Do you recognise this wording from your contract of employment?

“The Employee's normal working hours shall be 9am to 5pm on Mondays to Fridays and such additional hours as are necessary for the proper performance of their duties.”

Most employment contracts contain this or similar wording. Even if the contract does not refer to additional hours, it is often the commercial reality for an employer to require the employee to work beyond the hours stated in their employment contracts. Both of these scenarios are significant in relation to the law on the National Minimum Wage (“NMW”).

What type of workers does NMW apply to? ⚓︎

All ‘workers’ are entitled to be paid national minimum wage. In the context of the NMW, there are four types of worker. This isn’t a question of worker status (i.e. whether someone is an employee, a worker or self-employed), which is currently dominating the headlines. For NMW purposes, workers or employees fall into one of the following four classifications:

• Time worker - paid by the hour (includes casual workers);
• Output worker or piece rate worker - paid by the item produced (includes home workers);
• Salaried worker - receive annual salary for annual hours worked; or
• Unmeasured worker - paid for hours worked in each pay reference period.

When thinking of these classifications, most employers would consider that their staff (whose contracted hours are, for example, Monday to Friday from 9am to 5pm) are salaried workers because they receive a set weekly or monthly salary in return for (on paper, at least) a fixed amount of hours which they are required to work.

However, if their contract of employment contains the wording “and such additional hours as are necessary for the proper performance of their duties”, they will automatically be treated by HMRC as unmeasured workers. Equally, even if the contract of employment states that the employee must only work a stated number of hours, if the commercial reality is that the employees actually work beyond these hours, HMRC will deem them to be unmeasured workers. This misclassification (salaried workers vs unmeasured workers) is a common pitfall and the implications of this, for NMW purposes, are potentially severe.

Unmeasured workers should be paid for the hours they have worked (at a minimum rate per hour) in any pay reference period, rather than being paid a fixed amount each week or month, which truly salaried workers receive. It is therefore very easy for employers to be in breach of the minimum wage rate (currently £7.38 for 21-24 year olds and £7.83 for 25 year olds and older, who are entitled to the National Living Wage (“NLW”)), where their workforce contains lesser paid employees, who often work beyond their contracted hours, and who the employer treats and regards as salaried workers.

By way of example, if a 30-year-old employee receives £320 per week in respect of 40 hours work, there will be no NMW breach as the hourly rate will be £8 per hour. However, if in fact their contract contains the abovementioned wording, or in reality, they work more than 40 hours per week, say for example they work an extra 10 hours per week, HMRC will treat their hourly rate as being £6.40 (£320 / 50), which will amount to a NMW breach. 

What is ‘pay’? ⚓︎

Determining what constitutes pay is far from straightforward. However, as a general rule, pay includes basic pay, overtime (but not premium rate overtime) as well as, in certain circumstances, performance-related commission and performance-related bonuses. Many allowances, for example, shift premium allowances and location allowances are not included within the scope of pay. In simple terms, the payment of overtime may serve to defeat any claim that an employee has been underpaid.

Deductions must also be taken into account in the calculations and are an area of risk for NMW purposes. The general rule is that if the business charges the employee for something (or deducts the money owed at source), for example company car parking facilities, childcare facilities, a company car or a prescriptive uniform (ie a specific outfit or colour as opposed to ‘dark’, or ‘smart’), it is provided by the employer rather than by a third party and it is for the employer’s own use and benefit, then this will be deducted from ‘pay’ for the purposes of the calculation. Similarly, payments into pension via salary sacrifice will be deducted from ‘pay’ for the purposes of the calculation.

Steps to combat the risk of NMW breach ⚓︎

• Check the wording of employment contracts;
• Review staff working practices to see whether the stated contracted hours reflect the commercial reality;
• If the contracts contain the abovementioned wording or, in reality, employees work beyond their stated hours, consider updating their contracts of employment to reflect the hours actually worked. In doing so, you may need to review salaries and whether any back pay is necessary for the period of time in which they were paid less than minimum wage;
• Ensure you have up-to date-records of the hours each employee has worked (not just what their contract says they will have worked) for six years. Whilst the NMW legislation only requires employers to retain their records for three years, HMRC has can look back up to six years.

What are the penalties for breach? ⚓︎

Provided the total amount owed across the entire workforce is more than £100, HMRC will issue you with a notice of underpayment. This notice will detail the amount of arrears due. The total figure you will owe will be 200% of the amount underpaid, up to a maximum of £20,000. The penalty will be reduced to 100% if paid within 14 days. In addition to the financial penalty, HMRC can also publicly name and shame offenders, and therefore there is a risk of reputational damage.

HMRC are actively pursuing and enforcing NMW breaches at present. If there is any doubt as to your compliance with NMW, now is the time to review this and make any necessary corrections or adjustments.