With changes to the minimum wage being made every year, it is important that businesses are up-to-date with these rules and regulations to ensure that employees are not being underpaid. In this blog, the team at Clayton & Brewill discuss the nuances of minimum wage and any potential problems employers should be aware of.
The Government has announced the rates of the National Living Wage (NLW) and National Minimum Wage (NMW) which will come into force from April 2024. In doing so, it has accepted in full the recommendations of the Low Pay Commission.
The rates which will apply from 1 April 2024 are as follows:
Hourly rates from April 2024
|National Minimum Wage Rate|
|National Living Wage (21 and over)||£ 11.44|
|18-20 Year Old Rate||£ 8.60|
|16-17 Year Old Rate||£ 6.40|
|Apprentice Rate||£ 6.40|
|Accommodation Offset||£ 9.99|
New rates take effect from 1 April each year: they should be applied in the first pay reference period starting on or after this date.
Who should receive the minimum wage?
The minimum wage has a wide reach, and it should never be assumed that someone falls outside the scope. Part-time workers, casual labourers, agency workers and workers on probation, for example, all qualify. Depending on the exact arrangement involved, interns may also be due payment at minimum wage rates. People who are not eligible include the self-employed, company directors without employment contracts and volunteers, however care is needed to categorise volunteers correctly.
What can go wrong?
Underpayment can arise for many different reasons, but broadly, where underlying assumptions and calculations are adrift, employers are at risk.
Wrong type of work, wrong calculation
Minimum wage is worked out as an hourly rate. Not all workers are paid by the hour, however. For minimum wage purposes, there are four different categories:
- time work (workers paid by the hour)
- salaried hours work (workers paid an annual salary, under a contract for basic number of hours each year)
- output work (workers paid by the piece, such as number of things produced, or tasks completed)
- unmeasured work (workers paid in other ways).
Minimum wage applies to all eligible workers, whatever the type of work. Different rules and calculations are used for each category to produce an equivalent hourly rate, ensuring that all workers are paid at least the minimum wage. The first step for employers is therefore to look at the worker’s contractual arrangements and establish what type of work is done.
Don’t assume salaried hours rules apply
Changes to the rules from 2020 increased the number of workers to whom these rules apply. To qualify, it’s not enough just to receive a salary. There are four conditions, and all must be met. The worker must be:
- paid under a contract for a set basic number of hours per year
- entitled to an annual salary for those hours
- not be entitled to any other payment under their contract for those hours (except for performance bonus, and/or salary premium)
- be paid either in equal instalments or in varying monthly instalments that add up to the same amount each quarter.
If all the salaried criteria are met, it is the average pay over the year that matters. This means minimum wage compliance can be achieved even if hours worked in a particular week, month, or other period vary.
Watch deductions from wages
This is a particularly high-risk area. Deductions or payments from workers for items or expenses that are connected with the job, such as tools or equipment, can create minimum wage underpayment. The pay is reduced in the pay period in which the deduction is made and if workers then fall below the minimum wage in that period, underpayment arises.
Employers can also inadvertently fall foul of the rules where they require staff to wear a uniform, such as a shirt with a corporate logo, or enforce a dress code, like a white shirt and black trousers. Deductions for these (or payments to a third party) reduce minimum wage pay and should be factored into calculations.
Salary sacrifice can cause problems
Salary sacrifice arrangements, where workers give up part of their salary for a non-cash benefit like pension contributions, childcare vouchers, and cycle to work schemes, are common. In the case of pension contributions especially, they can be very tax efficient.
But take care to check how the sacrifice interacts with minimum wage rules. It is the figure for pay after the sacrifice that HMRC takes account of.
Check the rules for apprentices
It is not enough to call someone an apprentice, there has to be a contract of apprenticeship or recognised apprenticeship scheme in place to satisfy minimum wage requirements, and apprenticeships must include structured training.
It is essential that employers check that payroll systems can cope with change when it comes. The apprentice rate applies only to an apprentice who is under 19, or 19 and over and in the first year of their apprenticeship. Once an apprentice over 19 has completed their first year, they are due the appropriate minimum wage for their age. Underpayment can build up quite rapidly if pay is not uplifted from the £6.40 hourly apprentice rate.
Record working time accurately
Underpayment often arises through mistakes over what constitutes working time, and errors can creep in as easily as having a recording system that rounds time down. HMRC highlights failures paying for travelling time, and time spent training, as well as:
- not paying for additional time added to shifts, e.g. team handovers, and security checks on entry and exit
- not paying for time during a shift when someone is at the workplace and required to be available for work – even if no work is provided at that time
- miscalculating working time on shifts where workers may spend some time asleep.
How we can help
Getting minimum wage right the first time matters. Dealing with minimum wage problems after they have happened is likely to be more expensive, this is because underpayments must be made good to workers at current rates, and penalties are worked out as a percentage of arrears.