HMRC has recently contacted many employers, inviting them to make a voluntary declaration where employees may have been paid below the National Minimum Wage. Assessing compliance, however, is not always as straightforward as it may first appear. As HMRC guidance and webinars make clear, the National Minimum Wage is determined by a calculation rather than by reference to a headline rate alone.
What is National Minimum Wage?
In broad terms, the National Minimum Wage is the minimum hourly rate that an employer must pay a worker. Different rates apply according to age, with a separate apprentice rate applying during the first year of an apprenticeship.
How is an employee’s hourly rate calculated?
There are two common methods of calculating an employee’s hourly rate:
1. Wages / hours worked in the pay period = hourly rate
2. Wages x number of pay periods in the year / 52 / hours per week = hourly rate
For the purposes of a National Minimum Wage investigation, the first method is generally the more relevant calculation.
Why does the calculation become complicated?
The first point to consider is that “wages” for National Minimum Wage purposes are not the same as total gross pay. Several items are commonly excluded from the calculation, including:
· Overtime and shift premia
· Pension payments
· Benefits in kind
· Tips and gratuities
Employers must also consider deductions, as many can reduce the amount of pay used in the National Minimum Wage calculation. These may include:
· All salary sacrifice deductions
· Deductions for goods or services provided by the employer
· Uniform deductions
· Administration fees for Attachment of Earnings orders
For many employers, establishing which payments constitute wages will be relatively straightforward. The position may, however, be more complex where detailed or variable pay arrangements are in place.
Once the relevant wage has been established, the next step is to determine the time worked. This can also require careful assessment. Pay earned in the pay period under review can ordinarily be attributed only to that period and cannot generally be carried forward or applied retrospectively. In some circumstances, determining which hours qualify as working time may also be complex.
National Minimum Wage Warning Report
We can provide a report identifying employees whose calculated hourly rate falls within 5% of the applicable minimum wage, based on total pay subject to National Insurance and contracted hours. The report is available on request and is not issued as standard. It includes a disclaimer confirming that we cannot verify whether an employee has been paid for every hour worked and that the assessment is based solely on the total pay figure available.
The report was developed primarily for employers that had introduced salary sacrifice arrangements and required an additional safeguard for lower-paid workers.
Summary
National Minimum Wage calculations require careful and informed consideration. Employers should ensure that every payment included in the wage calculation is eligible and that all relevant working time has been accounted for. Further guidance is available from HMRC, Acas and other reputable sources.
Useful resources
National Minimum Wage and Living Wage calculator for workers