A legal entitlement to a minimum wage was first introduced in the UK in 1999 when the National Minimum Wage Act 1998 (the Act) came into force.
What is the National Minimum Wage?
The national minimum wage (NMW) is a specified minimum hourly rate of pay to which most workers are entitled. The rate is increased each year. The current standard adult rate (as from October 2014) is £6.50 per hour. This applies to most workers aged 21 and over although special rules apply to certain categories of worker, such as family workers (i.e. those who work in their employer’s home) who may not be entitled to the NMW. In addition, lower rates of the NMW apply for younger workers and apprentices.
Who is entitled to the NMW?
The Act applies to most workers who are working or ordinarily working in the UK (i.e. those who usually work in the UK but are working temporarily overseas) and who are over the compulsory school age (which, generally speaking, is 16). Workers under the compulsory school age are not entitled to the NMW.
A worker is defined as an individual who works under either a contract of employment or a contract to personally do or perform work or services for another, provided that the other is not a customer or client of a profession or business undertaking carried on by the individual.
This therefore includes employees but also extends to other workers engaged other than in the capacity of an independent self-employed contractor.
How to calculate whether the NMW has been paid
Whether a worker has been paid the NMW will depend on their average hourly rate. This is calculated by dividing the total remuneration received over the relevant pay reference period by the total number of hours worked over the pay reference period.
The pay reference period will be one month unless the worker is paid by reference to a shorter period in which case the shorter pay reference period will be used. For example, the pay reference period for someone who is paid weekly will be one week. However, the relevant pay reference period will never be greater than one month even where the worker is paid less frequently.
Total remuneration received during the pay reference period will consist of:
- gross pay (which includes basic salary, bonus and commission payments) before income tax or National Insurance contributions are deducted
- less any payments which reduce the NMW, such as benefits in kind, pension payments, advances of wages, or any premia paid for overtime or shift work.
The calculation of the total number of hours worked is also subject to specific rules as to which hours should be counted for the purposes of the entitlement to the NMW.
Remedies and penalties for failure to pay
Payment of the NMW by employers is enforced by the State and is initiated either by complaints from workers or third parties. Individual workers may also bring claims for unlawful deductions from wages or breach of contract.
Where, after investigation, a compliance officer concludes that the NMW has not been paid, he may issue a notice of underpayment which will set out the arrears of the NMW to be paid together with a requirement for the employer to pay a financial penalty within 28 days.
Currently the penalty imposed under each underpayment notice will be equal to the amount of the underpayment between a minimum of £100 and a maximum of £20,000. There are proposals for the amount of the penalty to be extended so that the maximum penalty of £20,000 is payable in respect of each underpaid worker, rather than each underpayment notice.
In addition to this process of civil enforcement, employers who are persistent offenders may be subject to criminal proceedings.