate allowances, such as Sunday and bank holiday pay, in making calculations over a six-year period.

Pat Sweet