The Department for Business, Energy and Industrial Strategy (BEIS) has published its annual report on National Minimum Wage (NMW) compliance and enforcement.
The report records that HMRC discovered that in 2017/18 there was a record underpayment of £15.6 million to over 200,000 workers. This resulted in penalties totalling £14 million and over 600 employers being publicly ‘named and shamed’.
BEIS and HMRC have committed to promoting compliance and improving employer awareness of the minimum wage rates and stopping underpayment from the outset by changing the behaviour of employers and workers.
At the same time, HMRC says it will continue to prioritise the Social Care, Retail & Commercial Warehousing and Gig Economy sectors for targeted enforcement, alongside employment agencies, apprentices and migrant workers.
In our experience, most employers are aware of the NMW rates and are committed to compliance but a significant number are unaware of how to calculate actual hourly rates for NMW purposes. This leads to the unintentional, although still unlawful, under payment of workers. Many employers, and even some well-known high street names, unexpectedly find themselves being ‘named and shamed’.
With that in mind, we have decided to go back to first principles and look at how to calculate your hourly rates.
Calculating the hourly rate
It is important to note at the outset that there is no right to be paid the minimum wage for each hour worked, a common point of confusion. The worker is only entitled to be paid at or above the minimum wage ‘on average for time worked over a pay reference period’. The pay reference period is a week, month or other period, depending on the intervals at which the worker is paid, up to a maximum of a month.
At its most basic, determining whether or not a worker is being paid the minimum wage involves working out an hourly rate of pay by dividing payments received by hours worked (PR / HW = P) in the pay reference period.
Payments received (PR)
In order to calculate the hourly rate, it is first necessary to calculate the worker’s total pay, or payments received, in their pay reference period. Total pay is the gross payments he receives from the employer (including incentive pay and bonuses) less any reductions.
Reductions do not include deductions for tax and national insurance, pension contributions or union subscriptions.
Hours worked (HW)
When it comes to determining whether or not the NMW has been paid, the second part of the calculation involves working out the number of hours worked in the pay reference period. To do this, you need first to identify which hours count (and do not count) as ‘hours worked’. That will depend on which ‘category of work’ any particular worker undertakes.
There are four categories of work: salaried hours work, time work, output work and unmeasured work. For the purpose of this article, we will focus on ‘time work’, which is the most common category of work that gives rise to NMW issues.
For NMW purposes, ‘time work’ includes time:
- when a worker is working;
- subject to the ‘sleeping over’ exception (see below), when a worker is available at or near a place of work when he is required to be available unless he is at home;
- when the worker is attending training approved by the employer, or is travelling to training; and
- time spent travelling for the purpose of his duties in the course of time work, except when the travelling is between the worker’s home and his place of work or a place where an assignment is carried out.
Time work includes time when a worker is available at or near a place of work for the purpose of working, unless he is at home.
However, sometimes, a worker may, by arrangement, sleep at or near a place of work, and be provided with sleeping facilities. In those circumstances, the hours during which the worker is permitted to use the facilities will only count as time work when the worker is awake for the purpose of working. Time when the worker is either asleep or awake, but not for the purpose of working, will not count as time work.
This has caused difficulties when calculating the hours worked for sleep-over domiciliary care and other workers who are ‘on call’ while sleeping-in. The latest authority on the point, and the current position, was recently set out by the Court of Appeal (CoA) in Royal Mencap Society v Tomlinson-Blake, Shannon v Rampersad.
The CoA held that workers who are required to ‘sleep-in’ at or near their workplace on the basis that they may be woken if required to undertake some specific activity, are to be characterised only as ‘available’ for work for ‘time work’ purposes, rather than actually ‘working’, so fall within the terms of the sleep-in exception above. This means that sleeping, even when on call, does not count as time work when calculating the NMW.
We understand that the decision in Royal Mencap Society is being appealed to the Supreme Court, so the CoA’s interpretation may well be overruled.
We recommend that all firms should be self-auditing on an annual basis to ensure compliance with the NMW Regulations.
Firms which pay at or near the NMW and/or which engage workers on a ‘time work’ basis, or operate in the Social Care, Retail & Commercial Warehousing and Gig Economy sectors, engage apprentices or migrant workers, or operate as an employment agency, would be well advised to self-audit on a more frequent basis.
This should encompass more than simply checking that each worker is contractually entitled to be paid an hourly rate at or above the NMW. It should involve:
- a careful assessment of the actual work or activities being undertaken by the worker; and
- calculation of the correct hourly rate of pay for NMW purposes using the PR / HW = P formula.