Until the early 1990s, wage rates for many industries were set by industry-specific Wages Councils most of which have been abolished. The introduction of a National Minimum Wage (NMW) returns employers to the type of controls set out above but with one marked difference. Wages Councils operated within each industry and could reflect the terms of business of those industries. The NMW applies across the UK and has severe implications in industries which operate on low margins. It also ignores the lower cost of living in parts of the UK.

The NMW is currently £4.85 per hour (October 2004) and is reviewed annually. This rate paid cannot be varied on any basis (e.g. area, region, business size, occupation) except age (as set out below). No doubt the rate will continue to rise but no commitment (e.g. to link it with the Retail Price Index or any other index) has been given. There is no requirement to pay NMW when the worker is taking part in industrial action - this is regarded as absence. Homeworkers must be paid at least the NMW.

The full rate applies to all workers aged 25 or over. Young workers (i.e. those aged 18-21) must be paid £4.10 (October 2004). Accredited trainees aged 22 or over, must also be paid £4.10 (October 2004) for the first 6 months of a new job with a new employer. Rates for those aged under 25 can be set by the Secretary of State. Homeworkers and agency workers are also subject to NMW requirements. Those working for more than one employer have the right to be paid NMW in respect of each employment. From October 2004, employers have been required to pay 16 and 17 year olds the NMW at a rate of £3 per hour.

Hours Covered
All hours on 'employer's business' must be covered - thus, although workers have no right to be paid for travel to and from their place of work, if they are asked to travel elsewhere - e.g. for a training course, or to visit a customer - these hours would need to be added to normal working hours and at least an average of the NMW rate applicable paid for all hours. This even covers hours when the worker is not actually working.

Those excepted from this Act's scope include:

a. those genuinely self-employed;

b. children;

c. office holders (this would include directors who are not also employees);

d. members of the Armed Forces;

e. voluntary workers;

f. work experience trainees who are not employed;

g. family members not routinely working or employed (i.e. it would cover those who work regularly); and

h. custodial prisoners.

Record Keeping
Employers must keep records which demonstrate that at least the NMW has been paid in respect of each hour worked. Since employers are also required to keep records of hours worked for the purposes of the WORKING TIME regulations, the possibility of linking the two could be considered. Contributions Agency enforcement officers have the right of access to records to check compliance.

All those covered (i.e. 'workers' including employees) may enforce their right to the NMW by access to an Employment Tribunal, and have the right not be subjected to sanction by the employer for so doing.

There are 6 criminal offences under the Act:

1. Willfully refusing or neglecting to pay a worker at least the NMW.

2. Failure to keep records.

3. Keeping of false records.

4. Producing false records.

5. Delaying or obstructing an enforcement officer.

6. Refusing to answer, provide information for, or produce a document for, an enforcement officer.

Each offence carries a £5,000 penalty. Whilst the fine can be levied against the employer, if the employer is a corporate body 'a director, manager, secretary or other similar officer of the body' (including partners in Scottish partnerships) could be held jointly liable for any offences committed under this Act where the offence is proved to have been due to their negligence, consent or connivance.

Types of Work

The regulations recognise four types of work:

1. Time Work
The worker works for a certain number of hours per working day but is not a salaried worker. He may be required to produce a certain output per hour or day but nevertheless earnings are determined by the number of hours worked. This should pose few problems in terms of calculation of the actual rate being paid - but see below for exclusions from and additions to the gross pay.

2. Output Work
Earnings are geared to the number of items produced or sales made. Again, this should pose few problems provided the number of hours as well as the output (which generates the earnings), are recorded. Where there are no set hours the worker and the employer are required to form an agreement 'Hours of Output Worked in a Pay Reference Period' prior to the pay reference period. This must contain an estimate of the number of hours, will require the worker to keep a record of the number of hours worked and to give the employer a copy, and confirms the payment 'piece rate' or other output rate. The total of the hours for the period are called 'ascertained hours' and each must be paid at the NMW rate. If however, the worker works in excess of these hours and generates additional output in addition they will be entitled to be paid for the excess output at the output rate.

3. Unmeasured Work
Here the commitment is to work as and when needed (i.e. when there is work to be done). If time is used travelling in order to carry out unmeasured work it counts as time for which the NMW must be paid. The hours that count are either the hours worked or, like the arrangements for Output work, the worker and the employer must determine the average number of hours per day that the employer expects the worker to work and to be paid for.

4. Salaried Work
The worker is employed at a fixed annual salary which is their total earnings apart possibly from a performance bonus. Employers need to know the basic hours for the year. Each year for the purposes of this calculation commences on the anniversary of their start date.

Calculation of Hourly Rate
The rate paid to an employee is calculated by reference to the number of hours in a 'pay reference period'. Such a period cannot be longer than a month, but can be any shorter period for which a worker is paid (e.g. a week, a fortnight, 4 weekly or since the start of employment). Obviously all hours worked in the period, including Travelling to externally-sited training etc., must be included.

The pay to be taken into account is the gross pay less non-allowable items. Non-allowable items include pay for:

  • being on call;

  • additional responsibilities;

  • unpleasant or dangerous conditions;

  • for accrued items;

  • for absence;

  • overtime and/or shift premiums;

  • non payroll generated tips or gratuities; and

  • reimbursement of travel expenses and so on.

  • In addition the following payments cannot be taken into account:

  • payments in kind (except living accommodation the value of which can be added to the pay); and

  • vouchers, loans, advances, pensions, allowances, awards, redundancy and so on.

  • To be included is:

  • gross pay;

  • productivity bonuses, profit/performance-related pay; and

  • incentive payments and so on.

  • If the pay with legitimate inclusions but after non-allowable deductions b) is divided by the number of hours a), a rate per hour is arrived at. Providing this is in excess of the NMW at the time nothing needs to be done. If however, the hourly rate arrived at is less than that, then for each hour it must be topped up to at least the NMW.

    As can be seen from the above summary‚ detailed records need to be compiled and kept to ensure that the actual hourly rate for each type of worker is known, so that additional payments can be made if necessary to bring the rate up to at least the NMW.