The National Minimum Wage Bill received Royal assent on 31 July 1998 and established the legislative frame work for the national minimum wage ("NMW"). The Government has now published draft Regulations to implement it. The Regulations, which are currently the subject of a public consultation, are expected to come into force on 1 April 1999.

New draft regulations

The rate of the NMW is set at £3.60 per hour. Workers under the age of 18 and certain apprentices are exempted from the NMW, and a lower rate of £3.20 is to apply to 18 to 21 year olds and workers receiving accredited training within the first six months of starting a new job.

The Regulations also set out how the hours covered by the NMW for particular workers are to be calculated. This is a difficult exercise where workers do not have normal working hours - for example, workers who are paid on a piece work or commission basis and workers who live on the employer's premises and/or who need to be available for 24 hours a day. This is achieved by defining three categories of work: "time" work, "output" work and "non hours" work.

The Regulations provide for which elements of the overall remuneration package are to be taken into account when determining whether or not the NMW has been paid. The starting point is a worker's gross pay per hour, from which deductions and payments are then subtracted (such as overtime or shift premia and some allowances) to arrive at the pay per hour for NMW purposes. That rate of pay is then compared against the NMW rate for the hours worked in each "pay reference period".

The Regulations also require employers to provide workers with an NMW statement setting out details of the rate of the NMW, and require employers to keep records to show whether or not the NMW has been paid.

"Time" work, "output" work and "non-hours" work

"Time" workers are employed and paid wholly, or partly, on a time basis. Such workers work a certain number of hours, which may or may not vary, for which they receive certain payments.

"Output" workers are employed and paid wholly on a piece work or commission basis. For example, they may be paid according to the number of products they make or the number or value of sales they make.

"Non-hours" workers are employed on some other basis that is not time based but is also not piece work or commission work - for example, some care workers and youth hostel workers.

Hours for which the NMW must be paid

For NMW purposes, the hours of work covered by the NMW for "time" work are those hours actually worked.

For "output" work, there is a "default" mechanism, of using the actual hours worked, which must in any event be recorded by the worker.

Where the worker's hours are not controlled by the employer, the worker and the employer can agree, at any stage before the start of the pay reference period, to use an alternative system. This includes working out the average daily number of hours the worker is likely to work, based on a "fair estimate" of weekly hours, which is then multiplied by the total number of days in the pay reference period. The total is the "ascertained" hours.

Where the worker has worked for longer than the "ascertained" hours, then the hours for which they must be paid at least the NMW rate are the "ascertained" hours. Where the worker has worked for less than the "ascertained" hours, the hours covered are the actual number of hours worked.

A similar approach is adopted for working out the number of hours of "non-hours" work covered by the NMW. There is a default mechanism of using actual hours, which workers and employees can again contract out of. The alternative mechanism is based on a "realistic" average of daily working hours which is then applied to each day on which the worker works to arrive at the "ascertained" hours.

The pay reference period

The pay reference period is the averaging period to be used in calculating the hours worked and how much the worker has been paid. It is set at a month (i.e a "calendar month"), except where workers are currently paid by reference to periods of shorter than a month (eg a week, a fortnight, four week) in which case, the pay reference period for NMW purposes is the worker's existing pay period.

Only pay which is received during the pay reference period, or during the next pay reference period, counts for determining whether or not the NMW has been paid. So, where an annual bonus is paid in December, 1/12 of the amount of the bonus can be taken into account in respect of December's pay and a further 1/12 can be taken into account in respect of November's pay. However, no element of the bonus could be taken into account in determining whether or not the NMW had been paid in October.

Pay to be taken into account in a pay reference period

The starting point is gross pay received by the worker (before any deduction such as tax and national insurance), but leaving out of account payments such as loans, pensions, court awards and redundancy payments. This amount is then reduced by:

  • any amount paid for work done in the previous pay reference period (this prevents double counting)
  • any payments for time when the worker was absent from work
  • any overtime or shift premium
  • any "allowance"
  • certain tips and gratuities
  • reimbursement of, for example, travel expenses
  • certain "deductions"
  • certain payments made by the worker to the employer
  • deductions for living accommodations in excess of specified amounts. 

The figure arrived at is then divided by the number of hours covered by the NMW for a particular pay reference period to determine whether or not the NMW has been paid.

"Allowances", tips and gratuity and "deductions"

"Allowances" which represent "compensation" for "non standard" work done in "unusual" circumstances, which are not consolidated are deducted from pay. Other allowances are included.

Service charges, tips, gratuities or cover charge are deducted from gross pay provided that they are not paid through the payroll. If they are paid through the payroll, they will count towards NMW pay.

"Deductions" by the employer which are to be subtracted from gross pay are deductions where a worker has had to purchase, for example, tools or parts for her or his equipment needed for her or his work. Relevant "payments", which cover the same type of expenditure, exclude the same amounts for NMW purposes where the amounts are not actually deducted at source by the employer, but are actually paid subsequently to the employer by the worker.

There are, however, exceptional "deductions" and "payments by the worker" which do count towards NMW pay. These are deductions or payments: 

  • on account of a worker's misconduct
  • to recover repayment installments in respect of a loan or advance of wages
  • to buy shares or securities.

In addition, payments by a worker to their employer for goods or services do count towards NMW pay unless the worker is required to make that purchase through their employment. For example, if a Bank required a worker to bank with it, any charge levied on the worker for the supply of banking services would not count for NMW purposes and would be deducted.

Right to an NMW statement and records to be kept by the employer

All workers will be entitled to receive an NMW statement from the employer. The statement is likely to be in prescribed form and will contain information about the level of the NMW and the worker's rights to access to the records kept by their employer. 
The record keeping requirements are targeted on those workers at most risk of being paid less than the NMW. For workers who earn at least £12,000 gross per annum, in installments of at least £1,000 per month, employers will need to keep records that are sufficient to show that they are paying workers at least at the NMW rate.

For workers earning less than the threshold, employers will have to keep more detailed records to show how hours worked had been calculated and the elements of pay which have been taken into account.

In either case, in the event of dispute, the burden of proof is on the employer to show that at least the NMW has been paid for hours covered.

Enforcement of rights

The NMW Act provides for six criminal offences by employers: refusal or willful neglect to pay the NMW; failing to keep NMW records; keeping false records; producing false records; intentionally obstructing an Enforcement Officer and refusing to give information to an Enforcement Officer.

A worker who believes that she or he has not been paid at the NMW rate is entitled to present a claim to the Employment Tribunal for payment of the difference between the NMW rate for the hours covered and what they have actually been paid. The NMW Act also provides workers with a right not to be subjected to any detriment on the ground that they have either qualified for the NMW or sought to enforce their right to the NMW or the employer has been prosecuted for an offence under the NMW Act.

If an employer fails to provide a worker with an NMW statement, the worker can present a complaint to the Employment Tribunal asking for a declaration as to the terms of that statement. If the employer fails to allow access to records, the worker can also apply to the Tribunal, which can award a sum equal to 80 times the hourly amount of the NMW.