Does an employer who always pays more than the national minimum wage hourly rate have to worry about compliance?

(In view of the new minimum wage rates that come into force from the first pay reference period on or after 1 October, and the news item this week about the EAT decision in the case Hughes v Graham and Jones, we are reproducing, earlier than normal, the following FAQ.)

The minimum hourly rates in recent years and up to 1 October 2008 are shown in the following table:

The new rates apply to wages paid in the first pay reference period that commences on or after 1 October each year. A "pay reference period" is the same as a worker's pay period, except that it cannot be longer than one month.

Example 1: An employee is paid for work performed between Saturday and Friday on that Friday. The first pay reference period on or after 1 October 2008 starts on Saturday, 4 October. The wages paid on 10 October are the first wages paid in October 2008 that must meet the new NMW rates.

Example 2: The situation is the same as Example 1, but the wages are paid a week in arrears. The wages paid on 17 October are the first wages paid in October that must meet the new NMW rates.

With regard to general compliance, if an employer pays at least the minimum hourly rate for every hour worked, including all overtime hours, the employer will never be in breach of the rules. In the terminology of the legislation, workers who are paid an hourly-rate for every hour they work are performing "time work". This type of work also includes workers who are paid piece rates during working hours that are controlled by the employer.

It is possible, in certain circumstances, to pay workers who are performing "time work" at a rate that is lower than the statutory minimum but, in such a case, the employer must fully understand the rather complex issues concerning the hours and payments that count, or do not count, towards the compliance calculation, for example, the accommodation offset.

There are, however, three other types of "work,

• "output work" - where workers are paid piece rates but the employer has no control over their hours of work
  
  
• "salaried hours work" - where workers are paid an annual salary, in equal instalments, but are not paid for hours in excess of their annual hours
  
  
• "unmeasured work" - where workers' earnings are not linked in any way to the hours they work.

Where an employer does not always pay for overtime, or pays piece rates to workers who are working on the employer's premises, or provides work that falls into these three additional types of work, compliance cannot be assumed. In the following situations, it may not be possible to demonstrate compliance unless each worker's actual working hours are recorded:

• workers who are paid an hourly-rate but who are not paid for every hour of overtime
  
  
• salaried workers whose salary is paid in equal instalments throughout the year, whose working hours are defined in their contracts, but who are not paid when they work extra hours, unless they never exceed their contractual annual hours
  
  
• output workers paid piece rates, or by commission, for work performed under the employer's control
  
  
• output workers paid piece rates, or by commission, but whose work is not performed under the employer's control, unless the employer pays "fair piece rates" and meets the necessary notification requirements
  
  
• workers whose working hours are unmeasured, e.g. because their contracts do not specify their hours of work, unless the employer and worker enter into a "daily average" agreement.

The statutory requirements for demonstrating national minimum wage compliance is probably least understood in the case of salaried workers. As long as a salaried employee (as defined above) does not work more than the hours defined in the contract and is paid a regular salary in respect of those hours, compliance is demonstrated simply by dividing the worker's annual salary by the worker's annual hours.

However, if the worker is not paid for hours worked above the annual hours, e.g. a worker contracted to work 40 hours per week but who regularly works 48 hours per week without any extra payment, those extra hours each week must be taken into consideration in order to demonstrate compliance. It is therefore necessary for the employer to keep records of all hours worked by salaried workers who are not paid for some of the hours they work.

Special statutory rules apply for salaried workers as soon as a worker has worked the contracted annual hours. It is not difficult to show that a worker with an annual salary of £23,000, contracted to work 40 hours a week (i.e. an hourly rate of over £11), who gets no additional pay for working more than 40 hours a week, but who works 48 hours on average over the year, will be paid below the national minimum rate in one or more months towards the end of the calculation year. In that situation, the employer would have to top up the salaried worker's earnings in those months to at least the national minimum wage.

For worked examples of the compliance calculations for salaried workers, see the booklet National Minimum Wage Guide, published by the DBERR (at www.berr.gov.uk/files/file47736.pdf), from page 62 onwards, although the rates shown are those that applied from October 2007.

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