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How to review your organisation's pay rates against the national minimum wage

Author: Sharon Tonks

Summary

Click on any of the hyperlinks to go to more detailed guidance below.

Eligibility for the national minimum wage

Most employers are likely to find that the majority of the workers at their organisation are eligible to receive the national minimum wage. The minimum wage is payable not just to employees but to all workers who are at least of school leaving age (see Eligibility for the national minimum wage).

Employers should note that both agency workers and those homeworkers who would not normally be categorised as "workers" are expressly covered by the national minimum wage. They should also be aware that an intern will be entitled to the minimum wage if they meet the definition of a worker (see How to manage internships).

There are a number of categories of worker that are exempt from the minimum wage. These include:

  • the genuinely self-employed;
  • volunteers or voluntary workers;
  • family members of the employer, living in the employer's home and working in the family business;
  • non-family members living in the employer's home, such as au pairs, who share in work and leisure activities and are not charged for meals or accommodation;
  • students doing work as part of their undergraduate, postgraduate or higher education course;
  • students of compulsory school age;
  • people working on certain training schemes, pre-apprenticeship schemes or doing work-shadowing;
  • prisoners;
  • company directors; and
  • members of the armed forces.

See Eligibility for the national minimum wage for a full list of workers excluded from the minimum wage.

The rates of the national minimum wage

In order to check whether or not all eligible workers are being paid at or above the level of the national minimum wage, the employer must establish which workers are eligible to be covered by the different rates. A new statutory minimum wage rate for workers aged 25 and over (the national living wage) was introduced from 1 April 2016. Lower minimum wage rates will continue to apply to younger workers, and apprentices who are aged under 19 or in the first 12 months of the apprenticeship. The table below contains the current rates of the national minimum wage effective from April 2019.

Current rate (effective from 1 April 2019), £ph
Workers aged 25 and over (the national living wage) 8.21
Workers aged 21 to 24 inclusive 7.70
Workers aged 18 to 20 inclusive 6.15
Workers aged under 18 who are no longer of compulsory school age 4.35
Apprentices aged under 19 or in the first 12 months of the apprenticeship 3.90
Accommodation offset 7.55

Changes to the minimum wage

Employers should be aware of the timescale for the process of reviewing the national minimum wage rates in order to check that they are compliant with any changes. Each year, the Government asks the independent Low Pay Commission (LPC) to research and prepare a report on the future level of the minimum wage and related issues, which it submits to the Government. The Government then responds to the report, announcing whether or not it has accepted the LPC's recommendations.

Both the national minimum wage rates and the national living wage are uprated on 1 April each year. The Low Pay Commission reports to the Government each October on its recommended rates.

Working out whether or not a worker is receiving the minimum wage

Sometimes it may not be clear whether or not a worker is being paid the minimum wage, particularly if they are not paid for a set number of hours each week. An employer must ensure that the payments it makes to each worker are at least equal to the national minimum wage for the hours that they have worked.

This can be checked by calculating the gross pay that the worker has received for work done over a particular period (known as the pay reference period), then dividing it by the hours that they have worked during that period, as outlined below. A useful tool to check whether or not the minimum wage is being correctly paid can be found on the GOV.UK website.

Establishing the pay reference period

To work out whether or not the minimum wage has been paid to a particular worker, the employer needs to establish what the worker's pay reference period is. The pay reference period is the period of time for which a worker's wage is paid.

Therefore, workers who are paid weekly will have a pay reference period of one week, workers paid daily will have a pay reference period of one day and workers who are paid monthly will have a reference period of one month. For the purpose of the national minimum wage, a pay reference period cannot be longer than one calendar month, so workers who are paid less frequently than monthly have a pay reference period of one month.

The worker does not have to be paid the minimum wage for every individual hour worked, but must be paid the minimum wage on average for the hours worked in the pay reference period.

Earnings received during the reference period include pay received during that period and also pay that is earned during that time but paid in the following period. For example, if the relevant pay reference period is the month of June and a commission bonus that is earned between 1 June and 30 June is due, it may not have been possible for the employer to calculate this in time for the June pay run, so the bonus may actually be paid in July. However, the bonus will count towards the June pay reference period rather than July, as this was the period during which the worker earned it.

Remuneration that counts towards the national minimum wage

Once the employer has established the worker's pay reference period, it should calculate the remuneration received during this period of time.

Only gross basic salary, including any bonus, commission or other incentive payments, can be counted as pay for the purposes of working out whether or not a worker has earned at least the level of the minimum wage.

Extra pay for overtime and shift premia should not be counted. If an employee is found to earn above the minimum wage threshold only as a result of extra pay for overtime or shift premia, this will not be sufficient to satisfy the requirement to pay the minimum wage.

Employee benefits

Limited daily accommodation costs can be taken into account where a worker is provided with housing as part of their job (see Accommodation) but no other benefits in kind, whether they have a monetary value or not, can be counted. The employer should also discount from the remuneration used to calculate the national minimum wage the following: tips or gratuities, loans by the employer, advances of wages, employer pension payments, lump sums on retirement, redundancy payments and tribunal/settlement awards.

Accommodation

If an employer provides a worker with somewhere to live, this can be taken into account when calculating the minimum wage, up to a maximum of £7.55 per day or £52.85 per week. If the worker pays rent to the employer, any value up to the accommodation allowance can be disregarded in the minimum wage calculation, but any rent paid above this level must be viewed as a deduction from pay counted towards the national minimum wage.

Annual bonuses

If an employer has a member of staff who works towards an annual bonus over the year and this is paid in December's pay run, most of the bonus should be counted towards the December pay reference period (assuming that the worker is paid monthly). However, it is possible for one-twelfth of the bonus to be counted towards the pay received in November, the previous pay reference period. The rest must count towards the December pay reference period, however, with none of the bonus allocated to the other 10 months of the year.

Lawful deductions

Where deductions for expenses in connection with the worker's employment are made, such as those for uniform or tools, the remainder of the pay must still be at or above the minimum wage for the eligible worker.

Certain types of deductions from wages will not reduce the amount of pay that should be taken into account for the purposes of calculating the minimum wage, these being:

  • recovery of an accidental overpayment of wages;
  • those made under the worker's contract because of conduct;
  • deductions under an agreement for a loan or advance;
  • those relating to the purchase of shares or share options;
  • payment of tax and national insurance contributions; and
  • those that are not in direct connection with the worker's employment or for the employer's benefit, such as trade union membership.

Working out the hours worked

Once the employer has calculated the relevant remuneration received by a worker over the pay reference period, it should work out the relevant number of hours worked. The employer will need to calculate how many hours of time work, salaried hours work, output work and unmeasured work the worker undertook in the pay reference period.

Time work

Time work is performed when a worker is paid by reference to the amount of time that they work. For these workers, average hourly pay must be at least the national minimum wage regardless of how many hours are worked.

Example: Peter is 24 years old and is eligible for the £7.70 per hour rate of the national minimum wage (the rate applicable from 1 April 2019). He is paid monthly. Over the month, he works 140 hours. This means that, for that month, he must be paid at least £1,078 (140 x £7.70).

The employer should note that only time spent actually working counts. Therefore, rest breaks, travel to and from work and time spent taking part in industrial action will not count as hours worked. Hours spent by a worker required to be on call at or near a place of work should be counted, although if an on-call worker is provided with facilities to sleep then only the hours spent awake and working should be treated as time work.

Time spent travelling between work and home is excluded from working hours by reg.34 of the National Minimum Wage Regulations 2015 (SI 2015/621). In Federación de Servicios Privados del sindicato Comisiones Obreras v Tyco Integrated Security SL and another [2015] IRLR 935 ECJ, the European Court of Justice held that, where an employee has no fixed or usual place of work, travel between their home and the first and last customer of the day counts as working time for the purposes of the Working Time Directive (2003/88/EC), for example in relation to the calculation of minimum rest breaks and maximum weekly working hours. This decision does not apply to the calculation of the national minimum wage. In the absence of a change to the Regulations, and subject to any collective agreement or contractual obligation, it is for employers to decide whether or not travelling time in these circumstances is to be included in the calculation of time work for national minimum wage purposes.

Salaried hours work

A worker doing salaried hours work is paid for a set basic number of hours over the year, with the payment divided into equal weekly or monthly instalments, regardless of the actual hours worked in a particular week or month.

For salaried hours work, travel for work during work hours and time spent training is classed as working time for the purposes of calculating the national minimum wage. Time spent on rest breaks, sick leave or maternity leave should also be counted when calculating the hourly rate, but only if the worker is receiving their normal pay. Time during which the worker is paid less than normal, such as unpaid leave or when statutory sick pay is paid, is not counted for this purpose, nor is travel to and from work or time spent taking part in industrial action.

Although the number of hours may not be stated as an annual figure for a worker doing salaried hours work, the employer needs to calculate this in order to check whether or not the hourly rate meets the minimum wage. To do this, the employer needs to do the following:

  • The employer should establish what the worker's annual basic hours of work are.
  • It should divide this figure by the number of times during the period that the worker is paid over the year, for example 12 (monthly) or 52 (weekly). This gives the number of hours' work in each pay run or pay reference period.
  • Finally, it should divide the remuneration received by the worker in each pay run by the number of hours of work in each period, giving the hourly rate at which the worker is being paid. This figure must be equal to or higher than the relevant rate of the national minimum wage.

Example: Susan performs a total of 2,040 hours of work in a year, for which she receives an annual salary of £16,000. She is paid monthly, so the employer should divide 2,040 by 12 (the number of times during the year that Susan is paid) to give the number of hours in each pay run (170). The amount Susan receives in each pay reference period (£1,333.33) then needs to be divided by the number of hours worked in each period (170 hours). The resulting hourly wage of £7.84 should be compared with the relevant hourly rate of the national minimum wage to check that Susan is receiving the minimum wage.

Where a salaried hours worker exceeds their basic hours, they must receive the national minimum wage for those hours worked. A specific calculation needs to be used for working out whether or not the national minimum wage has been paid for these hours of work, which is set out in reg.28 of the National Minimum Wage Regulations 2015. This is based on the concept of a "calculation year" over which the variation in hours of work needs to be established.

Piece, or output, work

Workers performing output work, or piece work, are paid by the task or piece of work they do rather than the time spent doing it. There are two ways of ensuring that output workers are receiving the national minimum wage. The first is to pay the worker the minimum wage or more per hour worked regardless of their productivity. The second is to pay a "fair rate" for each task or piece of work. The fair piece rate is the amount that allows an average worker to be paid the minimum wage for each hour if they work at an average rate.

To work out a fair rate per piece of work done, the employer first needs to calculate the average hourly output rate. To do this, the employer should:

  • select a sample of the workforce, including both fast and slower workers;
  • calculate how many pieces have been completed in a normal working hour by this group of workers; and
  • divide this by the number of workers in the sample to get the average rate.

The next steps are to:

  • divide the average hourly output rate by 1.2 (this will lower the average to account for the fact that newer workers may be slower, for example); and
  • divide the relevant hourly minimum wage by the revised hourly output rate, providing the fair rate for each piece completed.

If the work changes significantly, the employer should do another test to check the rate. A different location is not important, but if the type of work changes it will be necessary for it to recalculate the fair rate to check that the relevant minimum wage is being received by workers.

Example: The average hourly rate of a representative group of piece workers is to make 10 pieces per hour. Divided by 1.2, the average hourly rate is 8.3 pieces. Assuming that the worker is aged 25 or over, the relevant rate of the national minimum wage is £8.21 per hour (from 1 April 2019). Divided by 8.3, this means that the fair rate per piece is 99p per item. A worker will therefore need to make 8.3 items per hour to ensure that they earn at least the minimum wage. This equates to a minimum rate of £8.21 per hour (99p multiplied by 8.3).

Unmeasured work

Work not covered by any of the three forms of work above should be treated as unmeasured work. Where a worker is paid a set amount to do a particular task, such as being paid £500 to lay a patio regardless of how long it takes, for example, this would count as unmeasured work.

In order to calculate the number of hours worked in the pay reference period, employers can either record every hour worked or use a daily average agreement of hours. In order to do the latter, the employer and worker should agree the number of hours per day that the worker expects to work on average. One agreement can cover several pay reference periods if there is no change in the average number of hours. A daily average agreement must:

  • be agreed in writing;
  • be made before the start of the pay reference period or periods it covers; and
  • state how many hours the work should take each day, on average.

Taking action to ensure the minimum wage is paid

Where an employer finds that it has paid a worker below the national minimum wage, it must pay any arrears due immediately. It is a criminal offence for employers not to pay workers the national minimum wage or to falsify payment records. The employer must also increase the worker's pay to the level of the national minimum wage or higher.

Record-keeping

It is the employer's responsibility to keep records that demonstrate that it is paying the minimum wage. Unless an employer can prove that a worker is receiving the national minimum wage, officers of HM Revenue and Customs (HMRC), the agency responsible for enforcement of the minimum wage, will presume that the employer is not.

An employer must keep basic records of pay and hours worked as a minimum. Most employers use their payroll records as proof; paper copies or computer records are sufficient. Information such as accommodation deductions or absences may be necessary depending on the circumstances. It will also be important for the employer to keep copies of any agreements to undergo accredited training, a copy of any daily average agreement, copies of any written notices given to those doing output work and copies of any information used to calculate any average hourly output rates. The information about each worker should be kept in a single document, and the worker has the right to see it.

Enforcement

HMRC officers have the right to carry out checks at any time and ask to see payment records. They can also investigate an employer following a worker's complaint.

If HMRC finds that an employer has not been paying the correct rates, it will order the employer to pay the arrears to the worker. It will also apply a penalty where an underpayment has been identified. Provided that certain criteria are met, the Department for Business, Energy and Industrial Strategy will also name the employer via a press notice. For more detailed guidance on enforcement see National minimum wage enforcement.