Overview of the minimum wage

National Minimum Wage rates

Since April 1999 most workers in the UK have been legally entitled to a minimum wage. The National Minimum Wage (NMW) rates are set based on recommendations of an independent body, the Low Pay Commission (LPC). The current rates are:

• Workers aged 22+ per hour (main rate): £5.73
• Workers aged 18-21 per hour (development rate): £4.77
  The development rate may also apply to workers aged 22+ if they are receiving accredited training. There must be a written agreement between the worker and the employer, confirming the worker will attend training on at least 26 days during the first six months of employment for the training to qualify.
• Workers aged 16-17 per hour (young workers' rate): £3.53.

Exemptions

The minimum wage is not applicable to the self-employed, voluntary workers and workers based permanently outside the UK, in the Channel Islands or the Isle of Man. Apprentices under the age of 18 are exempt from the young workers' rate, as are apprentices under 26 who are in the first 12 months of their apprenticeship.  

Calculating a worker's NMW pay

Take the total gross pay subtract payments and deductions that do not count as gross pay (see below) and divide this amount by the total number of hours worked in the " pay reference period" , e.g. a week, fortnight or  four weeks.

Total gross pay includes allowable payments and deductions such as bonuses, and allowable deductions for income tax, National Insurance contribution and workers' pension contributions. Payments and expenses that do not count include loans, pension payments, redundancy payments and overtime. Deductions that do not count include expenses linked to the job, work-related travel costs and accommodation above a certain limit. 

Hours for which NMW must be paid

The number of hours for which you are obliged to pay your workers NMW is worked out differently according to the types of work they do. There are four types of work – time work, salaried-hours work, output work and unmeasured work – and the rules and calculation of hours differ for each.  

Time worker

A time worker is one who is paid according to the number of hours they are at work. Time work is also where a worker is on a contract for a certain amount of time and is paid for the hours done. Basically, anybody whose pay goes up or down depending on the actual hours they work is likely to be doing time work.

A time worker is counted as working for NMW purposes it they are:

• at work and required to be at work
• on standby or on-call at or near the place of work
• kept at their place of work but cannot work because of machine breakdown
• travelling on business during normal working hours
• training or travelling to training during normal working hours

Salaried-hours workers

Salaried-hours workers are entitled under their contract to an annual salary for a set basic number of hours in a year. They are paid in equal weekly or monthly instalments. It doesn’t matter how many hours the worker works in the week or month, so long as the weekly or monthly instalments remain the same. A salaried-hours worker is generally counted as working for NMW purposes at the same times as a time worker (see above).

Unlike time workers, absences for rest/ lunch/ holidays/ sickness or maternity leave count towards time when the NMW is payable if they form part of the worker's basic contractual minimum hours.

NMW for salaried workers may cease to apply in certain circumstances, e.g., if someone is on long-term sick leave, their salary may drop to a proportion of their normal salary, statutory sick pay or to nothing. Those engaged in industrial action will also not get NMW for the hours they were striking.

Where a salaried worker works more than the hours specified in their contract by the end of the contractual year, the NMW calculation for the relevant pay reference periods must include those extra hours. This rule applies where the worker's contract does not entitle them to extra pay for the additional hours. If the worker is paid at least NMW rates for the extra hours - e.g., because they are treated as overtime - these hours are treated as paid.  

Output worker

Output work is paid for according to the number of things that a worker makes or tasks they perform. It is also known as 'piece work' or 'fair piece rates'.

When paying output workers you can either:

• Pay the national minimum wage (NMW) for every hour they work.
• Pay them at least a fair piece rate for each piece produced or task performed (rated output work).

If paying by piece, you must work out the time taken to do the job by an average worker in your employment producing a given number of pieces or carrying out a given task. The number of pieces or tasks the average worker can do in an hour is called the mean hourly-output rate.

The 'fair' piece rate for that piece or task, is the one which allows workers of average speed to earn the NMW. This has been set so the piece rate had to be multiplied by 1.2 to ensure workers whose output is sometimes below average, can still earn the NMW.

If a person doing piece work is expected to work for a set number of hours per day, their work must be treated as time work and they must be paid the NMW for that time.

Unmeasured worker

Unmeasured work is that which does not fall into any of the previous three categories. It could include work where tasks need to be done, but not within any specified hours or times, or work where you require the worker to work when needed or when work is available.

You must pay at least the national minimum wage (NMW) to people who do 'unmeasured' work, and this could be done by either:

• recording every hour worked; or
• reaching a daily average’ agreement of hours to be worked.

Record keeping

You must keep sufficient records to show you are complying with the NMW requirements. It is a criminal offence not to do so (see below). Sufficient records might include details of:

• gross pay payments
• payments for overtime and shifts
• absences
• contracts and agreements between you and your workers

Criminal offences and workers’ rights

There are six criminal offences relating to the NMW, each carrying a maximum fine of £5000. They are:

• Refusal or wilful neglect to pay NMW.
• Failure to keep sufficient NMW records.
• Keeping false records.
• Producing false records or information.
• Intentional obstruction of a compliance officer.
• Refusal or neglect to give information to a compliance officer.

Workers dismissed for asserting their right to the minimum wage can claim unfair dismissal before an employment tribunal.

Changes to the NMW regime

Under the Employment Act 2008, from 6 April 2009 you will face a penalty if HMRC find you have failed to pay the national minimum wage. HMRC officers may issue a notice of underpayment requiring the employer to repay arrears to underpaid workers and a financial penalty to the Secretary of State. You can appeal against the notice of underpayment to an employment tribunal (industrial tribunal in Northern Ireland).

The penalty is set at 50% of the total underpayment (for periods starting on or after 6 April 2009) but there is a minimum penalty of £100 and a maximum penalty of £5,000. Employers who comply fully with the notice of underpayment within 14 days of service will receive a discount of 50% on the penalty.

Workers who are owed arrears of the NMW for pay reference periods starting on or after 6 April 2009 will be entitled to have their arrears repaid at current rates where these are higher than the rate or rates that applied when the arrears arose.

Compliance officers will be able to remove and copy NMW records from an employer’s premises but must return them within a reasonable period.

The Act gives HMRC the power to use the search and seize powers in the Police and Criminal Evidence Act 1984 when investigating criminal offences under the National Minimum Wage Act 1998. Those that dodge paying the minimum wage could be tried in the Crown Court and thus face stiffer penalties. 

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