Detailed NMW guidance and examples are available on GOV.UK or from the Department for Business and Trade, but the following provides an overview of NMW obligations for different workers’ pay arrangements.

Workers paid by the hour

Hourly-paid workers must be paid at least the NMW per hour on average calculated over each pay period.

For instance, most 21-year-old workers are entitled to the NLW of £11.44 per hour. If a 21-year-old who is paid monthly works 100 hours in a particular month, their minimum pay for that month would be £1,144 (£11.44 multiplied by 100 hours).

Whilst this is the simplest NMW/NLW category to comply with, employers who pay based on the number of hours worked can still fall foul of the NMW/NLW rules if they don’t understand what counts as working time. For instance, travel from home to work does not count as working hours, whereas time spent travelling from one workplace to another does count.

What counts as working hours is also relevant to the following categories of worker for NMW or NLW purposes.

Workers paid an annual salary

Salaried workers have their required working hours stated in a contract, and are paid at regular intervals (at least monthly, and no more frequently than weekly).  

To comply with the NMW or NLW, employers of workers paid an annual salary need to ensure their staff’s hourly rate (the amount paid in each pay period divided by the average number of working hours in that period) is at least equal to the relevant NMW or NLW.

For example, a 21-year-old worker’s contract states they must work 39 hours per week (2,028 hours per year) and they will be paid monthly. Each pay period covers 169 hours (2,028 divided by 12), so the amount they are paid each month has to be at least £1,933.36 (£11.44 multiplied by 169 hours).  

Workers paid by output

Workers paid based on how much they produce might include farm labourers paid by the weight of crops harvested, or telesales staff paid on a commission only basis. If their working hours are not fixed, they must be paid a ‘fair rate’ for each task or piece of work done.  

The fair rate of pay is based on the average output per hour a typical worker can produce, which is measured by testing existing workers in that role. That average output is divided by 1.2 so as not to disadvantage those new to the task who are still learning, and the relevant NMW or NLW rate is divided by the result to give the fair rate of pay for an hour’s output.  

For instance, a team of commission-only telesales workers are found on average to win 3.6 new customers per team member per hour. That number is divided by 1.2 to allow for new workers, giving 3 new customers won per hour. For a 21-year-old worker with no fixed working hours, the NLW per new client win would be £3.82 (£11.44 divided by 3), and they would be paid based on new client wins rather than how long they spend working. 

Employers wanting to use the fair rate of pay method must give written notice to each worker before they begin work. Failure to do so means the employer will have to pay by the hour instead.  

Other workers

Workers not covered by any of the above payment arrangements are referred to as performing unmeasured work. This includes workers paid a flat rate to perform a task, regardless of how long it takes – for instance, being paid £75 per day to provide IT support to a business, where there may be no IT issues at all one day, and hundreds the next. HMRC’s NMW Manual includes other examples of unmeasured work.

If the worker’s hours cannot be recorded and paid at the NMW/NLW (or above), the employer and worker will need to agree in writing the average daily hours the task is expected to take and the number of hours the worker is expected to be available to work on a full working day. This must be agreed in writing before works begins.  

For instance, it might be agreed that the IT support worker above is expected to do 4 hours of work a day on average but needs to be available to take calls for 12 hours each day. If the worker is available for calls on 4 days in a particular a week, their week’s pay needs to be at or above the relevant NMW/NLW for 16 hours (4 days at an average of 4 hours work per day), regardless of how much work they actually do on those four days. Their week’s pay must therefore be no less than £183.04 assuming the worker is aged 21 or over (£11.44 multiplied by 16 hours).  

NMW failures 

Classification of workers for NMW/NLW purposes is the first hurdle for employers in complying with their obligations in this respect. Getting this right is critical, before going on to consider the next steps in calculating the NMW.  

As evidence of the complexities involved in NMW/NLW calculations, earlier this year over 500 employers were found to have underpaid workers a total of almost £16 million. Employers failing to pay at or above the relevant rates risk compliance activity from HMRC including penalties of up to 200% of the underpaid wages, having to pay any arrears to workers, and being ‘named and shamed’ in the annual list linked above.

The Department of Business and Trade publishes a helpful checklist of common causes of minimum wage underpayments, which should help employers reduce the risk of being named and shamed.  

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.     

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