The national minimum wage, and piece rates

You have to pay at least the national minimum wage to most of your workers, including temporary, part-time and casual workers, those working on an agency or commission basis and homeworkers.

Rates

There are three rates. The main rate (also called the standard or adult rate) applies to all employees over 22 unless they fall within one of the exceptions, or another rate applies.

The development rate applies to workers aged 18 to 21 inclusive, and is sometimes called the youth rate.

A minimum wage was introduced for 16 and 17 year-olds who are above the compulsory school leaving age, from 1 October 2005. Apprentices of 16 and 17 years of age, however, are exempted from the new rate.

In England & Wales, a person is above the compulsory school leaving age (and therefore becomes entitled to the minimum wage for 16 and 17 year-olds) after the last Friday in June of the school year in which their 16th birthday occurs.

An employee cannot sign away his rights to the minimum wage.

From Oct 2007, the main rate is £5.52 (rising to £5.73 in October 2008) , the development rate is £4.60 (rising to £4.77 in October 2008) and the rate for 16 and 17 year olds is £3.40 (rising to £3.53 in October 2008).

Exceptions

You do not have to pay the minimum wage to:

• Apprentices under the age of 19. Also, apprentices between the ages of 19 and 25 are not entitled to the minimum wage for the first 12 months of their apprenticeship; thereafter apprentices aged 19 to 21 (inclusive) need to be paid the development rate and apprentices aged 22 and over are entitled to the standard rate;
• Individuals who live in the family home of the employer and are treated as family members, so there is no deduction from wages for food or accommodation. This is intended to cover au pairs, nannies and companions;
• Actual members of your family, in respect of domestic duties, or the running of the family business where the worker lives at home.

If workers are genuinely self-employed - that is, they have freedom to work for others, can refuse work; set their own hours, incur their own expenses, deal with their own losses and so on - you do not have to pay them the minimum wage.

The Employment Appeals Tribunal has said that the important points to take into account when judging whether someone is self-employed or not are:

• whether there is a contract to perform work or services,
• whether there is an obligation on the person undertaking the work to do it personally, and
• whether the provision of work or services is made in the course of running a profession or business, and the other party is a customer.

In particular the Employment Appeals Tribunal said that tribunals:

• must look carefully at any requirement for the individual undertaking the work to do it personally, and
• must evaluate the 'mutuality of obligation' - ie the company's duty to provide work, and the individual's obligation to do it.

So if you employ, eg a 'man with a van':

• on an occasional basis, as and when your deliveries are required, and not always then; and
• he has no compunction about turning you down or sub-contracting the work if he is busy

he is obviously much less likely to be considered one of your 'workers' than if he makes regular deliveries for you every Friday, and keeps his Fridays free so he can do them personally.

If you suspect you may have acquired a worker without intending to, take professional advice.

Voluntary workers - those working for therapeutic reasons only, with no contractual obligation to work at all, and no right to any payment or benefit - are not entitled to the national minimum wage.

Working out whether you are paying the minimum wage

You must pay the minimum wage over each 'pay reference period'. This is normally the period for which you pay people - for example, weekly or monthly. It cannot be longer than a calendar month.

You can take into account wages earned, but not paid, during that period - for example, by way of bonus or commission - provided that the extra earned is paid in the next pay reference period. You cannot then count that extra towards the minimum wage in the next pay reference period, as that would be double counting.

Strip out overtime premium from the sum that you include in your calculations. To work out the overtime premium:

• Take the lowest rate that you pay each employee for the same work during normal hours.
• Deduct that from the amount that you pay in overtime.

The result is the overtime premium. Then deduct that from your calculation of the wage payable. The result should equal or exceed the national minimum wage.

So for the purposes of calculating the minimum wage, you are effectively paying people for overtime at the lowest rate that you would pay for normal working.

Piece workers

If workers are paid by the piece, you must either pay them the minimum wage for the period actually worked, or operate a system known as 'rated output work'. This system has replaced the 'fair estimate' system previously used.

To apply the rated output system, you must conduct a test to determine the average speed at which the job can be completed. (In some circumstances you can adapt a previous test to make an estimate.) This test has to be undertaken using all workers, or a representative sample of workers, and in similar conditions to those of the piece rate workers - for example, it is not acceptable to base the test on the use of much better machinery than they will have. You must then issue the piece rate worker, in advance, with a notice which:

• says that such a test has been conducted (or that the speed has been estimated);
• says what average hourly output is;
• says that the worker will be treated as having worked for the time that it would have taken him (or her) to complete the job at the average speed;
• gives the rate to be paid for the work in question; and
• gives one of the National Minimum Wage helpline numbers.

For pay periods beginning after 6 April 2005 you must pay 120 per cent of the minimum wage for the time established by the testing procedure (previously 100 per cent).

Since the onus is always on you to be able to prove that you complied with the national minimum wage legislation, be sure to keep adequate records if you use the rated output system.

Taking accommodation into account

You can take the value of accommodation provided to an employee into account, but only up to a maximum of £4.46 (from October 2008) for each day that the accommodation is provided.

If the accommodation you are providing is worth more than that, you will either have to take the loss or ask the employees to make a contribution - either way, the excess cannot be counted towards the minimum wage.

Other benefits in kind

Benefits-in-kind other than accommodation (eg the right to buy company products at a discount) can't be taken into account when calculating the national minimum wage.

Tips

Only tips that go through the payroll can be included when calculating whether you have paid the national minimum wage. If they don't, you can't count them - even if all the tips are collected, pooled and divided equally, so that you know how much employees are making from them.

Travelling time and breaks

Time spent travelling on business must be included in your calculation of hours worked. Time travelling between home and work is not time travelling on business, even if work is being done well away from your normal work site. You can also exclude rest breaks while travelling, although only if the employee has some choice over how those rest breaks are taken.

Sleeping over

There has been some to-ing and fro-ing over this. Current official guidance says that, if you specify in their employment contract hours when people may sleep, and you provide them with suitable sleeping facilities, then you do not have to pay them for those hours, except insofar as any work is actually done in them. If you do not specify any sleeping time, however, an Employment Tribunal might require you to pay for the whole of the time that the worker is at work.

The European Commission has recently obtained agreement that on-call time will be defined much more precisely, to differentiate it from working time and rest time. However, this change will have to be implemented through legislation in the UK, and there is as yet no indication of when such legislation will come into force, or how it will apply.

Access to records

You must provide information showing an employee's right to the minimum wage within 14 days of receiving a written request. Otherwise the employee can go to an Employment Tribunal, which may impose penalties on you.

You must hold sufficient records to establish that they are paying workers at least the national minimum wage - the onus of proving that you have paid the minimum wage is on you.

Keep records of hours worked and wages paid, together with ancillary evidence such as training agreements, details of rated output work, or 'daily average' of hours worked agreements, for at least three years.

Failing to pay

If you fail to pay the national minimum wage, an enforcement notice can be served requiring you to pay the amount due. If you fail to comply, you could be subject to a fine of up to twice the hourly adult minimum wage per day (even if the worker is not an adult), per worker.

You could also be prosecuted in the criminal courts for a range of offences associated with the minimum wage, including a deliberate refusal to pay it, fiddling the records, or attempting to mislead HM Revenue and Customs (which is the investigating authority). If convicted of any of these offences you could be subject to a fine of up to £5,000 in respect of each offence.

There are also plans to amend the penalties and strengthen the enforcement regime in the new Employment Simplification Bill.

Former employees

The minimum wage was originally brought in (at £3.60 an hour for adults, and £3.00 an hour for 18-21 year olds) in April 1999. Subject to the exceptions outlined above for family or voluntary workers, anyone who has worked for you since those dates at less than the minimum wage can require you to pay them the difference, even after they have left. There is however an overall limit of six years on the amount of arrears that can be claimed.

If in doubt, take legal advice.