What are the various minimum rates?
The National Minimum Wage (NMW) is a statutory requirement introduced in 1999. By 2015 the NMW contained four rates:
- Adult rate (aged 21+) currently £7.05;
- Development rate (aged 18-20) currently 5.60;
- Youth rate (16-17 year olds) currently £4.05; and
- Apprentices (aged under 19 or those in first year of apprenticeship aged over 19) currently £3.50
In April 2016 a fifth NMW rate was introduced: the NLW, currently £7.50 per hour, and applies to workers aged 25 years or over, who are not in the first year of an apprenticeship. The NLW is part of the NMW legal regime so, importantly, the existing provisions for determining whether the NMW has been paid and enforcement measures also applies to the NLW.
All NMW - so including NLW - rates are revised annually in April (prior to 2017 in October).
By contrast, the RLW is a recommendation of the Living Wage Foundation and is voluntary on the part of employers and only relates to those aged 18 and over. There are two recommended rates which differ on geography rather than age "in recognition that young people face the same living costs as everyone else". The recommend rates are revised in November each year and are currently £10.20 in London and £8.75 for the remainder of the UK. The voluntary RLW scheme has been adopted by more than 3600 employers including Google, Heathrow Airport and IKEA.
The NLW is based on a target 60% of median earnings. When the NLW was first announced the then Chancellor of the Exchequer, George Osbourne, expected the NLW to rise to £9.00 by 2020. However, more recently, the Office of budget responsibility estimates that the rate will only reach £8.75 by 2020 - the current non-London RLW recommendation. By contrast, the RLW is a cost of living calculation by reference to a basket of household goods and services.
UK wage rates for 18+
The NMW development rate, for people aged between 18 and 20, is currently £5.60, while the NMW adult rate, for people aged between 21 and 24, is £7.05. The NLW, for people aged 25 and over, is £7.50. The NMW Apprenticeship rate applies to those aged 18 years and over in the first year of an apprenticeship. All are statutory law requirements and have no London weighting. The next annual revision will take place on 1 April.
The RLW, however, is voluntary, with two different rates for people aged 18 years and over: £10.20 for those in London and £8.75 for everybody else. The next annual revision for the RLW is due to take place on 6 November 2018.
Who is entitled to the National Minimum Wage?
The NMW applies to most workers working or ordinarily working in the UK who are over compulsory school age at the relevant rate applicable for their age. As workers 'ordinarily working in the UK' are covered, workers who are temporarily working abroad will still qualify for the NMW.
The NMW also applies to agency workers, though it is the person who actually pays the agency workers who is responsible. 'Piece workers' - those who are paid according to what they produce, rather than the hours that they work - must be paid at least the NMW or a fair piece rate (1.2 times the rate which lets a worker of average speed earn the NMW).
What happens if you don't pay the National Living Wage?
HMRC is responsible for enforcing the NMW. Where HMRC concludes that the NMW has not been paid, a notice of underpayment will be issued setting out the arrears of NMW to be repaid by the employer to the worker together with a requirement for the employer to pay a financial penalty to the Secretary of State within 28 days of service.
As regards a financial penalty, if the level of arrears for a worker is less than £100 a minimum penalty of £100 will apply. Above that level and a penalty equivalent to 200% of the arrears up to a maximum of £20,000 per worker will apply. For arrears of pay, these are calculated on the relevant NMW rate in force at the date of determination. This means that the worker will be repaid any arrears at the higher rate if the NMW has increased since the underpayment. This is designed to compensate workers for the length of time that the arrears have been outstanding. However, where the employee has changed age band since the underpayment, the arrears should still be paid according to the age band that applied at the date of the underpayment (in addition to financial penalties and arrears, HMRC can and does publicly name and shame employers who fail to pay the NMW including the NLW). Reasons for non-payment can be many and varies from inadvertent reporting errors to cases of deliberate decisions not to comply with the legislation.
The case of John Lewis illustrates how an employer may inadvertently commit a technical breach. The company was trying to give its employers a regular income and annualising hours. This is called 'pay averaging' and it is where staff are paid the same amount each month, even if the hours they've worked vary. But this meant that some people were being paid less than the NMW in some particular months, whereas well over in other months. This practice has the aim of providing more certainty and financial stability for workers, but it left John Lewis vulnerable as it inadvertently resulted in the retailer paying lower wages in some months.
On occasions like these, where it is simply an error, employers should accept that it has happened and work quickly on rectifying the mistakes.
In addition to these civil penalties criminal prosecution may be appropriate in more serious cases. Persistent failure or a refusal to co-operate with investigations may warrant and result in criminal prosecutions although there have only been 13 successful prosecutions since 2007.
The National Minimum Wage and sleep-in shifts
Treatment of "sleep-in" shifts for NMW purposes is an area that can often cause confusion. Where a worker is required to work a number of "sleep-in" night shifts at the employer's premises, and be available in case of an emergency, does the full night shift constitute 'working' for the purposes of the NMW? Alternatively, is the worker only 'working' for NMW payment purposes when they are awake to carry out any relevant duties? The point is particularly significant in the care sector where sleep-in duties commonly arise.
Under the NMW legislation, salaried hours workers and time work workers who are "on-call" are regarded as working when they are available at or near a place of work for the purpose of doing work and are required to be available for such work, unless they are at home. However, where a worker is entitled to sleep at or near a place of work when on call, and is provided with suitable facilities for sleeping; only time when the worker is awake for the purpose of working is treated as time work or salaried hours work (regulations 27 and 32 of the National Minimum Wage Regulations 2015).
Over recent years, tribunals have increasingly drawn an important distinction between those cases where an employee is "working" even when sleeping, merely by being present at the employer's premises and those where the employee is provided with sleeping accommodation and is simply on-call. A distinction that is not always easy to apply.
Recently the Employment Appeal Tribunal (EAT) considered the issues around sleep-in shifts and confirmed a 'case-by-case' approach was necessary. In other words the dreaded, "it depends on the facts of the case". The starting point is to determine whether the individual is "working" by being present at the workplace even in periods where they are permitted to sleep. It is only if the worker cannot be said to be "'working" that consideration of the "on-call" provisions of the NMW legislation come into play. Relevant factors may include (no single factor being determinative):
- the employer's particular purpose in engaging the worker - is it a legal requirement to have someone present on site?
- the extent to which the worker's activities are restricted - is the employee required to stay on site through-out the entire "sleeping- shift"?
- the degree of responsibility undertaken by the worker- is the worker responsible for dealing with any emergencies or simply there to raise an alarm.
A care sector crisis?
Applying the above factors has seen a marked increase in the type of 'sleep in' shifts being found to be working time for NMW purposes. This judicial trend combined with the introduction of the NLW last year has led to cries of under-funding of the UK care sector with many such businesses facing financial ruin over the past year.
On 1 November, HMRC has launched a new NMW compliance scheme and enforcement hiatus for social care providers that may have incorrectly paid workers below legal minimum wage hourly rates for sleep-in shifts. Social care employers will be able to opt into the new social care compliance scheme, which will give them a year to identify what they owe workers. Employers who identify arrears at the end of the self-review period will have up to three months to pay workers, without fear of a financial penalty also being imposed. Those that do not participate will be subject to HMRC's normal enforcement scheme.
Future challenges
We can expect the NLW to continue to rise albeit at a lower rate than originally envisaged back in 2015. Looking forward, the question for employers is how they will address continued upward wage increases. For some it may involve re-examining benefits packages and reducing the value of those packages to meet rising wage costs, others will look to reduce the workforce perhaps exploring greater automation of processes.
This is a real concern in sectors such as retail and care where margins are being squeezed and costs savings need to be made.
And then there is the economic uncertainty of Brexit…
If you have any concerns about the NLW, you can speak to one of our employment experts.