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The DTI has now published some basic guidance on the new "rated output work" method of checking compliance with the national minimum wage (NMW) for pieceworkers, i.e. workers who are paid piece rates and whose work is not under the direct control of the employer. The new arrangements will come into effect from 1 October 2004.
In our response to the consultation paper issued by the DTI in November 2003, we suggested that setting "fair piece rates" was a practical replacement for the "fair estimate agreements" that were a part of the original NMW rules for payments made to output workers. However, we were critical of the complexity of the method proposed for setting "fair piece rates". Employers will have to conduct what is effectively a work study exercise on all, or a representative sample, of the workers involved in each type of piece work. This may be impracticable where the work is performed in each worker's home. The alternative approach of estimating the rate at which work is performed is, we think, open to abuse.
The Government has published draft Regulations and these have now been explained in basic guidance notes. For the benefit of employers who will need to apply the new rules, we have reworked the key points from the summary of the proposals that appeared in the Newsletter of 7 November 2003.
Fair estimate agreements
The National Minimum Wage Regulations 1999 provide for the making of "fair estimate agreements" where workers are paid piece rates and the employer has no control over when the work is done or how much time must be spent doing the work. This is commonly the situation with homeworkers. In the absence of a fair estimate agreement, such workers must report the time they spend working at piece rates and the employer must ensure that the payment based on the piece rates is not less than the National Minimum Wage (NMW) for the time spent doing the work.
A fair estimate agreement allows the NMW to apply only for an amount of time previously agreed between the parties, with any extra time being paid only at the piece rate - even if that is less than the NMW.
The Government decided to review the operation of fair estimate agreements as it was generally agreed by all parties concerned that they were not working effectively. In their place, the Government proposes to replace fair estimate agreements with a requirement for all output workers to be paid either (1) the minimum wage for all hours worked, or (2) "fair piece rates" that are linked to the NMW.
Fair piece rates
As with all the methods defined in the Regulations for determining compliance with the NMW, whether or not piece workers are paid at a high enough rate is measured during a "pay reference period". This is the worker's pay period and may not be longer than one month.
If a worker is paid piece rates and the employer decides not to set "fair piece rates", the worker must be paid at least the NMW based on the time spent to produce the pieces. The workers must record the number of hours they work during a pay reference period and they must be paid accordingly. If the piece rate payment is too low, it must be topped up to the NMW.
Example: In 30 hours, a worker produces 90 pieces for which the piece rate is £1.25. The payment due is £120. As the NMW hourly rate is £4.50 per hour, the statutory minimum payment for 30 hours work is £135. The employer must top up the piece rate payment by £15.
In contrast, the setting of a "fair piece rate" is intended to ensure that a worker who works at an average speed receives the NMW hourly rate during a pay reference period.
Example: A worker produces 90 items in 30 hours. As the NMW hourly rate is £4.50 per hour, the statutory minimum payment for 30 hours is £135. To comply with the NMW, the employer must therefore set a fair piece rate of £1.50 per piece.
That is a straightforward approach but it has two inherent difficulties:
- not all workers work at the same pace, and
- how to measure the rate at which they work.
Taking the first of these problems, fixing a rate that guarantees the NMW for some workers does not guarantee it for others.
Example: Using the same type of piece work as in the previous example, another worker produces 80 items in 30 hours. At £1.50 per piece, the worker receives £120. The hourly rate is £4 per hour, below the NMW.
The new "fair piece rate" arrangement endeavours to overcome this problem by introducing the concept of "rated output work". This is intended to overcome the problem of some workers working more slowly than others when making the same pieces.
Rated output work
"Rated output work" refers to piecework that is measured in terms of the time it would take an average worker to produce a "subject piece" or perform a "subject task", i.e. the piece of work or the task that is the subject of the output work. A "subject piece" could be an item that is being assembled or a product that is being packed. A "subject task" is any task that is performed, e.g. making a telephone call, or making a sale. For simplicity, these notes will refer to "piecework" and to "pieces" being produced, but this also applies to tasks being performed.
If the employer meets the defined conditions, the number of hours for which the NMW rate must be paid is not the number of hours that each worker actually works to produce a certain number of pieces, but
- in respect of pay reference periods starting on or after 1 October 2004, the number of hours that a worker working at an average output rate would work to produce that number of pieces, and
- in respect of pay reference periods starting on or after 6 April 2005, 120% of the number of hours that a worker working at an average output rate would work to produce that number of pieces.
To be "rated output work", output work must meet four conditions, namely that:
- the worker's contract does not define any normal, minimum or maximum working hours for the output work to produce the subject piece, and
- the employer does not in practice control the hours worked by the worker in producing the subject piece, and
- the employer has determined the "mean hourly output" for the subject piece, and
- the worker is given a written notice containing certain defined information before the start of the pay reference period in question.
Note that all four conditions must be met. Therefore, as long as the worker is not contractually required to work certain hours and has personal control over when the work is done, the two issues for the employer are
- what to put in the statutory written notice, and
- how to perform the tests necessary to find the "mean hourly output" for the subject piece.
The written notice
The written notice must contain statements giving the following information:
- that, in order to comply with the NMW, the worker will be treated as working for a certain period of time in respect of producing the subject pieces during the pay reference period, and
- that the period of time is based on the average speed at which workers of the employer produce the subject piece, determined as the result of a test conducted by the employer or an estimate made by the employer, and
- the "mean hourly output" for the subject piece, and
- the piece rate for the subject piece, and
- the telephone number of one of the national minimum wage helplines, identifying it as such.
The significance of the written notice must be understood. If, for example, workers are paid weekly, they must be given, in advance of each work week, a separate written notice for each type of piecework that they will perform during that week, unless they have already been given a notice for an earlier week that is still relevant.
Determining the mean hourly output
The "mean hourly output" for a subject piece is the average number of pieces (including fractions of a piece) that workers of the employer produce in an hour. This average should initially be determined by testing the average speed at which all workers of the employer produce the subject piece. This is done by totalling all of the pieces produced in an hour (including fractions) and dividing the total by the number of workers.
The test must involve
- all the workers of the employer who produce the subject piece, or
- a sample of those workers who are representative in terms of the speed at which they work.
However, the test is only satisfactory if it is conducted in circumstances similar to those in which the worker in question will produce the subject pieces.
Instead of an actual test of the speed of production, the employer may estimate the speed of production for a particular subject piece
- if the subject piece is reasonably similar to another piece that has been actually tested and the average speed has been fairly adjusted to take account of the increased or decreased time involved in producing the subject piece, or
- if the speed of production of the subject piece has been tested in working circumstances that are different to those of the worker in question and the average speed has been fairly adjusted to take account of the increased or decreased time involved in producing the subject piece in the circumstances in which the worker works.
If the number or identity of workers involved in the test or estimate changes over time, the employer is not required to perform another test or make another estimate unless the employer has reason to believe that the changes materially affect the mean hourly output rate.
Effect of introducing "fair piece rates"
Having tested or estimated the "mean hourly output" of the subject piece, the number of hours spent by the worker in producing subject pieces in the pay reference period is treated as being, not the actual number of hours worked, but
- from the first pay reference period starting on or after 1 October 2004:
the number of subject pieces produced ÷ the mean hourly output
- from the first pay reference period starting on or after 6 April 2005:
the number of subject pieces produced ÷ the mean hourly output × 1.2
It must be noted that this procedure does not affect the way in which the employer's payments are calculated using the number of pieces produced and the defined piece rate. It is intended only to allow the employer to calculate the number of hours that are treated as having been worked for the purposes of the NMW and ensure that at least the NMW rate is paid for those hours instead of the actual number of hours worked.
One of the key advantages for workers and employers, therefore, of using "fair piece rates" is that it will no longer be necessary for the worker to record and report the number of hours actually worked. The DTI's guidance, however, points out that the "rated output work" method may only be used if all of the defined conditions are met. If any are not met, the employer's NMW compliance can only be met if the actual hours worked by each worker are used - in which case workers must continue to record the actual worked hours.
From 1 October 2004
Using the "rated output work" method of ensuring compliance does not guarantee that all pieceworkers will receive the NMW. From 1 October 2004, workers whose rate of work is less than the "mean hourly output", will not actually receive the full NMW. However, as long as the employer has met all of the conditions for using the "rated output work" method, the payment will be treated as complying with the NMW. The situation is illustrated by the following example, using the £4.85 NMW rate that comes into effect from 1 October 2004.
Example: The employer tests the rate at which the pieceworkers in the employment produce a particular item and the average is 3 per hour. In a written notice, the workers are told that the "mean hourly output" is 3 and the piece rate is £1.62.
A worker produces 90 items in the pay reference period. The worker is treated as having worked 30 hours (i.e. 90 items ÷ 3), for which the payment must be at least £145.50 (i.e. 30 hours × £4.85). The employer pays £145.80 (i.e. 90 items @ £1.62).
If the worker worked 30 or fewer hours to produce the 90 items, i.e. at or above the average production rate, the employer's payment meets the NMW.
If the worker worked more than 30 hours to produce the 90 items, i.e. at below the average production rate, the employer's payment is less than the NMW. However, as long as the employer has met all of the conditions for using the "rated output work" method, the payment is treated as having met the NMW.
From 6 April 2005
The number of workers who, under these new provisions, may legitimately be paid less than the NMW because their rate of work is less than the "mean hourly output" will decrease considerably from 6 April 2005. From that date, the number of hours that are treated as having been worked is increased by a factor of 1.2. The effect of this will be that the employer has to increase the fair piece rates by 20%. The following example, using the same circumstances as the example above, illustrates this situation.
Example: The employer tests the rate at which the pieceworkers in the employment produce a particular item and the average is 3 per hour. In a written notice, the workers are told that the "mean hourly output" is 3 and the piece rate is now £1.94.
A worker produces 90 items in the pay reference period. The worker is treated as having worked 36 hours (i.e. 90 items ÷ 3 × 1.2), for which the payment must be at least £174.60 (i.e. 36 hours × £4.85). The employer pays £174.60 (i.e. 90 items @ £1.94).
If the worker worked 36 or fewer hours to produce the 90 items, the employer's payment meets the NMW. The worker may take 6 hours more to produce the items than the average worker, but the payment still meets the NMW.
If the worker worked more than 36 hours to produce the 90 items, the employer's payment is less than the NMW. However, as long as the employer has met all of the conditions for using the "rated output work" method, the payment is treated as having met the NMW.
Sources: www.hmso.gov.uk/si/si2004/draft/20048731.htm
www.dti.gov.uk/er/nmw/fprates.htm
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For Payroll and Human Resource Professionals
