National minimum wage: common errors to avoid

Calculating wages for people on the national minimum wage (NMW) and national living wage (NLW) is not always easy.  

The date of the rate of pay change for NMW and NLW is now 1 April of each year. And any pay falling within a monthly reference pay period starting 1 April must be calculated at the new rate. This rule may seem straightforward. However, what is included in the pay, and what deductions affect the pay can make calculating the correct rate of pay complex and meeting the minimum rate rule, difficult.

This article will not cover all the different types of pay. It will focus on the some of the lesser known rules which, if not followed could mean an underpayment of NMW and the chance of a penalty.

Pay reference period

An organisation may have a pay reference period that starts during the month, so adjustments will need to be made to the pay in April. The rules on what pay is allocated to a pay reference period is any pay:

  • Received in that month
  • Earned in that month but received in the next pay reference period.

So, if a pay reference period starts on 14th day of the month then pay received in April will need to be split as follows: 1 April to 13 April, calculate at the old NMW rate, while the new pay reference period onwards should be calculated at the new NMW rate. This will be the same for any pay earned in April but paid in a later month.

There is however, an important variation to that rule. If there is a delay in payment of more than one pay reference period then the rate to be used when making the calculations will be the new NMW rate.

Calculating pay

The rules for calculating different types of pay are as follows:

Bonuses

The rate used to see if a bonus meets the minimum hourly rate of pay is usually the rate relevant to the month in which the bonus is paid. There is the option to allocate a proportion (for example, for an annual bonus, one twelfth) of the pay received to the previous pay reference period. So, if a bonus was received in January for the work performed in the previous February – January, then one twelfth of the amount can be allocated to the previous December.

Pay recorded on timesheets

Generally, hours recorded on a timesheet will be paid in the same pay reference period or the following pay reference period. However, occasionally an employee will hand in their timesheet late. If it is handed in within four working days before the end of the following pay reference period then a special rule applies, and this is best demonstrated by an example.

An employee with a monthly pay reference period is paid at the end of each month. For hours to be paid in January then the hours recorded must be on the timesheet for December or for January. If the employee hands in the timesheet for December three days before the end of January, then to be able to calculate the pay at December’s NMW rate, the payment must be made in January or February.

Tips, gratuities and other payments

Since 1 October 2009 tips, gratuities, service charges and cover charges are no longer to be taken as part of the minimum wage pay. And this is regardless of whether they are paid direct to workers by customer, through the payroll or by a tronc master.

Apprentices

Apprentices aged 16 – 18 years can be paid the apprentice rate, and those aged 19 and over can be paid the apprentice rate for the first year. After the first year they must be paid at the NMW appropriate for their age, or more. They must be paid for all the hours at work and in training, whether on the job or at college. And any back pay due, if it is for work more than one pay reference period ago, must be at the current NMW rate.

Accommodation offset

Charging more than the national daily amount of £6.40 for accommodation will mean that the excess will reduce the employee’s pay, and possibly take their hourly rate below the NMW. Any accommodation provided falls under the third party rules and includes:

  • Businesses and companies which are separate legal entities
  • Directors, family members of a director, business partner, shareholder, member or owner of the employing business
  • Businesses or companies with a director, shareholder, member, owner or business partner who is a family member of a director, shareholder, owner or business partner of the employing business.

So if accommodation is provided by any of the above then the rent charged, after offset, will reduce the pay for minimum wage purposes.

There are special rules that apply if the employee is absent or sick.

All employees must be paid the NMW rate as a minimum. There are different rules to follow, and different circumstances warrant different methodologies. Care must be taken when calculating pay to avoid underpayment and possible penalties.

For more information and the special rules on NMW visit the government minimum wage guidance page.

Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.

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