National Minimum Wage and the salaried worker

Many a worker – and many an employer – would think that an employee who received an annual salary would be categorised as a salaried worker. Surprisingly, when it comes to the workings of the National Minimum Wage Act (NMW), that isn’t always the case.

For NMW purposes, HMRC – who ‘police’ the workings of the NMW – contend that the legislation requires that, for someone to be in a ‘salaried’ employment, they should be able to work out at the start of the contract year exactly how many hours the worker will have to work in the year ahead.

If a contract says that you will work from 9am until 5pm from Monday to Friday each week, and the contract year starts on, say, 1st March 2016, then that would be a salaried contract – because at the start of your working year, you would be able to say how many Mondays, Tuesdays, Wednesdays, Thursdays and Fridays there are in the year ahead and calculate the exact number of hours you need to work to earn your salary. From there, it is an easy step to divide the salary due under the contract by the number of hours to determine whether a worker is being paid the National Minimum Wage (or, if the employee is 25 or over, the National Living Wage).

But, say that your contract simply says that you will do 40 hours per week. The HMRC view is that the annual hours cannot be ascertained from the contract – because it doesn’t stipulate which days you will work – and the year doesn’t work out exactly as 52 weeks but as 52 weeks and one day (or two days in a leap year).

If you do not fall into the category of a salaried worker, then you are more likely to be categorised as an ‘unmeasured’ worker. Workers fall into four broad categories when calculating the national minimum wage:

1. ‘Salaried hours workers’ – who are paid annually under a contract
2. ‘Time workers’ – who are paid by the hour
3. ‘Output workers’ – who are paid by the piece, for example the number of items they make
4. And ‘unmeasured workers’

If you fall into the ‘unmeasured’ workers category, then your hourly rate is calculated in terms of your ‘pay reference period’ or PRP. If you are weekly paid, your PRP is a week, if you are monthly paid, it is a month. In this category, HMRC calculates compliance with the NMW by dividing the salary paid in the PRP by the number of hours worked in the PRP. This usually doesn’t cause much of a problem with weekly paid staff (because they will typically work 40 hours and be paid for 40 hours). However, difficulties can arise for monthly paid staff because the number of working days in a month will vary from month to month.

The greatest issues arise in a 31-day month with four weekends, where the worker will typically work 23 days. This can be exacerbated where the worker’s hour or day pattern might change from week to week. If at the start of the month the worker is working from Monday to Friday but later in the month changes to working Saturday to Wednesday, you can have the effect of ‘losing’ a weekend so that the worker does 25 days in the monthly PRP – with the result that, mathematically, for that month they appear to be receiving less than the NMW or National Living Wage (NLW), even though their annual salary is pitched at a level intended to ensure the worker gets paid no less than the NMW/NLW.

No sector is more likely to be prone to these issues than the hospitality sector where, because of fluctuating and seasonal variations in demand, it is often essential for the employer to be able to ask their workforce to change their work pattern from week to week, to cater for that sudden and unexpected influx of guests or to cover the colleague who is absent.

Unfortunately, the NMW legislation doesn’t allow for such variations and is applied very strictly so that any infringements are punished with a de minimis limit of only £100 across all affected employees, and any employer who fails to pay NMW can find themselves “named and shamed” for their offences. As you can imagine, this can come as a very nasty surprise to any employer who believed that they had set their annual salaries at a level that met the requirements of the NMW/NLW – only to find out that, due to a technicality with the wording of the contract, their workers might not be categorised as salaried.

About the Author

Jon Claypole, a partner at Mazars LLP, and his team have helped many businesses with National Minimum Wage enquiries and have extensive knowledge in the area. If you would like to get in touch to discuss anything mentioned above or would like any further advice on the National Minimum Wage contact Mazars on 0207 063 4639 or 0161 831 1312 or email jon.claypole@mazars.co.uk