We have witnessed a number of investigations in this area recently and thought it might be a good idea to share our findings with you. It appears that HMRC is less interested in the hours times rates scenario – where it is pretty transparent let’s face it, you are either paying the right rate based on age/the law or you are not. Also, most payroll software systems can spot it a mile off.
The target now seems to be “salaried hours worked”. This is an employee who is being paid one-twelfth of their annual salary each month. Take a 24-year-old who is being paid an annual salary of £10.42 an hour for 37.5 hours a week for 52.14 weeks of the year. Thus, annual pay of £20,374. They are then paid one-twelfth each month being £1,697.83.
The problem stems from the fact that this employee is working different hours each month (working days falling into a calendar month vary from as little as 20 to a maximum of 23) whilst always being paid the same amount. So, if we take March 23 as an example:
23 working days – giving 172.5 hours worked @£10.42 means the employee is entitled to £1,797.45 of pay. So underpaid by £99.62 for the month of March when compared to the salaried pay.
If we repeat this calculation for February (which only had 20 working days) you come up with an overpayment of £134.83 but can one mitigate the other?
The answer is both yes and no. In order to ensure that you are not falling foul of the rules, you need to consider when the employee’s calculation year begins and ends. HMRC defines the year as the employee start date up to the end of the calendar month finishing 12 months from the first calendar month in which they started. So, if employment commenced on the 13th May 2022 their first calculation year runs to the 31st May 2023. Thereafter, it runs from 1st June to the 31st May each year. If employment continues uninterrupted, you will need to perform a calculation each year as at 31st May to ensure that they had not accrued any unpaid hours.
So technically, you could end up having to perform this routine every month if you have enough of these types of employees and their original start dates are spread throughout the year. There is a process whereby you can redefine the calculation year to bring each employee in line to the same date but it is rather a moot point.
This is further complicated by leavers – calculations need to be performed to ensure that if leaving part way through the calculation year, the employee had not been underpaid up to their leaving date.
If you have one or two of these types of minimum wage salaried hours workers this may be tedious but doable. If you have a dozen or more – this could become an administrative nightmare.
So what can you do? The simplest solution would be to not employ these types of employees as “salaried hours worked” but actually pay them each month for the number of hours they have worked multiplied out by their hourly rate.
This approach has the added advantage of making it much easier for our software to spot a breach of minimum wage. Once you are using hours and rates, we have full visibility. Not ideal, but it works and if all your minimum wage workers have the same working pattern, you only have to count the number of working hours in each month and the answer will be correct for all of them.
National minimum wage inspections tend to be triggered by one of the following:– certain industries that get targeted (hospitability is a hot favourite at the moment), reports of a breach to HMRC typically by an employee or former employee, and thirdly random selection (in other words bad luck).
Hope this helps. If you would like further information on NMW please give us a call or go to: Minimum wage for different types of work.