11 June 2024

Jeni Morris ACIPP, head of the national minimum wage (NMW) team at EY, offers guidance on how to correctly classify the worker category of every employee for NMW purposes, and explains why it’s so important to get this right

In my role as a NMW technical specialist, I’ve noticed a common misconception: people tend to believe my days are filled solely with discussions about current NMW rates, age-related uplifts and apprenticeships. Yet in truth, the legislation surrounding NMW is remarkably intricate. Ensuring a business’s compliance reaches far beyond knowing the basic rates is a sophisticated dance of understanding legalese and business operations intricately.

Most are aware that the NMW rates mandate the legal minimum a UK employer must pay their workers. However, the minutiae of calculating these rates are laden with complexity. My typical workday entails unravelling various NMW risks and outlining the essential requirements. I’ve come to expect that each day carries with it the opportunity to guide a payroll manager, chief finance officer or human resources (HR) director through step one – the fundamental principle of NMW compliance: correctly classifying the worker category of every employee.

The reason for this fixation on worker categories – of which there are four under NMW legislation – is simple: each classification carries its own set of guidelines for ensuring NMW compliance.

1. Time workers: they earn wages by the hour.

2. Salaried workers: they’re paid an annual salary.

3. Output workers: their payment is determined per task or piece of work they complete.

4. Unmeasured workers: this is the catch-all category for those who don’t fall into the first three classifications.

Pinpointing the appropriate category is crucial because each one has differing rules to follow for the correct NMW calculation. Whether it’s determining the frequency of calculations, identifying which pay elements to incorporate or omit or establishing the definition of ‘working time’, the criteria can vary significantly.

Businesses frequently stumble at this initial hurdle, often misinterpreting each category’s requirements. This misunderstanding can result in inadvertent NMW compliance breaches, which may lead to HM Revenue and Customs (HMRC) issuing enforcement notices, demanding arrears repayment to affected employees. Worse still, HMRC usually imposes a penalty (200% of the unpaid arrears) and refers the business to the Department of Business and Trade for inclusion in the ‘name and shame’ list for NMW non-compliance. The financial and reputational damage to a business can be significant, even for unintentional errors.

A situation that regularly prompts queries is the precise definition of a salaried worker, typically understood as someone receiving an annual salary. However, NMW nuances emerge when, for example, a perceived salaried worker earns commission. The fact that commission is earned will usually mean the individual is classed as an unmeasured worker.

For such individuals, NMW calculations must be completed each and every pay period, including all the actual hours worked, not just their contracted hours.

To navigate these complexities, I often recommend that businesses initiate a self-audit, in conjunction with their HR departments, to ensure accurate worker classification. This pivotal step equips the payroll team with the ability to apply the specific NMW calculation protocols required for each category.

Embarking on the journey to NMW compliance can seem daunting, but it’s an essential endeavour for any business. Understanding the legislative tangle and safeguarding against missteps not only prevents potential financial penalties but also upholds the ethical and legal standards we champion in our employment practices. It’s about securing the foundations of a fair and just workplace – one that recognises and values its workforce. 


This article featured in the July - August 2024 issue of Professional.