Thousands of workers could now be set for a windfall after the retailer, which runs John Lewis department stores and Waitrose food shops, admitted the payroll error affected all staff who had been paid by the hour over the past six years, the Telegraph reports.
The payroll error is embarrassing for John Lewis as it has been highly feted by politicians for its employee-ownership model and its commitment to “happiness of all members”, who are known as partners within the company.
John Lewis said that the problem arose because of its “pay averaging” practice which smooths out income to ensure staff receive the same monthly salary, regardless of how many hours they work each month.
“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”, the company said.
“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”, said chairman Sir Charlie Mayfield.
As a result of setting aside money for backpay, John Lewis pre-tax profits now stand at £452.2m for 2016, rather than the £488.2m previously reported at its full-year results in January.
The pay error comes less than four years after the retailer admitted to miscalculating holiday pay for seven years, leading to £40m in back-pay.
The Partnership said that it was looking to overhaul its pay processes “to ensure that they are easy to administer in a fast changing market and reduce the risk of non-compliance”.
John Lewis also revealed that its job satisfaction levels had fallen by 3 per cent after it took the decision to slash its bonus from 10 per cent to 6 per cent – the lowest payout since the 1950s.
The department store chain is also planning to cut 387 jobs as part of an overhaul of its cafes and restaurants and curtain fitting service in response to changing consumer habits.
New John Lewis boss, Paula Nickolds, warned last month that there would be fewer jobs at the department store chain in future while Waitrose is reviewing shop closures.
To reflect the changing environment and cut to staff bonuses, the retail group revealed that Partnership chairman Sir Charlie Mayfield is waiving his £66,000 bonus for the year.
Sir Charlie will still receive a £1.4m salary, following a 4.9 per cent increase in basic salary to £1.1m.
He also receives a £300,000 defined benefit pension entitlement, although his total pay package is 7.4 per cent lower than the previous year.
John Lewis said that the chairman’s pay was 70 times the average basic pay of non-management partners.