Policy guide:The national minimum wage (NMW)

The NMW was introduced in 1999 by the National Minimum Wage Act 1998.  The Act gives workers the right to a specified minimum hourly rate of pay. The actual rate of the NMW is usually updated each year on 1 October.  The latest increase took effect from 1 October 2012.

All workers are entitled to be paid the NMW and it is the duty of the employer to ensure that the correct rate is paid.

The new rates for the NMW are as follows:

• 21 year-olds and over - £6.19

• 18-20 year olds - £ 4.98

• Under 18s - £3.68

• *Apprentice - £2.65

*This rate is for apprentices under 19 or those in their first year. If they are 19 or over, and past their first year, they should receive the rate that applies to their age.

Contracts for payments below the minimum wage are not legally binding. A worker is still entitled to the National Minimum Wage.

It’s a criminal offence for employers not to pay someone the National Minimum Wage or to falsify payment records.

Employers who discover they have paid a worker below the minimum wage must pay any arrears immediately.

A worker's contract and working conditions must be checked carefully to ensure that the NMW Regulations are not inadvertently breached. Some common questions relating to NMW are set out below.

How is the NMW calculated?

In order to calculate whether an individual is paid the NMW, the average hourly rate must be calculated. The average hourly rate is the total pay earned over the relevant pay reference period divided by the total number of hours worked during that period. An employee who is paid weekly will have a pay reference period of one week; an employee who is paid monthly will have a pay reference period of one month.

What counts as 'pay'?

To calculate the average hourly rate, the employee's total gross pay plus any benefits are included, less any deductions.

Benefits will include any payments made on top of the worker's basic salary, such as bonuses, commissions and other incentive payments. Any premium on overtime cannot be included in the NMW calculation.

The only non-cash benefit that may be used in calculating NMW is the accommodation allowance. This is a daily rate which can be added to a worker's salary for the purpose of calculating NMW for every day that the employee is provided with accommodation by the employer. This rate was amended to £4.82 per day on 1 October. This is the maximum amount - even if the employee lives in a palace, the most an employer can offset per week is £33.74. Other benefits in kind cannot, however, be taken into account when calculating NMW.

Some deductions, such as those made for the worker's benefit, or in respect of expenditure in connection with the employment, will reduce pay for the purpose of calculating the NMW.

However, certain deductions, most importantly income tax and national insurance, will not affect the NMW calculation.

What counts as working time?

To calculate the NMW, it is necessary to calculate what hours the worker has actually worked. Working time includes not only time spent working but also any time during which the worker may be obliged to be available for work. Therefore, the danger exists that the NMW Regulations (and the Working Time Regulations 1998) could be breached in respect of a worker who is required to be 'on-call' for significant periods, even if they do not work during these periods. Time spent travelling (excluding commuting) and training time will also count as working time.

What are the particular risk areas?

Many nurseries require members of staff to attend work on an evening or weekend to carry out training, some of which may be a statutory requirement.  Under the Working Time Regulations,  work related training is counted as part of the working week. Therefore if employees attend training you will need to calculate their average hourly rate worked during the pay reference period to ensure they are not paid below the NMW.

Who can bring a claim for failure to pay the NMW?

A worker can bring a claim in the employment tribunal for unlawful deduction from wages for failure to pay the NMW. Such claims must be brought within three months of the date of the deduction (i.e. the failure to pay the NMW) or from the last in a series of deductions. Arrears can be claimed back to 1999, provided that there have been continuous deductions in the pay periods. A claim for breach of contract can be brought by the worker in the County Court up to six years after an alleged failure to pay the NMW.

If the employer cannot prove that the NMW has been paid, then it will be assumed that the worker has not been paid NMW. Pay records for current staff should be maintained throughout the employment relationship, and for at least a minimum period of three years from the date of termination for those who have left.

Additionally, the HMRC can carry out random inspections and require employers to prove that the NMW is being paid.

What do I need to do as a nursery owner?

Review all contracts and pay arrangements for all lower-paid staff annually to ensure that the NMW is being paid in all cases. As the annual increase is usually in October then reviewing the contract and pay in August ready to implement in the October pay would be recommended.

Jacqui Mann is director of HR4Nurseries