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National Minimum Wage
It is now ten years since the national minimum wage (NMW) was introduced on 1 April 1999. It is implemented and enforced by the National Minimum Wage Regulations 1999 and the National Minimum Wage Act 1998.
There are three rates of pay – one for workers aged 16 and 17 (currently £3.57 per hour), one for workers aged 18 to 21 (called the development rate which is currently £4.83 per hour)) and the main rate (currently £5.80 per hour) which is for workers aged 22 and over.
The rates are reviewed every year and change on 1 October, depending on the recommendations of the Low Pay Commission. There is no guarantee that the rates will necessarily rise each year.
For up to date rates, go to the Department for Business Innovation and Skills.
Who is covered?
Everyone over 16 is covered by the legislation which applies to casual workers, freelance workers, home workers, temporary workers, piece workers, offshore workers, sales agents and agency workers. Taxi drivers and time-share sales workers have also been found to be entitled to the NMW.
However, the genuinely self-employed are excluded, as are members of the armed forces, most voluntary workers, au pairs and family workers, apprentices under 19 (and those over 19 but only in the first year of their apprenticeship), students on work placements of less than a year as part of a UK higher or further education course and some DWP back to work schemes.
How is it calculated?
Employers have to work out workers’ hourly rate of pay by using the following calculation
TOTAL GROSS PAY FOR THE PAY REFERENCE PERIOD
TOTAL HOURS WORKED DURING THE PAY REFERENCE PERIOD
The pay reference period is the period over which the worker’s pay is calculated – for instance, daily, weekly or monthly. It covers pay actually received during that period as well as pay earned in that period but which is not received until the next period. For instance, workers who are paid monthly in arrears with the result that they are paid in July for work done in June.
Employers do not have to pay the national minimum wage for each hour worked, but it must be paid on average for the time worked over any particular day, week or month.
How many hours have been worked?
The hours for which the minimum wage must be paid depends on the type of work that the worker is doing. For the purposes of NMW, there are four types of work – time work; salaried-hours work; output work; and unmeasured work. The rules and calculation of hours differ for each of them.
What is time work?
If a worker is paid according to the number of hours they are at work (and which may vary from day to day), then they are doing time work. Alternatively, the worker may be on a contract for a week or a month to do a particular job and be paid for the hours done each week or month. That is also time work
Generally, anyone whose pay goes up or down depending on the actual hours they work is likely to be doing time work.
To figure out the number of hours that will count, employers just add up the total number of hours of time the worker has worked (or been available for work) in a day, week or a month. The following hours count:
- Time spent at or near the workplace, excluding rest breaks, tea and lunch breaks
- Travelling time connected with the business (including meal and rest breaks), except travel between home and work
- Training time and time spent travelling to and from it
- Time spent on standby or on-call at or near the place of work (but not if they are at home) if the worker is waiting to be given work
- Time spent at work, even if they are unable to work because something has broken down
- If they have to sleep over at work, they must be paid for any time they have to get up and work but not for the time they spend asleep
There have been a number of cases the latest being Burrow Down Support Services Ltd –v- Rossiter [2008] ICR 1172 which have held that night workers such as night watchmen and night sleepers in a care home are entitled to be paid the NMW for the whole of their shift even if they are permitted to sleep. This is on the basis that where the employer requires the worker to be on the employer’s premises then they should pay them for the whole time they are there not just when they are awake.
However, periods when someone is on holiday, on strike, on sick leave or on maternity leave will not count for the purposes of the minimum wage. Nor do employers have to pay for rest breaks, unless they require the worker to work at that time.
What is salaried-hours work?
Salaried-hours work is when a worker does a set number of basic hours under an annual contract and is paid in equal weekly or monthly instalments during the year. To calculate these hours, employers just have to divide the total number of basic hours in the year by twelve (if paid monthly).
The hours that count for the minimum wage are the same as those for time workers, except that absences such as rest breaks, lunch breaks, holidays, sick and maternity leave can be counted if they are included in the basic minimum hours under the contract.
So, if the contract says someone is employed for 35 hours per week and that includes their lunch break, then they are entitled to count that time into the number of hours they work every week or month for calculating the minimum wage.
However, if the worker is away on long-term sick leave and on a reduced salary (or none at all), then this period of absence does not count as part of the basic annual hours of the contract. Workers cannot be paid for time when they are taking industrial action.
In general, employers should calculate the basic hours for salaried workers for each pay reference period, based on how frequently they are paid. They should ensure that the worker is paid the minimum wage for these hours in each reference period. They must also decide whether to pay for excess hours as they are worked or pay for them later.
What is output work?
Output work is work that is paid for according to the number of things that workers make or tasks they perform. It is commonly known as “piece work”.
Output workers include:
- home workers who do piecework
- commission workers
- sales agents paid according to the number or value of sales they make
So if the employer does not set any normal, minimum or maximum hours of work in relation to the piece to be produced or the task to be performed, that is output work. Likewise, if the worker is free to start and finish when they want or the employer does not determine the length of time to be spent producing an item, that is output work. If the worker does piece work, but the employer fixes the hours of work, this counts as time work even if the worker is paid according to how much they produce.
Employers have to either pay their output workers the minimum wage for every hour they work, or a “fair piece rate” for each piece produced or task performed. If they choose to pay for each piece performed, employers must first figure out the time it takes an average worker to do the job. The number of pieces or tasks that an average worker can do in an hour is called the “mean hourly output rate”.
The “fair piece rate” for whatever the worker has produced (or the task they have performed) is the one that allows workers of average speed to earn the national minimum wage. This is set so that the piece rate has to be multiplied by 1.2, ensuring that workers whose output is below average (perhaps because they are learning a new task) can still earn the minimum wage.
To calculate the “mean hourly output rate”, employers can either carry out a test of all workers making a particular piece and then divide the total produced (or tasks performed) by the total number of workers. Or they can test a representative sample of workers. However, the representative sample should not be just the fastest workers.
If the job or the working circumstances change slightly, employers don’t have to repeat the exact same exercise every time, but they do need to make a fair adjustment to the average hourly output rate
Employers have to provide workers with a notice saying that the employer has conducted a test and worked out the average hourly output rate. It must also state the “mean hourly output rate” for the piece or task and state the rate or sum to be paid for producing the piece or doing the task. They must issue a new notice at the start of every pay reference period if the terms of the notice change.
Output workers must be paid at least the minimum wage for time spent travelling in connection with the job, but not between home and work.
Is it unmeasured work?
This is a catch-all for any other type of work not covered by any of the above formulae, and could include work where someone has to do certain tasks, but the employer does not specify any number of hours or times within which they have to be done. For instance, it may be that they only work when work is available, such as domestic staff or carers.
There are two options for identifying the hours of unmeasured work to be done:
- record every hour worked and pay the worker, on average, the NMW for those hours, or
- come to a “daily average” agreement of hours to be worked
The “daily average” agreement is a written agreement which must be agreed with the worker before the start of the pay reference period that it covers. It must set out the average number of hours that the worker can realistically spend each day in doing the tasks assigned to them. It is up to the employer to ensure that they are realistic. Employers only have to issue a new notice when the number of hours changes.
To calculate the number of hours of unmeasured work done in the pay reference period (for instance, one week) when there is a “daily average” agreement, employers must:
- confirm the agreed daily average number of hours per day (for instance five hours) and the number of hours the worker is required to be available for work on a full working day (for instance 12 hours)
- multiply the agreed daily average number by the number of days when the worker was, in fact, available for work for the full number of hours contemplated by the contract (say 4 days). In this case that would mean multiplying 5 hours by 4 days, giving 20 hours
If a worker is only available for part of a day, employers must work out what fraction that is of the time the worker is normally required to be available and calculate their hours of work proportionately. In this case, if the worker is estimated to average five hours work in 12 and was only available for six hours in a day, that would count as 2.5 hours work.
Someone doing unmeasured work must be paid at least the NMW for the time spent travelling in connection with their job. Such time would normally be included in the “daily average” hours to be worked.
What counts as NMW?
The starting point for calculation of the NMW is total or gross pay, so employers need to know what is included in gross pay and what is not.
When calculating gross pay, employers must include the following:
- Incentive or performance-related pay
- Bonuses
- Tips paid through pay roll (although this is due to change later in the year)
- Deductions for income tax and NI contributions
- Deduction or payment of a penalty (eg because of misconduct)
- Deduction or payment to repay a loan
- Deduction or payment to repay an advance of wages
- Deduction to pay for purchase of shares or securities by worker
- Deduction to recover an accidental overpayment of wages
- Deductions such as union subscription or pension contribution
- Any deduction made by the employer but not for their use or benefit
- Payment by the worker for goods and services from the employer (as long as the worker is not required to buy them)
- Accommodation up to a certain limit
Gross pay does not, however, include the following:
- a loan
- an advance of wages
- pension payment
- lump sum on retirement
- redundancy payment
- a reward under a staff suggestion scheme
- the premium element of overtime and shift pay
- special allowances (unless consolidated into standard pay)
- expenses, such as for travel and subsistence
- refund of money spent on the job
- deductions or payment for expenditure connected with the job such as tools or uniform
- deductions or payment for the employer’s own use or benefit such as a deduction for meals
- payments by the worker to another person connected with the job
- accommodation above a certain limit (including deductions for gas and electricity made by the employer, as confirmed by the Court of Appeal in Leisure Employment Services v HMRC)
- cash tips or gratuities paid directly to the worker (eg by a customer)
Do employers have to keep records?
It is a criminal offence for employers not to keep records to show they are paying the NMW, including copies of “daily average” agreements and the written notices served on output workers, as well as copies of the data showing how they arrived at the average hourly output rate.
The law does not state exactly what records employers should keep, but they must be kept in a single document for a minimum of three years. If a worker brings a claim to a tribunal for failure to pay the NMW, the onus is on the employer to provide the records showing that it was paid.
Workers have the right to see their employer’s records if they suspect they are being paid less than their legal entitlement. They have to put the request in writing and the employer has to produce the records within 14 days
Workers can complain to a tribunal if the employer refuses to let them see the records. If they succeed, the tribunal can make an award of a sum equal to 80 times the hourly amount of the minimum wage in force.
How is it enforced?
If a worker thinks they are not being paid the NMW, they can complain to Her Majesty’s Revenue and Customs (HMRC) which has the responsibility of enforcing it by ringing their helpline on 0845 600 0678 or by downloading a complaint form from www.hmrc.gov.uk/nmw. The complaint can be made anonymously. HMRC has the power to issue an enforcement notice, impose a financial penalty and initiate criminal proceedings.
Workers who are owed arrears for pay reference periods after 6 April 2009 will be entitled to have their arrears repaid at current rates for all the periods they were underpaid, even if these are higher than the rate that applied when the arrears arose.
If an employer fails to pay the NMW, workers can bring a claim to an employment tribunal or other civil court to recover the money they believe they are owed. They can also bring claims for unfair dismissal or being subject to a detriment if the employer sacks them or takes some other action against them simply because they are entitled to the NMW or for asserting their right to the NMW.
