National minimum wage update
Given the current situation in the UK, many workers may be on furlough with employers anxiously waiting for grants from HMRC. As a result, the national minimum wage (NMW) will not apply to those employees while they are on furlough leave. However, employers should be aware of changes to the national minimum wage laws.
The first is the usual changes to the rates. With effect from 1 April 2020, the following rates apply:
National living wage
(Age 21 to 24)
(Age 18 to 20)
(Age under 18)
Measures to simplify compliance
In addition, the Government has implemented some changes, which are more technical in nature, but are intended to simplify compliance and reduce instances of employers inadvertently being in breach of NMW.
Types of work
For the purpose of assessing whether workers have been paid NMW, workers are classified as performing work of one of four types:
- Salaried hours work
- Time work
- Output work; and
- Unmeasured work.
However, the definition of “salaried hours work” was much more restrictive than the name suggests. It did not apply to all those who received an annual salary, instead it only applied to those on annualised hours contracts who were paid either weekly or monthly and only received basic salary and potentially a performance bonus. It did not include those paid fortnightly or 4-weekly or those who received premium pay, e.g. for working on bank holidays.
Instead, those workers would predominantly fall to be performing “time work” and as such they had to be paid at least NMW for all time worked in each pay reference period. This potentially led to NMW breach as their pay remained the same each pay reference period, but their hours varied, e.g. because there are a different number of working days each month.
In contrast, a worker performing “salaried hours work” is assumed to work basic hours evenly over the course of a year and their average hourly rate of pay must be at least NMW for those basic hours. However, their actual hours worked may not be the same in each pay reference period. There are likely to be fewer compliance issues with salaried hours work, unless a worker’s annual salary is close to NMW and the worker is regularly required to hours in excess of their basic hours.
For example, a salaried shop worker may be required to work extra hours over the Christmas period, but would then be rostered for fewer hours at a quieter time of the year. If this worker was paid equal instalments of salary every month, but received a shift premium for working on bank holidays, the worker would be performing “time work”. It is likely there would be NMW breach in December because the worker would have worked more than one twelfth of their basic annual hours, but only been paid one twelfth of their salary.
With the new changes, there would not be a breach unless the worker exceeded their annual hours, for example due to an administrative oversight in being rostered for more than their basic hours under their contract.
Ability to have a standard “calculation year” for salaried hours work
A further change is to allow employers to choose the “calculation year” for monitoring whether a worker’s basic hours are exceeded where they perform salaried hours work.
To ensure compliance with NMW employer must check that each worker’s average hourly rate of pay for basic hours is above NMW. Where it is close to NMW, then employers will need to ensure that the worker only works their basic hours or there could be a breach of NMW.
Prior to this change, to check whether an employee works in excess of their basic hours required an individual assessment for each worker by reference to their first day of work. This made it difficult for employers to check whether basic hours had been exceeded. Going forward, employers can set a standard calculation year.
Due to transitional arrangements, these changes to broaden the scope of salaried hour work, and change the calculation year, do not take effect for at least two years unless the employer takes action. To have the benefit of these provisions more quickly, employers must give written notice to each worker which complies with various requirements. If notice is given, then the changes apply from the date specified in the notice, provided it is after 6 April 2020.
Reduction to pay for NMW purposes
There is also a small change to the rules about payments by workers which reduce pay for NMW purposes. At present if a worker makes a purchase from the employer in connection with their employment (e.g. the latest clothing line for uniform in a clothes shop) then it will always reduce NMW pay, even where the employer reimburses the worker (e.g. by providing a clothing allowance or allowing the worker to claim back the cost of such items).
Under the rules from 6 April 2020, if the employer reimburses the purchase it will not reduce NMW pay. This will also cover situations where employers provide money for the purchase in advance, e.g. a uniform allowance payment.
In February 2020, the Department for Business, Energy and Industrial Strategy announced that it will resume naming and shaming rounds and intends these to occur more frequently. The NMW enforcement budget will be £27.4m for 2019/20, which is more than double the budget in 2015/16.
The latest NMW Enforcement Policy, published in February 2020, has also confirmed that HMRC will not take enforcement action where pay has fallen below NMW as a result of a worker participating in a salary sacrifice arrangement, provided certain conditions are met. These include the worker consenting to the arrangement and deriving a benefit, the employer repaying arrears and the prior conduct of the employer.
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