CIPD - National Minimum Wage

Pay and reward

Revised October 2008

This factsheet gives introductory guidance. It:

provides basic information on current rates, the operation, scope and enforcement of the National Minimum Wage (NMW)
includes the CIPD viewpoint.

The rationale of the NMW

The introduction of a National Minimum Wage (NMW) was a major feature of the Labour Party's manifesto. Following the 1997 General Election the new Labour Government set up an independent Low Pay Commission to recommend the level of the NMW and how it should apply to young people and people in training. The Commission of nine people was drawn from academics and representatives of employers and employees, under the chairmanship of Professor George Bain. The current chairman is Paul Myners.

The Commission first reported in June 1998. The vast majority of its recommendations were accepted by the Government and the necessary legislation and regulations introduced. The United Kingdom's first national minimum wage became effective on 1 April 1999. The Commission publishes an annual report which contain recommendations for the uprating of the NMW and for amendments to the regulations.

The reasons put forward to support an NMW cover three broad areas:

social - a minimum wage would attack low pay and poverty
equity - a minimum wage reduces exploitation, protects employers against under-cutting on wages, and cuts the cost to taxpayers of topping up low incomes via the social security system
economic - extra demand in the economy would increase employment; a minimum wage could also boost investment and productivity.

In commenting on the report of the Low Pay Commission the then Secretary of State emphasised four key messages. The NMW would:

begin to end the 'scandal of poverty pay'
form part of an overall package to make work pay
produce a more committed and productive workforce
encourage competition based on quality not 'sweatshop labour'.

Who are the low paid?

Those affected most by the introduction of the NMW are likely to be:

women
part-timers
'peripheral' workers (for example, seasonal or casual workers)
younger employees
people with disabilities
working for small employers (under 25 employees)
working in certain parts of the private sector (especially hospitality, retail, social and personnel services, and healthcare).

Key elements

Minimum wage rates

The NMW rates are expressed as national hourly rates. There are no variations by region, occupation, industry or employer size. Employees cannot agree to accept a rate lower than the NMW.

Regulation 31 of the Employment Equality (Age) Regulations 2006, which introduce age discrimination legislation in the UK for the first time, expressly provides an exemption for the NMW so that employers can follow the age bands and minimum wage levels used in the NMW legislation. However, some lawyers have suggested this could be open to challenge in the courts.

Hourly rates from 1 October 2008 are:

Standard rate: £5.73 - payable to people aged 22 and over
Development rate: £4.77 - payable to people aged 18 to 21 years whether or not they are receiving 'accredited training'. Payable to people aged 22 and over who start a new job with a new employer and receive 'accredited training' for first six months.
Youth rate: £3.53 - payable to 16 and 17 year olds (above the compulsory school leaving age).

The recent increases are in line with the Low Pay Commission’s recommendations. The Commission has said it will not be recommending future rises above inflation as a matter of course.

Who gets the minimum wage?

The relevant NMW rate applies to all those with a contract of employment whether written, oral or implied.

The NMW applies to:

agency workers
agricultural workers (although these will continue to have pay rates determined by the Agricultural Wages Boards)
commission workers
disabled workers
pieceworkers and homeworkers - the National Minimum Wage Regulations 1999 (Amendment) Regulations 2004 introduced on 1 October 2004 replace existing provisions and a new 'rated output' work system is to replace fair estimate agreements for homeworkers and pieceworkers
offshore workers in UK territorial waters, workers from outside the UK, and workers usually employed in the UK but temporarily working overseas.
seafarers.

The NMW does not apply to:

the 'genuinely' self-employed
apprentices (the NMW need not be paid at all to those aged 18 and under; and need not be paid for the first twelve months of their apprenticeship to those aged 19 to 26)
people in higher education whose courses require work experience
the armed forces
friends and neighbours doing jobs on an informal basis
people living and working within the family (eg au pairs, nannies and companions)
prisoners
a resident member of a religious or other community
share fishermen
students on training courses
trainees on Government-funded training courses or supported by the European Social Fund
trainee teachers
voluntary workers (provided they work for a charity, voluntary organisation, charity shop, school, hospital or similar body and receive only reasonable expenses and/or a 'genuine' honorarium).

What's included in the minimum wage?

Compliance with the NMW is calculated on the basis of gross pay before deductions such as income tax and National Insurance.

The following items are included in pay for compliance purposes:

basic pay
incentive pay
bonuses
tips (provided they are paid through the payroll)
deductions for reasons such as misconduct or poor work, advances of wages, or accidental overpayment of wages
cost of employee-provided accommodation (to a maximum of £26.25 per week).

The following items are excluded from pay for compliance purposes:

an advance of wages
loans
redundancy payments
the premium element only of shift or overtime enhancements
unconsolidated special allowances (eg London Allowances, 'danger' or 'dirty' money, on-call payments)
expenses
deductions or payment for tools, uniforms etc.
benefits in kind
a reward under a staff suggestion scheme.

Pay reference period

Pay can be averaged over a certain period of time to assess compliance with the NMW. This pay reference period is the employee's actual pay period (typically weekly or monthly) up to a maximum of one calendar month. Relevant pay received in the period counts towards meeting the NMW as does pay earned in the period but not paid until the next period (eg commission or other variable payments).

Hours which attract the NMW

Besides setting out the minimum rate and the groups to whom it is payable, it is important to know the hours to which the rate applies, ie the definition of working time. Relevant pay divided by working time provides the employee's hourly rate against which compliance can be assessed. There are four aspects to working time: time work, salaried-hours work, output work, and unmeasured work. This is a complicated area, but broadly these are defined as follows:

Time work is where employees are paid directly in relation to the time they work; it is unlikely that such workers would receive an annual salary. Time when the employee is available for work, irrespective of whether work is available, must normally be included. This covers periods of on-call or standby near the place of work, machine 'downtime', some travel periods, and training periods during normal working hours.
Salaried-hours work is where an employee receives an annual salary, paid in equal instalments, for an agreed basic number of hours work in a year. This covers the periods outlined for time workers with the addition of hours of absence if the employee is paid his/her normal pay. Hours in excess of those agreed under contract must be paid at the NMW.
Output work generally covers people paid by commission or by piecework. These pay methods can continue but must not deliver a rate of pay for hours worked lower than the NMW. The employer can either pay at least the NMW for every hour actually worked, or agree with the employee a 'fair estimate' of the number of hours worked in the pay reference period.
Unmeasured work typically covers situations when there is no specified times for when a task has to be done (eg zero hours contracts). In defining the hours to attract the NMW the employer can either pay the minimum rate for all hours worked or reach agreement on a definition of a realistic 'daily average' of hours to be worked.

Depending on the aspect of working time, the following may be excluded: travelling time between home and work; holidays, sick and maternity leave; industrial action; recognised breaks; and sleeping between duties. An important point is that, while the premium pay element of overtime is not to be included as part of gross pay, overtime hours worked must be included as part of hours worked.

Records which the employer must keep

All employers will have to keep 'sufficient' records to show they are paying the NMW. There is no definition of 'sufficient' but the closer individual employees' earnings are to the NMW the more important it is to ensure that comprehensive information is kept on all the components of pay made in the reference pay, the total number of hours worked, and any absences. Records must be kept for at least three years plus one pay period.

There is no requirement on employers to state the NMW separately on pay statements. However, employers are encouraged to advertise the NMW rates and the telephone number of the NMW Helpline to their workforce (see Useful contacts below).

Enforcement

There are four approaches to enforcement.

An employee who thinks that they are not being paid the NMW can see records which the employer is required to keep. If the employer refuses access the employee may appeal to a tribunal.
The enforcement agency is HM Revenue & Customs (Wages Inspectors in agriculture). Inspectors can require access to records and interviews with the employer. Where an employer has not paid the NMW, the agency may require the rate to be paid along with the previous underpayment. In the event of non-compliance, the employer may be served with a penalty notice imposing a fine equivalent to twice the hourly amount of the NMW multiplied by the number of days of the enforcement notice. In the event of continued non-compliance, the employer may be taken to an employment tribunal or prosecuted.
Employees may pursue an employer through tribunals or the civil courts. In civil cases the burden of proof is on the employer to show that the rate was paid.
There are six criminal offences arising from the NMW: refusing to pay the NMW; not keeping records; keeping false records; producing false records; obstructing an enforcement officer; and refusing to give information to an enforcement officer.

The National Minimum Wage (Enforcement Notices) Act 2003 came into effect in July 2003. It closes a loop hole in the existing law so that HM Revenue & Customs now has the power to issue enforcement notices in respect of workers who are no longer employed by the under-paying employer. Arrears are limited to a 6-year period prior to the service date of the enforcement notice.

It is against the law to dismiss or victimise a worker because of the minimum wage.

Impact of the NMW

The government claims that 1.3 million people have benefited from the introduction of the NMW, with £14million in extra pay being paid or owed.
The Low Pay Commission estimate that the introduction of the NMW at £3.60 in April 1999 raised the UK wage bill by 0.35%.
Around 70% of all people who have directly gained from the introduction of the NMW are women, and about 66% of jobs affected are part-time.
An estimated £1.8 million is owed to workers by employers as a result of HM Revenue & Customs Inspector decisions.
The Standard rate has risen nearky 40% since introduction in 1999. The Low Pay Commission are to monitor closely the effect on business.

Future role of the Low Pay Commission

The terms of reference of the Low Pay Commission have been revised. They have been asked to:

continue to monitor and evaluate the impact of the NMW with particular reference to the impact on pay, employment and competitiveness in low paying sectors and small firms
review the levels of each of the different minimum wage rates and make recommendations, if appropriate, for amendment.

CIPD viewpoint

In broad terms, it is the CIPD's view that the NMW should, together with the social security and tax system, form a safety net below which earnings levels should not fall. It should also provide a common base for earnings of the lowest paid jobs so that competition between employing organisations starts at a reasonable common minimum level of pay. The NMW should be observed in both the letter and the spirit of the law. However, the NMW should not be viewed as a mechanism for uplifting general pay levels or as a trigger for a chain of differential-restoring increases for those paid at or above the NMW level.

Useful contacts

NMW Helpline Tel: 0845 6000 678. In Northern Ireland, tel: 0845 6500 207
Department for Business, Enterprise and Regulatory Reform
HM Revenue & Customs
Low Pay Commission
Federation of European Employers – review of
European minimum wage rates

National Minimum Wage