Minimum wage calculations: four scenarios to help employers comply

As the Government this month publishes details of how HM Revenue & Customs can name and shame employers who break national minimum wage regulations, we look at four scenarios to help employers ensure that they comply with the national minimum wage (NMW).

Paying a minimum wage per hour – typically £6.31 from 1 October 2013 – sounds like a fairly simple rule to obey. But once you take into account the myriad variables that can affect the way you pay an employee, it quickly becomes apparent that fulfilling your NMW obligations is not as easy as you might think.

The “pay reference period”, the number of contractual hours, any commission earned, gratuities received, any sick leave taken and any other benefits granted to the employee can all have an effect on what must be paid by the employer.

Here, we set out four pay scenarios, explaining the particular issues involved. We calculate whether or not the first scenario is compliant with the national minimum wage in detail and provide links for three more scenarios to fully worked examples on XpertHR.

1. Independent adviser on hourly pay plus commission

George, 47, is contracted to work a 37.5-hour week as an independent adviser. He has no set annual salary but is paid a basic hourly rate according to time worked and commission at an agreed rate.

George’s earnings are based on an hourly rate of £2.50, plus commission earned from the financial products he sells. He is paid every four weeks on a Friday in cash, with commission payable in the same period for which it is earned. The employer must ensure that George is paid at least the national minimum wage of £6.31 per hour on average for all hours worked in the pay reference period of four weeks ending Friday, 4 July 2014.

George’s earnings for the pay reference period Saturday, 7 June to Friday, 4 July 2014 are as follows:

Pay date	Hours per week	Weekly pay
13 June	37.5	£250
20 June	37.5	£250
27 June	37.5	£255
4 July	37.5	£220

The national minimum wage is set as an hourly rate. For pay reference periods starting on or after 1 October 2013, the rate for workers who are aged 21 or over is set at £6.31 per hour. The pay reference period is the worker’s actual pay period up to a maximum of one month. This is the period of time over which the NMW must be paid. In this scenario, it is four weeks.

George is a “time worker” because his hours of work are set for him, even though he is paid partly by results. He does not have to be paid the NMW for each hour worked, but must be paid the NMW on average over the pay reference period.

The national minimum wage calculation for George is:

(£250 + £250 + £255 + £220) / (37.5 hours x 4 weeks) = £975 / 150 hours = £6.50 per hour.

This is above the adult rate for the NMW of £6.31 per hour for the complete pay reference period, so the employer complies with the law.

If, however, the employer paid George weekly instead of every four weeks, it would not comply with national minimum wage regulations, because in the week ending 4 July 2014, George is only paid £220 over a 37.5-hour period, giving an hourly wage of £5.87 – 44p less than the minimum hourly wage.

Further detail on this national minimum wage calculation is available here.

2. Bakery worker on an annual salary including period of sickness absence

Mike, 20, is contracted to work a basic 40-hour week in a bakery. He is paid on the 25th of each month by BACS. He has an annual salary of £10,500 and was off sick for two days in January 2014. He turns 21 the following month.

See national minimum wage calculation…

3. Seventeen-year-old waitress paid weekly receiving tips from customers

Katherine is 17 and has a contract of employment to work a 20-hour week in a restaurant at lunchtimes. She is paid every Friday by cheque at an hourly rate according to time worked, but also receives tips paid directly by customers. She also has a better-paid part-time evening job with an unassociated employer.

See national minimum wage calculation…

4. Greeting card packager working from home paid on a piecework basis

Ron, 59, works from home packaging greeting cards. His contract does not set any hours of work and he is free to start and finish whenever he wishes. Ron is paid on the last working day of every month by BACS at an agreed piecework rate of £1.514 per envelope packed.

See national minimum wage calculation…

XpertHR has 10 worked examples on national minimum wage calculations, which cover issues including where the employer provides accommodation, where the worker is an apprentice, and where the worker receives overtime pay and additional allowances.