What is the National Minimum Wage (NMW) and National Living Wage (NLW) and why must employers pay it?

The NMW was introduced in the UK in 1999 and is a specified minimum hourly rate of pay to which most workers age 16 or over are entitled. All employers are obliged to pay the NMW, irrespective of their size.

The NLW came into force in April 2016 and is the minimum hourly rate of pay to which most workers aged 25 and over are entitled.  

HMRC enforces the NMW and the NLW and requires employers to pay workers at least the NMW or NLW, dependant on their age, and to keep records to show that this is being done.

Failure to do so is a criminal offence.  Along with pay arrears, employers in breach are fined twice the hourly rate per day per worker that they fail to pay the NMW or NLW. They can also be prosecuted under one of six criminal offences and face reputational damage from the "name and shame" list.

The "Name and Shame" list

The Government has fined and "named and shamed" 179 businesses for failing to pay their workers the National Minimum Wage (NMW). Among the "named and shamed" are Wagamama, TGI Friday and Marriott Hotels. The "name and shame" list can be found on the Government website.

The Government's action is a reminder to all employers about the consequences of failing to correctly pay their workers the NMW or the NLW.

Employers should ensure that they are paying their workers the correct amount and need to be clear about what counts as pay towards the NMW and the NLW.

How can an employer calculate whether NMW / NLW has been paid?

In summary:

  1. Work out the pay period (usually monthly or weekly depending on when the worker gets paid)
  2. Calculate the total remuneration received in the relevant pay period by working out the gross pay and deducting any payments or deductions that reduce NMW pay.
  3. Work out the total number of hours worked over the pay period.
  4. Calculate the hourly rate of pay by dividing the total pay received in the pay period by the hours worked in the pay period.

What is counted as pay towards the NMW / NLW?

It is important to remember that not all remuneration earned in the relevant pay period counts towards the NMW / NLW and some payments reduce the amount of pay that is to be taken into account.

The following elements of pay count towards the NMW / NLW:

  • Basic salary (the gross amount);
  • Bonus, commission and other incentive payments based on performance (but not any premium paid for overtime or shift work);
  • Piecework payments; and
  • Accommodation allowance.

The following elements of pay do not count towards the NMW / NLW:

  • Deductions from the worker's wages such as expenditure in connection with employment i.e. uniforms or cost of tools if the deduction reduces the overall pay below the NMW;
  • Benefits in kind whether or not they have a monetary value with the exception of the accommodation allowance;
  • Loans by the employer;
  • Advances of wages;
  • Pension payments;
  • Lump sum payments on retirement;
  • Redundancy payments;
  • Tribunal or settlement awards;
  • Premium paid for overtime or shift work;
  • Expenses; and
  • Since 1 October 2009, tips and gratuities paid by the employer through its payroll.

For further information please contact Ashfords' Employment Team.

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