Most workers are entitled to be paid at least the national minimum wage (NMW). The legislation that underpins the NMW - principally the National Minimum Wage Act 1998 and the National Minimum Wage Regulations 1999 - is complex, and not every detail is covered here. More information on the NMW can be found in a detailed guide produced by the Department of Business, Enterprise and Regulatory Reform (BERR) or through your Association or the BERR helpline.
A company is obliged to pay the NMW to most workers that it directly employs. It is not only employees who are entitled to the NMW. The NMW also covers workers who contract with a company to perform personally any work or services, unless they are dealing with the company as a part of a profession or business undertaking that they are running.
Homeworkers and agency workers are also entitled to the NMW. The person responsible for ensuring that agency workers receive the NMW is the person with whom they have their contract, or, if the contractual position is not clear, the person who pays them. In the case of workers placed with a company on temporary assignments through an employment agency, that will usually be the agency.
Certain workers are excluded from the NMW. These include trainees on certain Government-funded training programmes, including the New Deal programmes, unless they are entitled to receive wages for the work they do.
There are special rules for apprentices. For NMW purposes, apprentices include those who have traditional contracts of apprenticeship ( trainees and apprentices ), and those taking part in National Traineeship and Modern Apprenticeship programmes. In Scotland, apprentices include those taking part in Skillseekers or Modern Apprenticeship programmes leading to a National Vocational Qualification Level 2 or 3 or a Scottish Vocational Qualification Level 2 or 3.
Apprentices aged 16 to 18 are not entitled to the NMW. Apprentices aged 19 and over are not entitled to the NMW in the first year of their apprenticeship, but become entitled in the second year of their apprenticeship and beyond.
The various rates of the NMW are reviewed from time to time. From October 1 2008, the rate for workers aged 22 or over is £5.73 per hour, the rate for 18 to 21 year-olds is £4.77 per hour and the rate for 16 and 17 year-olds is £3.53. (Although these rates discriminate on the ground of age, they do not breach the age equality legislation, which contains a specific exemption to allow employers to pay workers who are under 22 less than the standard rate of the NMW.)
The pay reference period
A worker must be paid an average of the NMW over his or her pay reference period. A worker's pay reference period is generally the interval at which he or she is paid, whether daily, weekly or monthly. But the maximum period is one month, so a worker who is paid quarterly has a pay reference period of one month.
In order to assess whether a worker has received an average of the NMW in a particular pay reference period, it is necessary to identify what payments count towards the NMW for that period.
Any payments made to the worker in the period are taken into account, as is any pay earned in the current period but not paid until the next. This could include, for example, overtime or commission that a monthly-paid worker receives in the month after the one in which it is earned. Most of an annual bonus is counted in the pay reference period in which it is paid. A proportion can, however, be allocated to the previous period. For example, one-twelfth of an annual bonus can be allocated to the previous period for a monthly-paid employee.
Broadly, the amount that counts towards the NMW is the result of this calculation:
- Take gross basic wages or salary, including performance-related pay and bonuses (apportioned where relevant, as explained above).
- Deduct any premium element for overtime or shift working (that is, the difference between the rate paid for overtime or shift working and the worker's basic rate of pay).
- Deduct any special allowances, such as allowances for unsocial hours, 'on call' duties or location allowances, if these are not consolidated into basic pay.
If an employer provides accommodation, that counts towards the NMW. The amount that counts is £4.30 multiplied by the number of days in the reference period for which accommodation is provided. Accommodation is the only benefit in kind that can be counted towards the NMW. From October 1 2008, the rate for accommodation is increased to £4.46.
The hours for which the NMW must be paid depend upon the way in which the worker is paid for the work he or she does. There are four different categories of work:
- time work;
- salaried hours work;
- output work;
- unmeasured work.
This is work that is paid according to the number of hours the employee works, but the employee is not paid an annual salary. In practice, most workers who are expected to be at work for a set number of hours (such as 40 hours a week) or at set times (such as 8 am to 5 pm from Monday to Friday) will be time workers, unless they are on an annual salary.
All the hours when a time worker is required to be available for work are taken into account, but rest breaks are not. Time when the worker is 'on call' at or near the workplace counts, but time when the worker is 'on call' at home does not. If a worker is permitted to sleep at or near the workplace during specifically allocated hours and is provided with suitable sleeping facilities, those allocated hours do not count as time work unless and until the worker is called on to work. Travelling during normal working hours can be counted but travel between home and work cannot. Time spent on training during normal working hours also counts, as does training outside normal working hours if done at the worker's normal place of work. Time when the worker is on holiday, sick leave or maternity leave does not count, but any payment the worker receives for those absences is also left out of the calculation of whether he or she has received the NMW.
This covers time where an employee receives an annual salary, paid in equal instalments, for a basic minimum number of hours in a year. Those basic hours may be expressed as an annual total, as in an annualised hours contract, or as a weekly or monthly figure, such as 35 hours a week. Most office workers and non-manual workers with large companies are likely to be salaried hours workers.
In the main, hours count for salaried hours workers on the same basis as for time workers. However, hours of absence, including rest breaks, holidays, sick or maternity leave, are counted as salaried hours work, but only if the worker is paid his or her normal pay during those hours and they count towards the worker's basic hours. Broadly, the salaried hours that must be taken into account in a pay reference period are the basic hours that must be worked in the year divided by the number of times the worker is paid in the year.
This is work that is paid according to output, whether that be the number of things the employee makes or processes, the number of sales the employee achieves or the number of transactions the employee completes. So a homeworker who is paid by the piece or a worker who is paid on the basis of commission is doing output work, unless his or her hours are fixed, in which case he or she is doing time work.
The hours of an output worker are assessed in one of two ways. One method simply involves counting the number of hours spent by the worker in producing the type of piece or performing the type of task concerned during the pay reference period. Another method applies, however, if the work is "rated output work", as explained below. Whichever method applies, if the output worker is a homeworker who has to travel to an employer’s premises to pick up and deliver work, that travelling time also counts as output work for which the NMW must be paid.
Work can be rated output work only if the worker’s contract does not set any normal, minimum or maximum working hours, the employer does not in practice decide what hours the worker must work, and the employer has calculated the mean hourly output rate for the piece or task involved. The employer can calculate this mean rate by testing the output of its other output workers doing the same work in similar circumstances. Alternatively, the employer can estimate the rate, by reference to the rate at which its other output workers produce pieces or perform tasks that are reasonably similar to those in question, or produce pieces or tasks that are the same as those in question but in different working circumstances.
Where a worker is engaged on rated output work, the number of hours that count for NMW purposes is 120% of the number of hours that a worker working at the mean rate would have taken to produce the number of pieces or perform the number of tasks that the worker in question produced or performed.
An employer must give rated output workers a written notice containing certain specified information. In particular, the notice must explain what their mean hourly output rate is and how it was calculated, and give the telephone number of the NMW Helpline.
This covers all work that does not fit into one of the other three categories already mentioned. It would include work where the worker has certain tasks to do but no specified hours or times when they must be done, or where the worker is required to work only as and when needed.
There are two ways of assessing the amount of unmeasured work that counts for the NMW. One is for the worker and the employer to come to a written agreement on a realistic average number of hours that the worker is likely to spend each day doing the work. If no 'daily average' agreement is reached, then the actual hours worked during the pay reference period are the ones that count.
To calculate whether a worker has been paid the NMW, take the payments that count in the pay reference period, divide them by the hours of work that count in that period, and compare the result with the rate of the NMW that applies to the worker concerned.
Complications can arise where an employee who does salaried hours work works longer than the basic annual hours before the end of the year. In this case the employer will need to ensure that the employee is paid the NMW for any hours he or she works in excess of the basic annual hours in the pay reference period when he or she first starts working them, and for the remaining reference periods in the year. Likewise, an employer may need to adjust the final salary payment to a worker who leaves its employment having worked more than the basic annual hours, or the basic hours for the part of the year that he or she has worked. The BERR guide to the NMW (see Pay and Related Matters) give guidance on how to make these calculations.
In practice, these calculations will usually be necessary only where a worker is paid a salary that is close to the NMW or works substantially longer than basic hours.
All employers are required to keep records that show that they are paying at least the NMW. If they have reached a training agreement, a fair estimate agreement or a daily average agreement with a worker, they must keep a copy. It is a criminal offence for an employer not to keep adequate records or to falsify its records. Another good reason for keeping adequate records is that, if there is a dispute, it is up to the employer to prove that it has paid the NMW.
The legislation does not specify what records have to be kept. However, the closer to the NMW a worker's pay is, the more detailed will need to be on hours worked and payments received. The records can be kept in any form, but the employer must be able to produce them for a particular worker in relation to a particular pay reference period in a single document.
The NMW legislation requires records to be retained for only three years from the end of the pay reference period following the pay reference period that the records cover. Nevertheless, a worker has six years in which to bring a claim that he or she has not been paid the NMW and it would therefore be advisable for employers to retain their records for six years.
Workers who reasonably believe that they are not receiving the NMW are entitled to see their pay records and to copy them. A worker must put any request for access in writing, and the employer must produce the records within 14 days or within whatever further time is agreed with the worker. When inspecting the records, a worker is entitled to be accompanied by any person of his or her choice. HM Revenue and Customs, which is responsible for enforcing the NMW, is also entitled to see employers' records.