How employers should calculate the National Minimum Wage

21 Jul 2021 By Stephanie Sharpe

It is not a simple matter of minimums, it is the way firms engage with workers that determines how wage payments should be made, says Stephanie Sharpe

In brief, to qualify for National Minimum Wage (NMW) an individual must be:

  • A ‘worker’;
  • Between school leaving age and 23 (from 23 National Living Wage applies);
  • Working in the UK;
  • Not on the list of exemptions from NMW (including company directors, share fishermen, members of the armed forces, live-in staff treated as one of the family, like an au pair, to mention just a few) and;
  • Not an apprentice.
As an employer, having determined if you need to pay the NMW, it is time to work out how much to pay. The hourly rate, which is age-based, applies whether or not the individual is paid by the hour and depends on how the work is measured. There are four categories of work:
  • Salaried hours work: paid an annual salary for a basic number of hours each year.
  • Time work: paid by the hour.
  • Output work: paid by the piece, the number of things made, or tasks completed.
  • Unmeasured work: anything not in the preceding categories.
  • Salaried hours work must be performed under an employment contract which sets out the basic number of hours and the annual salary for the hours. Payments must be made in equal instalments, usually weekly or monthly but may be two- or four-weekly. 

For example, Janet takes a job at a shop working three days a week from 9am to 3pm, excluding school holidays, for a fixed annual salary paid monthly in arrears. The NMW is measured against the total contractual hours and Janet is paid the same amount at the end of each month even if she has not worked – for example in August.

Time work is not as straightforward as it may seem. If the contract is simply for hourly pay, NMW applies for each contractual hour worked. If the worker has set hours but is paid according to what they produce or do in those hours, pay will need to be at NMW even if production or output falls below the agreed level. Time work will rarely be the same each pay period, unlike salaried hours work, as it will vary according to the actual hours worked in the week or month.

Output work is where pay is based on items produced, also known as piece work and the employer can either agree a piece rate under the specific arrangements in place or can pay at least the NMW for each hour worked. There are no set hours. For example, someone may work in the evening or at other times to suit their personal circumstances, but the pay per hour worked must not fall below the NMW unless pay is agreed under the ‘rated output work system’.

Unmeasured work is the catch-all for any type of work not falling into the other categories. For NMW purposes, pay is calculated either according to the actual hours worked or a daily average agreement between the employer and worker. 

HMRC uses the example of a delivery driver paid £50 to make five deliveries regardless of the time taken to perform the task. On the face of it this would be output work, but the assumption is that the deliveries may be made over an undefined period. The driver may set out to deliver all five items as quickly as possible or make the deliveries when convenient to him. 

Stephanie Sharpe is a senior tax manager at Moore Kingston Smith

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