Salaried workers, salary sacrifice and the National Minimum Wage consultation: An opportunity to enable change for the better
21 February 2019
Naming – for a wide variety of reasons is now utilised by government departments and agencies as a way of shaming employers and businesses for failing to comply with a range of different legal requirements. However, it is the naming of employers who have been issued with a Notice of Underpayment (NoU) for failing to pay the minimum wage that has been hitting the headlines over recent years.
The promise of bringing about the introduction of a national minimum wage (NMW) proved to be a vote winner in the Labour Party Manifesto of 1997 and resulted in the laying of primary legislation in the form of the National Minimum Wage Act 1998, together with enacting Regulations.
Section 1(1) of the Act states ‘A person who qualifies for the National Minimum Wage shall be remunerated by his employer in respect of his work in any pay reference period at a rate which is not less than the national minimum wage.’
From 1 April 2016 the National Living Wage (NLW) was implemented with the aspiration of achieving a rate of 60% median earnings by 2020 for workers aged 25 and over. For the purpose of this article I shall use ‘minimum wage’ to cover both NMW and NLW.
There are four types of work that count for minimum wage purposes:
- Salaried hours work
- Time work
- Output work
- Unmeasured work
The consultation focuses on salaried hours work specifically regulations 21 and 24 which detail the required pay reference periods (PRP) that are allowed within the definition of salaried hours work which can be weekly and monthly only.
For work to be accepted as salaried hours work, the following conditions must be met:
- the worker must be entitled under their contract to an annual salary;
- the worker must be entitled under their contract to be paid that salary in respect of a specific number of hours in a year and those hours must be specified in or ascertained in accordance with their contract;
- the worker must not be entitled under their contract to a payment in respect of basic hours other than an annual salary or an annual salary and performance bonus; and
- the worker must be entitled under their contract to be paid in equal weekly or monthly instalments (excluding overtime payments and a performance bonus) regardless of the number of hours actually worked.
Research continues to confirm that weekly and monthly PRPs remain the two most popular for salaried workers; but they are not the only PRPs used for salaried hours workers and increasingly, particularly in the retail industry where 2 weekly or 4 weekly PRPS are widely used, other PRPs exist.
Detailing the annual hours that the salary relates to or being able to ascertain the annual hours is key for ensuring employer compliance – can you? Salaried hours workers can include the following (this list is not exhaustive):
- Monthly paid workers who receive an annual salary for working 9am-5pm, Monday to Friday;
- Term-time only workers who receive equal weekly/monthly payments but only work during term time; or
- Annualised hours workers who receive equal weekly/monthly payments for working 2,000 hours a year.
Salaried hours work enables the employer to average the hours equally across the year, regardless of hours worked during the PRP, however the hours worked need to be monitored to ensure that they are not exceeded. This is of particular importance when a worker leaves during a calculation year.
The consultation asks whether other payment cycles should be allowed and if so – what are those cycles?
The calculation year enables the employer to identify where the basic hours are exceeded – and should this occur the worker must be paid the minimum wage for each additional hour worked.
The minimum wage calculation year will vary for each worker which begins on their start date and each year following begins on the anniversary of that start date.
Where a worker is paid monthly and they begin their employment on any other day than the first date of the month, their calculation year will be:
- the period beginning with that day and ending with the day before the first anniversary of the first day of the next month;
- in each subsequent year, a year beginning on an anniversary of the first day of that month.
The consultation asks if a ‘single uniform calculation year’ applied for all workers would make life easier – and if so, should It run as a calendar year, a tax year or at the discretion of the employer?
Overtime and pay premia
Overtime or premium payments e.g. for hours worked on Bank Holidays, cannot be included within the basic hours and so must fall outside of the calculation for salaried hours work. They can be paid but would be included as time work paid over and above the basic salary payment.
The consultation seeks to establish what difficulties this causes employers and asks whether the regulations should be amended to include these amounts?
Employers are prevented from including workers in their salary sacrifice scheme if this would take their rate of pay below those of the minimum wage.
The consultation asks for evidence of schemes being withdrawn or restricted in the last 12 months as a result of higher rates of minimum wage what risks are presented to workers – if any, by salary sacrifice schemes?
Is there anything else that can be done?
Space as ever prevents further discussion here about the role of education material and guidance, however in its final section the consultation considers whether there are any other rules which penalise employers without offering any protection to the workers this legislation seeks to protect?
Call to action
The consultation closes on 1 March. There are a number of ways in which you can respond, by completing the BEIS online survey, or by email to the team at BEIS running this consultation, or in writing. Equally the CIPP policy and research team is also running a survey – which mirrors that of BEIS.
We would urge you to respond to this consultation as we know how important an area this is to employers, your clients and your business. This offers a real opportunity to reduce the incidence of employers being named for technical errors that haven’t resulted in actual underpayments of minimum wage.
This article was originally written for Accounting Web (published 21 February 2019).