We all know that employees are entitled to receive the National Minimum Wage. Employers are made aware of the rates, and they change once a year now, each April in line with the timing of the increase to National Living Wage for those who are 25 years or more.
Breaching the National Minimum Wage can result in fines and of course the disgraceful, ‘naming and shaming’ on line. Remember the HMRC only know that there may be an issue when someone makes a complaint. Here’s one Nursery Owner in his local paper writing about his experience of a HMRC investigation.
And its not just the care sector, High Street retailer John Lewis was fined for its technical breach last year. They were “pay averaging” — whereby it pays staff the same amount year-round regardless of variations in how many hours they work each month and it meant it had paid some staff less than the minimum wage in some months.
There’s been much written recently about the way the sector is being singled out. In fact we believe retail, hospitality and care providers, face similar issues.
In terms of pay there are two common types of remuneration that are used by employers in the UK. There will be others such as those who are paid commission only, but believe me they aren’t common, nor a good idea.
These two common forms are salaried employees and time work employees.
Let’s look at the advantages and disadvantages of each:
Salaried employee advantages
- Employees receive 12 monthly payments of equal size.
- Employees can budget easier as their monthly payments are the same.
- For the employer they find wages easier as the payments may not change from month to month.
- For the employer it can be cheaper where outsourcing payroll to an accountant or payroll bureau.
Time Work employee advantages:
- Employees are typically paid at the end of the month for the time they gave in that month.
- Employees won’t receive the same each month as some months are longer/shorter than others.
- If the employee has been absent (depending on the timing of the absence) they will be paid less in that month, as they gave less time.
- If the employee works extra, (again depending on the timing of the extra, and the employer’s policy) it may in the pay for that month. Yay, a reward for working extra!
Now let’s now look at the disadvantages of each.
Salaried employee disadvantages:
- The pay period may be monthly but in reality months are of different length.
- If the employee is absent (depending on the timing of the absence) this may result in a deduction in that month or in the following month.
- Where employee is absent for an extended period and you pay SSP, this can mean challenges to calculate the money owed as SSP is often less than regular weekly earnings.
- If you are spreading as well as paying a salary this can cause even more problems for the employee i.e. spread payments fall below lower earnings level is not uncommon where employee is part time and on national minimum wage.
Time Work employee disadvantages
- Employers have to use timesheets or similar systems that record attendance in order to calculate what pay to give someone at the end of the month. This is a pain for the employer and employee, though timesheets do also provide a record under H&S as to who is on the premises.
- It may cost more to pay this way when you outsource to an accountant or payroll bureau as its more work.
- If you DIY it can cause grey hairs doing the monthly payroll (we can’t be certain on this, but we imagine it does)
- Records of timesheets have to be kept in case there are disputes over time worked. Space can be limited in childcare.
So where can breaches of the National Minimum Wage occur in Early Years?
Well here’s some common examples we’ve heard of:
- Requiring staff to be on site at lunchtime when on a unpaid break.
- Requiring someone to stay behind and not be paid.
- Requiring someone to arrive early and not be paid.
- Not paying for training time and not allowing Time off in Lieu (TOIL)
- Deduction childcare costs from wages before tax.
- Deducting uniform purchases from wages before tax.
Then you get technical breaches, like what happened with John Lewis and Les Enfants Nursery.
We think the problem really occurs where an employer confuse’s the two types of payments and treats as salaried those who are intended to be Time Work employees.
Here’s an example of where we think a problem can occur. Betty is salaried.
- You’ve contracted Betty to work 40 hours a week, Monday to Friday, 8 hours a day, on £7.50 per hour. She’s paid in January the same as in February. In January she worked 23 days. In February she worked 20 days. You’ve paid her the same salary of £1300. The 23 working days in January, mean she was paid £7.05 per hour for each of the 8 hours she worked, for the 23 days. (£1300/23/8). She could technically say in January, for that pay period she received less than the National Living Wage.
Salaried employees like Betty aren’t uncommon, but perhaps we do need to do more to reassure Betty and the HMRC that are are doing the right thing.
Let’s not forget in Early Years we commonly see:
- No Company Sick Pay schemes so it’s Statutory Sick Pay (SSP) only when sick and that’s only after 4 waiting days, plus;
- High levels of sickness absence so where no Company Sick Pay there will be deductions from wages for hours not worked.
Trying to get the experts and those in place to guide us (HMRC and ACAS) to ‘spell out’ their expectations has proved very difficult.
Therefore we think* the answer is to take what we will call a ‘belt and braces’ approach.
Perhaps the answer lies as follows?
- Choose how you want to pay – you can pay salaries or for time worked, but don’t mix the two.
- Where you want to pay a salary you should show the hours contracted per week, for how many weeks and hourly rate (with annual salary you’ve calculated in brackets).
- Where you want to pay by the hour, you can still do a monthly payroll but you may find it easier to do it 4 weekly i.e. 13 times a year. This shouldn’t cost much more than monthly.
- If you are concerned about lots of variation and are prepared to manage it, stating an annualised hours in the contract may be helpful. This would mean stating that the 40 hours a week an employee is therefore contracted to work 2080 hours a year. The problem with annualised hours contracts is that you still want the staff to be contracted weekly, whereby annualised hours normally means that the employee and employer must both agree when they work throughout the year. Moving to purely annualised hours contracts will not solve the problem, but we feel it will create ‘new’ ones.
- Have a TOIL Policy explaining what equates as TOIL, the procedure for asking for TOIL and the timescale in which it must be taken. Make Supervisors and Managers responsible for ensuring TOIL earned is taken.
- Do an audit of your contracts, make sure you can show what someone is contracted to work and be paid. Keep on top of the issue of written statements of terms and conditions. Some of the employers being fined were fined because their paperwork wasn’t in order or was just a letter of offer rather than a full written statement of terms and conditions. Remember one employer decided not to show the inspector the paperwork at all. See what happened to her here.
- Whether you pay salaries or for time worked make sure payslips are itemised.
- If you pay for time worked, think about getting timesheets signed by the employee and retained for a period of at least 90 days. If you like use a software based solution. We’ve heard good things about this one.
We hope this has been helpful. We are now off to audit our client records and see who may be affected by the approach HMRC are taking. If we can be of any assistance to you with your written statements of terms and conditions, please do not hesitate to call us on 01527 909436 or email at [email protected]
* This blog isn’t intended to be advise on your particular situation, always get advise on what you are doing from an experienced, qualified individual who has your contracts in front of them and understands how you are applying those contracts in reality.
If you need any assistance on this or any other aspect of HR or employment law please contact us on 01527 909436