It is essential to ensure that employees are not paid below the National Minimum Wage (NMW) and HM Revenue & Customs (HMRC) undertakes a number of checks to ensure employees receive the NMW. The department has issued a factsheet that describes the checks they make and also how to conduct a self-review for the National Living Wage (NLW) and NMW. John Davison investigates.

National Minimum Wage and National Living Wage checks

HMRC is permitted to ask any business for information and records which shows whether employees are being paid the NMW or the NLW. Information used by HMRC will include internet data which is publicly available, so it is important to ensure that the information provided on the internet where accessible is accurate. HMRC will also use news reports, blogs, social networking sites, Companies House and Land Registry records.

Self-review

HMRC can request a business to self-review its records to establish if it is paying the NMW or NLW correctly. Where an underpayment is identified, the self-review period or the number of workers checked will need to be extended to ensure that all underpayments have been identified. Where errors are identified, a written summary needs to be provided to HMRC showing the names, addresses and National Insurance numbers of any underpaid workers and the arrears for each pay period. After a review, HMRC will contact the business to inform them of the actions that need to be taken.

HMRC visits

HMRC may also pay a visit to check the records. Often these visits occur where HMRC has been given information indicating that the NMW is not being paid; HMRC does not have to reveal what this information is. During a visit, HMRC will ask about workers’ work patterns and the arrangements for calculating pay. This will be checked against the records maintained by the business.

Errors

Where errors are found, the business will be issued with a Notice of Underpayment. This will detail the underpayments and how much is to be paid to each worker. Penalties may also be applied. In serious cases where the law has been deliberately broken, the business may be subject to criminal prosecution.

When calculating arrears of the NLW or NMW it is important to treat each pay period separately. Underpayments in one pay period cannot be offset against any overpayments in other periods. It is necessary to identify for each worker the way they are being remunerated. For example, is work paid by the hour, by an annual salary, by piece work or through some other method?

Where an underpayment has been identified in a period where the worker was paid a lower statutory rate than the current rates, any underpayment needs to be uplifted to the current rate of the NMW or NLW. This is calculated by using the following formula:

(A/B) X C

A = the underpayment identified

B = the rate of the NMW or NLW at the time of payment/underpayment

C = the current rate of the NMW or NLW.

Different types of work payments

It is first important to define what counts as working time. This includes any time where the individual is required to be at work either working or on standby or when training for the job, but does not include any rest breaks. Work time does include periods where machines are broken down but the individual is not actually working, periods when waiting for goods to work on or collect, waiting to meet people or to start a job. Travelling in connection with work (such as travel to training or between appointments) is also work time, but the time taken to travel to and from home and work is not work time. Rest breaks, sick leave, holidays or industrial action are not work time.

Hourly pay

Where a person is paid by the hour, the average hourly pay has to be at least the NMW. This is to be calculated over the period each pay packet covers. For example, for an individual paid monthly, the hourly rate is calculated monthly.

Salaried hours

Where an individual is paid salaried hours for a set number of hours each year, the annual number of hours may not be explicitly stated, but it must be possible to work this out from the contact. To calculate the hourly rate, the number of annual hours under the contract is identified and divided by the number of times the employee is paid (12 for monthly payments, 52 for weekly). The amount paid in each pay packet is then divided by this average number to give the hourly rate. Any additional hours must be paid at the minimum wage.

Paid piece work

Employees’ paid piece work must be paid the minimum wage for each hour, worked in the basis of a fair rate for each piece of work completed. Where an employer sets working hours or where employees “clock in and clock out”, this is timed work (hourly work) and not piece work.

The fair rate is the amount that allows average workers to be paid the minimum wage per hour, if they work at an average rate. This is calculated by finding the average rate of work per hour and then dividing this figure by 1.2. The hourly minimum wage rate is then divided by this number to calculate the fair rate.

Average hourly rate

To calculate the average rate of work per hour, some or all of the workers need to be tested (a typical group must be tested, not just the fastest workers). The number of pieces of work completed in a normal average hour is to be identified and then divided by the number of workers to calculate the average rate. For example, an individual making an electronic part can produce on average, six parts per hour. This is divided by 1.2 to give 5. An individual who is 25 years of age and eligible for the 2018/9 NMW rate of £7.83 will be paid £1.57 per item made.

Task work

Where work is not measured, but an amount is paid for a task, the NMW or NLW still must be paid. To calculate the minimum wage, it is necessary to record each hour worked and use a NMW calculator to ensure the employee receives the minimum wage or to have an agreement concerning the daily average hours worked.

More information

National Minimum Wage and National Living Wage rates.

The Employment Calculator is a quick calculation tool providing answers to complex statutory rights and payment queries.

HMRC provides further information on calculating the NMW.

Last reviewed 4 January 2019