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UK – Staffline takes £32.6 million hit over minimum wage failure

17 June 2019

Staffline, the UK-based staffing and employability organisation provided a trading update today. The company said non-recurring exceptional charges for 2018 totalled to £32.6 million in relation to errors in historic compliance with National Minimum Wage (NMW) regulations.

The company added that it will not recommend a final dividend for the 2018 financial year.

Furthermore, Staffline said it would raise £37 million from a share issue and open offer to cut debt.

“Constructive discussions with the group's lenders are ongoing and, in conjunction, the company has commenced discussions with investors regarding a placing of ordinary shares to raise approximately £30 million for the company with the target of reducing 2019 year-end leverage, being net debt/underlying EBITDA, to below 2x,” the company stated. “In the event that the company does pursue an equity capital raise the Board anticipates also launching an Open Offer for an additional £7 million to enable wider shareholder participation.”

“In light of these discussions the Board will not recommend a final dividend for the 2018 financial year,” Staffline stated.

Staffline intends to announce its audited results for the year ended 31 December 2018 on 27 June 2019.

According to the company, the most significant and time-consuming area in finalising its financial results was related to the group's historical compliance with National Minimum Wage Regulations 2015. Liabilities in relation to this have been booked as exceptional, non-underlying charges on the basis of their nature, magnitude and the fact that they relate to a period of six years from 2013 to 2018. 

In January 2019, the group launched an investigation in conjunction with auditors PwC relating to concerns over invoicing and payroll practices within its Recruitment division.

On 12 March 2019 the group announced that the Board had received the key findings of an independent legal investigation and deemed it prudent to increase a provision in respect of additional costs from £4.4 million to £7.9 million. Since then, and following discussions with HMRC, the group has further reviewed its obligations and liabilities in respect of this matter.  

“As a result of completing this further review, the Board has made a final update to the provision for liabilities associated with historical National Minimum Wage compliance, increasing this from £7.9 million to £15.1 million, which includes £0.5 million of adviser costs, all of which it expects to be a cash cost in 2019.  Additional exceptional costs included in the 2018 result relating to extended audit procedures will be £1.8 million, taking total non-recurring exceptional charges for 2018 to £32.6 million,” the company stated.

The group's non-compliance was initially identified by a self-review process as part of HMRC's compliance review.  It relates to a limited number of food production facilities and the payment for preparation time, which is generally the time spent donning workwear.  In these cases, the group was following its end customers' operational procedures for clocking in and out. 

Staffline said these procedures have now been rectified so that all work-related time is paid in accordance with current legislation. Any additional time paid is charged to the customer in the same way as all other hours supplied.  However, the additional costs incurred in relation to historical non-compliance are not recoverable from customers. 

“The nature, complexity and volume of data that has been analysed as part of the additional independent specialist review, and the subsequent audit of this information has been a very significant undertaking which took several months to complete.  Furthermore, the calculation of underpayments is a difficult and complex matter requiring judgement and the application of assumptions, all of which have been subject to discussions with HMRC,” Staffline stated.

On 17 May 2019 the group issued a trading update referencing headwinds faced in both of its training and recruitment divisions. As a consequence, the Board expects the group to require a waiver of possible future breaches to the leverage covenant in its lending agreements.

Chris Pullen, Chief Executive of Staffline, commented, "While the time taken to announce our 2018 financial results is frustrating, we look forward to posting these results at the end of June at which point we expect the business to return to normalised trading.  Staffline continues to enjoy a unique position in its markets and once this episode is behind us we are confident of a return to future growth."

The group said it continues to operate within its facilities and is expected to do so into the foreseeable future.

“The Board reiterates its guidance that the group will report an underlying performance for the year ended 31 December 2018 in line with expectations. The Board also continues to expect the group to report underlying EBIT for the year ending 31 December 2019 in the range of £23-28 million and, before proceeds of any equity capital raise, net debt at year end to be in line with current market expectations,” the Board stated.

Following Staffline’s update and news of its £32.6 million write-down, shares plummeted 29.12% on the day. During today’s trading session, the company set a new 52-week low when it reached £157.60. Over this period, the share price is down -81.77%. Based on its current share price the company has a market value of £68.46 million.

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