Every few months HMRC publishes a list of those employers it finds underpaying employees the National Minimum Wage (NMW).

The most recent list, published mid-August, was the largest ever and named 197 employers, two of which were in the property sector who collectively owed £7,293.81 to four workers. Cast the net back to January 2015 and the total rises to a staggering £102,164.86 owed by nine firms to 138 workers – none of these employers will have welcomed HMRC’s attention, especially as they’re now on HMRC’s radar.

Employers either have problems calculating NMW, or they assume the rules don’t apply to them. They do.

Judging by the size of the list it’s clear that employers have problems in either calculating NMW, understanding their obligations, or they assume that the rules don’t apply to them. With real pressure from the government and the media to have employees paid correctly, employers need to know the rules.

THE NATIONAL MINIMUM WAGE

The National Minimum Wage – NMW – called the National Living Wage for those who are 25 or older, was introduced in 1999. It is a specified minimum hourly rate of pay to which anyone aged 16 or older is entitled. NMW is presently:

• £7.20 an hour for anyone aged 25 or over; 
• £6.95 an hour for anyone aged 21 – 24; 
• £5.55 an hour for anyone aged 18 – 20; 
• £4.00 an hour for anyone aged 16 – 17; and £
• 3.40 an hour for an apprentice (under age 19 or in their first year) 

HMRC has gone on record as saying that “it is an employer’s responsibility to be aware of the different minimum wage rates depending on the circumstances of their workers – and to make sure all eligible workers are paid at least the minimum rate they are entitled to.”

Lee Ashwood, a senior associate in the employment department of Eversheds, says that you would think that calculating NMW is simple – but it’s not. “To most the calculation would be total pay divided by the number of hours worked. Unfortunately, it is not that simple and this is often why employers inadvertently pay people less than NMW.”

The first step, he says, is to note that the calculation must be based on the relevant ‘pay reference period’. But not all pay in the reference period counts towards the calculation. Ashwood goes into detail: “A pay reference period is the period for which an employee receives pay (assuming they are paid regularly and at least once a month). For example, if someone is paid weekly, their pay reference period is one week; for those paid monthly, it is one month. Employers then need to look at the total employees were paid before deductions for income tax and National Insurance contributions in the period in question (the relevant pay reference period), and then remove any payments and deductions that do not count towards NMW.”

Basic salary, bonus, commission and other incentive payments based on performance, all count towards NMW as does, in some circumstances, an accommodation allowance. But there are a number of elements of pay that do not count including pension payments or benefits in kind such as private medical insurance or other benefits (except an accommodation allowance); any extra pay for overtime or shift work. Only the basic rate of pay is taken into consideration for overtime worked; expenses; and any allowances or payments that are not attributable to their performance and is not part of their basic salary, for example an additional element of pay that is for London-weighting or an on-call allowance.

The amount that is left is the total amount paid for the purposes of NMW.

GOVERNMENT WARNING

Establishing how many hours the employee worked is not simple either and Ashwood says employers need to consider the time spent actually working, but not any rest or meal breaks during which the employee is not required to work (even if they voluntarily do some work during the break). “It’s also important to note standby or on-call time, but only if they are required to be available at or near their place of work should they be needed; any travel time for business during normal working hours, but not commuting to and from work; and time the employee spends receiving training, whether at work or anywhere else during normal working hours.”

To stay out of HMRC’s reach Ashwood firmly advises employers to note these relevant factors when calculating NMW. “Remember, NMW is not going away. As the government minister responsible for NMW, Margot James, said, ‘This government is determined to build an economy that works for everyone, not just the privileged few. That means making sure everyone gets paid the wages they are owed – including our new, higher, National Living Wage. So we’ll continue to crack down on those who ignore the law.’”