National Minimum Wage

Key points
  • Since the coming into force on 1 April 1999 of the National Minimum Wage Regulations 1998 (as amended), every UK worker aged 18 and over now has the statutory right to be paid no less than the national minimum wage (NMW) appropriate to his or her age.
  • From 1 October 2002 to 30 September 2003, the NMW for workers aged 22 and over is £4.20 an hour. For workers aged 18 to 21, inclusive, it is £3.60 an hour. And, for workers aged 22 and over who are in receipt of 'accredited training' (on at least 26 days in their first six months of employment) it is also £3.60 an hour. At present, there is no NMW for workers under the age of 18. Certain payments made to workers (such as overtime premium payments, shift allowances, cost of living allowances, and the like) do not count towards the NMW; nor do most benefits in kind. Some deductions from pay also do not count. Deductions and payments which do or do not count towards the NMW are discussed later in this section.
    Note 
    The term 'accredited training' means training undertaken with a new employer during normal working hours (at or away from the workplace) which leads to a vocational qualification approved by the Secretary of State for Education. It does not apply to in-house training devised and provided by employers. At present, there is no NMW for workers aged 16 and 17 
  • A refusal or failure to pay the appropriate NMW is an offence, the penalty for which, on summary conviction, is a fine of up to £5,000 for each offence. Inland Revenue enforcement officers have the right to enter an employer's premises and to inspect wage records. A failure to keep adequate or accurate records, or an attempt to obstruct inspectors in the exercise of their functions, will also lead to prosecution and a fine of up to £5,000.
  • Workers who are dismissed, selected for redundancy, or subjected to any other detriment, for questioning or challenging their employer's refusal or failure to pay the NMW, or for bringing proceedings before a tribunal or court, will likewise be entitled to compensation. Indeed, a worker who suspects that he or she is being paid less than the NMW may write to his or her employer demanding to see the relevant wage records, and must be supplied with those records within 14 days. An employer who fails to comply with such a request will be ordered to pay the worker in question the sum of £288 (that is to say, 80 times the level of the NMW), as well as compensation for the shortfall in pay.
Practical guidance
Meaning of 'worker'
  • A 'worker' is a person who does work for an employer, either under a contract of employment or under a contract sui generis (that is to say, of its own kind). In short, the term encompasses employees, seasonal and casual workers, freelances, agency 'temps', pieceworkers (or output workers), workers paid entirely on commission, and homeworkers. All such workers must be paid no less than the appropriate NMW rate. As a 'rule of thumb', a worker's employer is the person (or organisation) who (or which) pays the worker 's wages or salary, and deducts payments in respect of PAYE tax and NI contributions. It is important to stress that workers over normal retiring age or the state pension age (60 or 65, as the case may be) must be paid the appropriate NMW rate if they are workers.
  • The only category of person who is not a 'worker' in this sense, and who does not qualify for the NMW, is the self-employed person. The genuinely self-employed person is engaged under a contract for services to carry out a specific task or activity in return for an agreed fee. The self-employed person prepares his (or her) own annual accounts for submission to the Inland Revenue, pays his own taxes and National Insurance contributions, submits his own invoices (preferably on a preprinted form), is (where appropriate) registered for VAT, provides his own tools and equipment, and is not under the direction or control of any other person. An employer would be well-advised to demand proof of 'self-employed' status from any person who holds himself out to be self-employed.
  • Employers who choose to categorise some or all of their workers as 'self-employed', in order to avoid paying the appropriate NMW rate, are liable to prosecution and heavy fines – unless they are in a position to convince Inland Revenue enforcement officers that the workers in question are indeed self-employed.
  • Agency 'temps' are usually employed by the employment business which hires them out to client employers. It is the employment business (not the client employer) that is responsible both for paying a temp's wages (within clearly defined time limits) and for ensuring that their workers are paid the appropriate NMW rate.
Excluded categories
  • The NMW need not be paid until their 19th birthdays to 18-year-old apprentices who began their apprenticeships at 16 or 17. Nor need it be paid to apprentices age 19 and over during the first 12 months' of their apprenticeships or until their 26th birthdays, whichever occurs sooner. An 'apprentice', for these purposes, is a person who is either employed under a contract of apprenticeship or who is taking part in the Government's Modern Apprenticeship programme.
  • Also excluded from the NMW during their placements with employers are 'sandwich course' students, students obtaining work experience, teacher trainees, and trainees on Government-funded schemes (such as the 'New Deal', 'Work-based learning for adults', and so on).
    Note 
    Also excluded are members of the armed forces, share fishermen, voluntary workers (who receive no pay for their time apart from genuine expenses), and prisoners.
  • But those exclusions do not apply to students taking a 'gap year ' between school (or college) and university. Nor do they apply to students undertaking post-graduate studies (whether taking up employment independently or as an adjunct to their studies). All such people must be paid no less than the appropriate NMW rate during their employment.
Deductions and payments that do or do not count towards the NMW
  • As was mentioned above, there are some payments included in a worker's gross wages or salary (such as overtime premium payments and shift allowances) which do notcount towards the NMW; and there are others which do. Likewise, there are certain benefits in kind and deductions from pay (or payments made to an employer) which must be excluded from calculations. There is, for example, no upper limit on the amount of rent that an employer may charge a worker for 'live-in' accommodation (a not uncommon feature of employment in the hotel and leisure industries). However, as is explained below that portion of the rent paid by a worker, which exceeds a specified hourly, daily or weekly amount, does not count towards the NMW. In short, the excess amount must be deducted from the worker's gross wages or salary in order to establish whether the worker in question is being paid the appropriate NMW rate.
  • Other deductions (or payments by a worker) that do not count include deductions in respect of meals compulsorily purchased by a worker from his or her employer; and deductions in respect of uniforms or protective clothing and equipment. The object of the exercise here is to ensure that employers do not use deductions from pay (or demands for certain payments from workers) as a means of 'clawing-back' (or reducing the effect of) the NMW.
Deductions and payments that do not count
  • The following components of a worker's gross wages or salary in a particular pay reference period (week, fortnight or month) do not count as part of the NMW:
    • overtime premium payments;
    • shift allowances;
    • premium payments for work carried out on a bank or public holiday;
    • unsociable hours payments;
    • danger money;
    • standby or on call allowances;
    • travel allowances;
    • cost of living allowances (eg 'London weighting' payments); and
    • payments carried forward from a previous pay reference period.
    Benefits in kind provided by an employer (whether taxable or not) do not count towards the NMW. These include:
    • a company car;
    • petrol, oil and lubricants;
    • meals (or the notional value of such meals) if, as is unlikely, a worker is required by his (or her) contract to take his meals in a staff or works canteen;
    • luncheon vouchers (or the notional value of such vouchers);
    • the employer's contributions to an occupational pension plan;
    • relocation expenses;
    • free health insurance; and
    • that part of the rent charged by an employer for live-in accommodation which exceeds a specified hourly, daily or weekly amount 
Furthermore, tips paid directly to a worker (or distributed amongst fellow workers), which are not paid through the payroll, do not count towards the NMW. The same applies to deductions from pay (or payments made to an employer) in respect of protective clothing and equipment, uniforms, dry cleaning or laundry costs, tools, etc.
Deductions and payments that count towards the NMW
Deductions or payments that do count towards the NMW include:
  • incentive payments, bonuses, commission;
  • tips, gratuities and service charges collected centrally by the employer and distributed to a worker through the payroll (but not otherwise);
  • deductions in respect of PAYE tax and NI contributions;
  • a worker's pension contributions;
  • fine imposed in accordance with a worker's contract for misconduct (including authorised deductions in respect of cash shortages or stock deficiencies);
  • deductions in respect of overpaid wages or salary (or overpaid expenses);
  • deductions (or payments) in respect of live-in accommodation up to a prescribed maximum;
  • voluntary deductions in respect of trade union dues, private health insurance, membership of a social club;
  • deductions or payments in respect of meals voluntarily purchased by a worker from a staff or works canteen; and
  • deductions in respect of goods and services voluntarily purchased by a worker from his or her employer.
Live-in accommodation
  • Live-in accommodation is a common feature of employment in the hotel and leisure industry, both for the convenience of employers and that of workers. Although technically there is no upper limit on the amount of rent that a worker may be required to pay for live-in accommodation, the 1998 Regulations make it clear that employers will not lessen the effect of the NMW Regulations by charging more than a prescribed amount for such accommodation.
  • The most that an employer may offset against the NMW by way of accommodation charges is 57 pence for each hour of a worker 's contractual weekly hours or £19.95 a week, whichever is the lower of those two amounts. In short, the maximum that may be offset against the NMW is £22.75 a week. If a worker works a 35-hour week, the maximum that may be offset against his or her NMW is £19.95 a week; if a 30-hour week, £17.10; and so on.
  • If a worker occupies live-in accommodation for less than a whole week (eg, five days a week), the maximum daily amount that may be offset against the NMW is whichever is the lower of 57p per hour for each of the worker's contracted (or average) daily hours or £3.25. A day for these purposes is the period from midnight to midnight.
Categories of worker
  • Most workers in industry and commerce can be categorised as salaried or hourly-paid. Other categories include seasonal workers, casual workers, workers paid wholly or mainly by commission, agency 'temps', and homeworkers.
Salaried workers
  • The ranks of salaried workers traditionally include senior executives, managers, accountants, clerks, secretaries, etc, most of whom are paid at regular monthly intervals by cheque or credit transfer to their bank accounts. A salaried worker's pay usually remains the same month after month (unless absent from work because of illness or injury or on maternity or parental leave, or on approved leave of absence without pay). A salaried worker's pay will also encompass meal and rest breaks, and annual holidays.
  • Many salaried workers (especially those in the middle and higher echelons of management) are not paid for overtime working, it being a feature of their contracts that they work such additional hours as may be necessary for the more efficient performance of their duties. Given that salaried jobs are no longer the exclusive preserve of 'white-collar' workers, there will, of course, be salaried workers who are relatively lowly-paid (eg, in the region of £8,000 to £10,000 per annum), whose hourly rate of pay in a particular pay reference period may dip below the appropriate NMW rate – the more so if any such worker routinely works overtime hours (paid or otherwise) or is paying more than £22.75 a week in rent for 'live-in' accommodation provided by his or her employer. As was explained earlier, there are a number of payments or deductions from pay that do not count towards the NMW.
    Note 
    The term 'pay reference period' means the period (not exceeding one month) in respect of which wages or salary are normally paid (monthly, weekly, fortnightly, etc). Workers who are paid weekly have a pay reference period of one week. Those who are paid monthly have a pay reference period of one month. Some workers, notably casual workers will have a pay reference period of one day. Workers who are paid less frequently than once every month (eg every three months) nonetheless have a pay reference period of one month. In short, the maximum pay reference period for any worker (under the 1998 Regulations) is one month.
Example
  • 24-year-old Mary Brown works as an Assistant Manager at a small London hotel. She earns a salary of £9,600 per annum, and is contracted to work a 5-day, 40-hour week (including meal and rest breaks). She is paid monthly, receives all her meals free of charge, but occupies 'live-in' accommodation, provided by her employer, for which she pays rent of £200 a month. Mary often works more than 40 hours a week when the hotel is busy or there are staff shortages. She is paid time-and-a-half for all hours worked in excess of 173 hours a month.
  • Mary's gross salary for June 2003 (before the deduction of PAYE tax and NI contributions) was made up as follows:
    Monthly pay (£9,600, divided by 12):
    £800.00
    Overtime pay (23 hours @ £6.92/hour):
    £159.16
    Gross pay:
    £959.16
    less rent of £200:
    £639.38
Was Mary paid less than the NMW for June 2003? To answer that question, Mary's overtime premium payments (£53.05) must be disregarded, as must all rental payments in excess of £22.75 a week (or £98.58 a month) (ie, £101.42). These 'specified reductions' effectively reduce Mary's gross pay for May 2000 from £959.16 to £804.69. As Mary worked a total of 196 hours during May, her hourly rate of pay for that month was £4.11, that is to say, £0.09 per hour less than the NMW of £4.20 for her age. It follows that Mary's employer must pay her an additional £17.64 for June 2003.
Hourly-paid workers
  • As the term implies, hourly-paid workers are paid for the number of hours they work each week or month (whatever the pay reference period). They are traditionally paid overtime for all hours worked in excess of their standard (or contractual) working hours, but are not normally paid for meal and rest breaks. If they work a system of shifts, they may be paid a shift allowance. If they work normally on a bank or public holiday, or on a rest day, they may be paid at a higher hourly rate for such work or they may have a contractual right to an equivalent amount of paid time off work to be taken at an agreed later date. If employed under a contract of employment, their terms and conditions of employment (including working hours, rate of pay, shift allowances, overtime premium payments, and the like) must be explained in the written statement of employment particulars necessarily issued to each of them within two months of the date on which their employment began.
  • Hourly-paid workers must be paid no less than the appropriate NMW rate for all hours worked in the standard pay reference period. Working hours do not include recognised meal and rest breaks (even if the worker is paid during such breaks, or works throughout a recognised meal or rest-break), absences from work occasioned by annual holidays, sick leave, maternity leave, parental leave, time off for dependants, and so on. Nor do they include time when a worker is engaged in a strike or other form of industrial action (including a 'go slow' or 'work to rule'). Whether or not a worker is entitled to be paid all or part of his (or her) wages when sick or injured will depend on the terms of his contract (although he will have the qualified right to be paid statutory sick pay at such times). Payments in respect of maternity leave and annual holidays are regulated by statute.
  • An hourly-paid worker who is on standby or 'on-call', at or near his (or her) workplace (or who is at work, as required, but is not actually provided with work, or is unable to work because of a machine or plant breakdown) must be paid no less than the NMW for that time. The same applies when a worker is travelling between jobs, but not when he is travelling from and to his home and place of work.
Piece-workers and 'output' workers
  • There are workers who do not receive a basic wage, but are paid entirely on the basis of the work they do, the sales (or number of telephone calls) they make or the goods they produce. Such people may work from home or in premises provided by their employer. Unless (as is unlikely) they are genuinely self-employed, every such worker must be paid no less than the appropriate NMW wage rate for every hour worked (based on what their employer agrees is a fair estimate of the hours they work). The NMW rules for pieceworkers, output workers, and the like, are complicated. Interested employers are advised to acquire a copy of the DTI's Detailed Guide to the National Minimum Wage(Ref URN 99/662), copies of which are available from the address given at the end of this section.
Records
  • Regulation 38 of the 1998 Regulations imposes a duty on employers to keep records 'sufficient to establish that he is remunerating [workers] at a rate at least equal to the national minimum wage'. Those records must be kept in a form which enables the information about a worker in respect of any one reference period to be produced in a single document. Furthermore, the employer must keep those records (either in paper form or on a computer or computer disk) for a rolling three-year period and must make those records available either to a worker (on request) or an Inland Revenue enforcement officer (on demand). An employer who fails to keep such records, or who keeps or produces false or inaccurate records, is guilty of an offence and liable on summary conviction to a fine of up to £5,000 – for each and every such offence.
Enforcement and penalties for non-compliance
  • As was mentioned above, the National Minimum Wage Act 1998 and its accompanying regulations are policed and enforced by Inland Revenue enforcement officers. Section 14 of the 1998 Act cautions employers that enforcement officers have the power to enter an employer's premises (at reasonable times), to inspect and take copies of pay records, to require an explanation of any such records, to ask questions, and to talk to workers. Enforcement officers can also issue enforcement notices requiring an employer to pay the appropriate rate of NMW to identified workers or to make up the shortfall between the NMW and the wages actually paid to those workers (backdated as appropriate). A failure to comply with the terms of an enforcement notice will prompt the issue of a penalty notice requiring the recalcitrant employer to pay £7.40 a day to each affected worker for every day of continued noncompliance.
  • There are a number of criminal offences under the 1998 Act, each of which attracts a penalty of up to £5,000 for each offence. These are:
    • a refusal or wilful neglect to pay the appropriate NMW rate;
    • a failure to maintain adequate and accurate payroll records and time sheets;
    • keeping false or inaccurate records;
    • intentionally obstructing an Inland Revenue enforcement officer in the exercise of his or her authority; and
    • refusing or neglecting to give information to an Inland Revenue enforcement officer.
Complaints by workers
  • Workers who know (or suspect) that they are not being paid the appropriate NMW rate have the right to ask to see their payroll records. Any such request must be made in writing. An employer who fails or refuses to produce those records within 14 days, or who prevaricates or refuses to make those records available, will be ordered by an employment tribunal to pay the worker in question an amount equal to 80 times the appropriate NMW rate. A worker may also apply to a tribunal or county court for the recovery of any amount of wages or salary which fell short of the NMW. Any such application must be lodged with the nearest Regional Office of the Employment Tribunals on Form IT1 within three months of the employer's alleged refusal or failure.
  • Workers have no need to resign in order to pursue their statutory rights before an employment tribunal. If denied their right to be paid no less than the appropriate NMW rate, they may complain to an employment tribunal and/or invoke the assistance of an Inland Revenue enforcement officer. An employer who dismisses such a worker, or selects him (or her) for redundancy, or subjects him to some other detriment (eg, by demoting or transferring him, withholding a promised pay rise, or by denying opportunities for overtime, etc) for challenging or questioning the employer's refusal or failure to pay the NMW (before a tribunal or court, or otherwise), or for asserting his statutory rights, will be ordered to pay the worker a substantial amount of compensation. In such situations, workers may pursue their rights before the tribunals regardless of their age or length of service at the material time.
Further information
  • The Department of Trade & Industry's (DTI) Detailed Guide to the National Minimum Wage (Ref URN99/662) may be obtained without charge from the DTI Publication Orderline, ADMAIL 528, London, SW1W 8YT (Telephone: 0870 1502 500; fax: 0870 1502 333; or email: publications@dti.gsi.gov.uk).
    For further assistance on the national minimum wage, employers may call NMW Enquiries on 0845 6000 678 or write to the following address:
    NMW Enquiries
    Freepost PHQ1
    Newcastle upon Tyne
    NE98 1ZH

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