The National Minimum Wage Act 1998 which took effect from April 1999, was created to ensure that workers from the age of 18, were paid a minimum hourly rate of pay. Since then, there have been various updates to the legislation, including the introduction of the National Living Wage in April 2016 for those workers specifically aged 25 and over.
Whilst there have been updates, there has always been four classifications of workers for the purposes of calculating pay to ensure compliance with the legislation. These different types of workers are:
- Salaried workers
- Timed workers
- Output workers
- Unmeasured workers
The National Minimum Wage legislation has always been a complex area of employment law and is often confused by conflicting case law. Many employers have fallen foul of the legislation, incurring millions of pounds of penalties and backdated payments to its workforce. Recently, HMRC has taken a very close look at lower paid salaried workers.
Criteria for salaried workers
One of the most common errors is an employer incorrectly assuming that just because a worker is paid an annual salary that they are indeed a salaried hours worker for minimum wage purposes. This is not always the case. There are four criteria, all of which must be met, to classify a worker as salaried. These are:
- The worker is contracted to be paid for an ascertainable number of basic hours per year. The contract may not state the basic number of hours as an annual figure, but, it must be possible to establish the basic hours required to be worked over the year and then use this figure to ensure that the rate of pay is at least minimum wage;
- The worker is entitled to an annual salary for those hours;
- The worker receives no other pay for those ascertainable basic hours except a performance bonus. This means they cannot be paid anything extra for those basic hours, e.g. premium rate; and
- The worker must be paid in equal weekly or monthly instalments or varying monthly payments where the total paid each quarter is the same. Workers paid using different instalments (for example, fortnightly or 4 weekly), do not meet this condition.
Calculating Minimum Wage
Minimum wage is calculated at an hourly rate even if the worker is not paid by the hour. If an employer can work out the ascertainable number of hours per year, then they can identify any excess hours worked and ensure that the minimum wage has been paid for all hours worked. Those additional hours should not be included within the basic annual hours otherwise the work will not be deemed to be salaried hours work. If the employer doesn’t know the total ascertainable hours, they won’t be able to work out when the employee has exceeded those hours.
Please also note that a weekly paid worker is not salaried if the employer simply divides the annual salary by 52 weeks as it won’t cover the total basic hours in the full calendar year as the full year of 365 days (or 366 days in a Leap Year) does not equate to 52 weeks exactly (i.e. it would be 52 weeks and one day or 52 weeks and two days in a Leap Year).
Civil enforcement penalties
As mentioned, HMRC are currently taking a closer look at those workers who are being paid as salaried workers with an annual salary on or around £20,000. Civil enforcement penalties for non-compliance can be up to 200% of the underpayment of national minimum wage up to a maximum of £20,000 per worker. If the employer complies with the notice of underpayment within 14 days of its service, the financial penalty is reduced by 50%.
There is also a naming scheme in place. If the employer does not appeal the notice of underpayment, or if an appeal is unsuccessful, and HMRC has satisfied itself that any arrears owed have not been paid back, it will refer the employer to Department for Business, Energy & Industrial Strategy for automatic naming. The employer will have 14 days from the HMRC's case closure letter to make written representations against being named.
Civil enforcement is likely to be sufficient in the majority of cases. However, for a small minority of employers who are persistently non-compliant and refuse to co-operate with compliance officers, a criminal investigation could be undertaken, and the employer prosecuted.
What does this mean for your business?
If you believe that you have salaried staff who fall into this category (i.e. who earn in the region of £20k per annum and work additional hours and could therefore be at risk of dropping below the national minimum wage), we suggest that you closely monitor their total hours of work and get in touch as some minor changes to the salaried contract may be required to provide greater clarity and protection.
If you are unsure about the classification of your workers and the pay arrangements that are in place the Alcumus PSM HR Consultancy team can offer further advice and guidance. Get in touch by emailing [email protected].
HMRC have also produced a series of helpful webinars on national minimum wage.
Alcumus PSM (People & Safety Management) specialises in human resources (HR) and health and safety (H&S) consulting for small and medium-sized enterprises.
Written by Marie-Clare Swallow, Senior HR Consultant