Work Matters: Policy Q&A: The National Minimum Wage - Take time to check contracts carefully

The national minimum wage (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 on an annual basis. The latest increase took effect from 1 October 2010. 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:

• - the adult hourly rate increased from £5.80 to £5.93
• - the hourly rate for 18- to 21-year-olds increased from £4.83 to £4.92
• - the hourly rate for 16- and 17-year-olds increased from £3.57 to £3.64.

A worker's contract and working conditions must be checked carefully to ensure that the NMW Regulations are not inadvertently breached. In particular, there are facets of the NMW Regulations that nurseries must consider when deciding on the level of remuneration for staff. Some common questions relating to NMW are set out below.

Q: Are there other changes of which you should be aware?

Yes, from 1 October the adult rate of pay was extended to any employee aged 21 or over; it previously applied to any employee aged 22 or over.

Additionally, a new NMW of £2.50 per hour was introduced for apprentices. The rate of pay will apply to anyone employed under a contract of apprenticeship. There has also been an increase in the accommodation allowance employers can use when calculating NMW.

Q: 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.

Q: 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 £4.61 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 £32.27. 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.

Q: 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.

Q: Particular risk areas

The payment of staff who only work during term time in 12 equal monthly instalments throughout the year can present problems.

In essence, if the monthly payment is divided by the hours worked during a typical month in term time, the worker's hourly rate will be lower for the purposes of calculating the NMW than if payment was not spread equally over 12 months. The risk is only likely to exist where the actual hourly rate of pay is low. However, it is technically possible to be in breach of the NMW Regulations even though a worker actually receives more than a minimum wage over the course of a year for the hours worked. For example:

• - a term-time-only nursery assistant works a 20-hour week for 37 weeks a year and receives an additional 5.6 weeks statutory holiday
• - she earns £5,112 a year, which equates to £6 an hour
• - she is paid in 12 equal monthly instalments of £426 (less deductions)
• - in January she will receive £426 for working 80 hours (four full weeks) which equates to £5.33 per hour, and in February she receives £426 for working 84 hours (four full weeks plus a day), which equates to £5.07 per hour. She therefore receives less than the minimum wage in both months
• - the fact that she will receive pay during the Easter holidays when she will not be working does not prevent the nursery from being in breach of the NMW Regulations.

Where there is a risk of the above situation, consideration should be given to amending the payment method by using an 'hourly paid' contract, paying staff for the actual hours worked per month.

Q: 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 a minimum period of six 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.

The contracts and pay arrangements of all lower-paid staff should be reviewed to ensure that the NMW is being paid in all cases. The contracts and pay arrangements of any staff who are not currently paid the NMW should be reviewed and amended as appropriate.

Further information

If you have any queries relating to the issues discussed in this article, you can speak with Karl Deakin or another member of the Early Years Team at Veale Wasbrough Vizards. Karl's contact details are: 0117 314 5443 or kdeakin@vwv.co.uk.