Not complying with National Minimum Wage (NMW) and National Living Wage (NLW) requirements can be expensive for an employer, both in terms of being required to pay any shortfall and penalties of up to 200%. Employers can also be ‘named and shamed’, risking their reputation for what in many cases can be an oversight or lack of understanding of complicated rules.

Whilst some employers may believe that they only need to pay an hourly rate of at least the current NMW or NLW, in reality the rules are more complex. Employers must first identify employees as being one of four types of worker and then calculate their working hours based on which category they are in.

The four types of worker

The National Minimum Wage Regulations 2015 set out four types of work for NMW and NLW purposes: salaried hours work, time work, output work and unmeasured work. 

As the name suggests, an employee carrying out salaried hours work is paid an annual salary for working their basic hours. They may be paid overtime or receive a bonus, but their base pay is the same for each pay period (whether monthly, weekly or similar).

A worker carrying out time work is paid by reference to the time they work. Their pay is based on the hours they work.

Other employees may be paid based on the number of items they produce, known as output work. There can be variations of such arrangements which are classed as time work, especially where an employer ‘tops up’ the employee’s pay to a higher hourly rate where their pay based on output is below the NMW or NLW rate.

Unmeasured work covers all employees who do not fit into one of the other categories. This could include cases where the employee is paid a set amount for the task regardless of how long it takes, or where the employee is expected to work as many hours as are needed to complete their duties for a particular day or week.

For this article, we will focus on what employers need to do for employees carrying out salaried hours work.

Calculating working hours for employees carrying out salaried hours work

The employer needs to ensure that all working time, as defined by the National Minimum Wage Regulations, is taken into account. Whilst each case needs to be looked at individually, working time includes time when the employee is required to be at their workplace to carry out their duties.

As well as time spent actually working, working time can therefore also include time spent on call or standby (unless at home), time at the workplace where the employee cannot work (such as due to a machine breakdown), time spent travelling from a workplace to training required by the employer and time spent travelling on business. 

It is important to note that an employee’s home to work travel is not counted as working time. Rest breaks are also not counted as working time.

There are several other circumstances that HMRC does not consider to be working time. These include: unpaid leave, absences from work due to sickness, maternity, parental or adoption leave, periods of industrial action, and training not required by the employer. 

Special rules apply where employees carry out sleep-in shifts, and are expected to spend a shift at or near a workplace but are due to be asleep for most or all of the shift. As long as sleeping facilities are provided by the employer, the time spent sleeping is not counted as part of working hours. NMW or NLW must be paid where the employer does not provide sleeping facilities.

Determining whether a salaried employee has been paid NMW or NLW

Taking account of the employee’s working time, the employer needs to work out the average hourly rate of pay for the pay reference period. This can be any period of time up to one calendar month.

Where employees are not paid extra for any additional time above their basic hours, employers need to take account of their actual hours worked in the pay reference period. This can mean that employees whose salary is set at an hourly rate above NMW or NLW based on their basic hours can be underpaid once unpaid overtime is included.

Further guidance

The NMW and NLW rules can be complicated, even for routine employment scenarios. HMRC has produced guidance on calculating the minimum wage that can help with topical queries, although a NMW and NLW specialist may need to be consulted for more advanced or unusual cases.

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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