Our Finance Manager recently attended a webinar on the National Minimum Wage, which was run by an HMRC inspector who specialises in compliance in the Early Years sector. Below is some information from the session, which we think might be relevant to our member settings. Have a read and if you have any questions get in touch in the normal way!
The Minimum Wage (MW) relates to rates of pay in a Pay Reference Period (PRP),which is the period of time for which someone is paid either weekly, fortnightly, 4-weekly or monthly. MW must be paid for all time worked in each PRP. Failure to pay the MW for all time worked in a single PRP means there has been an underpayment.
Employers are unable to average pay across different PRPs to show the MW has been paid, with the exception of workers who are performing “salaried hours” work.
The two main types of workers in early years settings are Salaried and Timed (hourly paid) and later in the blog you will find additional information which covers term time working.
“Salaried hours” workers:
This is not as simple as earning a salary (nothing is ever simple!). Four conditions must be met and salaried hours workers are:
- entitled under their contract to be paid for a set basic number of hours in a year. (HMRC would expect to see the annual number of hours detailed in the contract.)
- entitled under their contract to an annual salary for those basic hours. (HMRC would expect to see the annual salary amount detailed in the contract.)
- not entitled under their contract to any other payment for their basic hours other than the salary.
- not paid more often than weekly or less often than monthly. Acceptable frequencies are weekly, fortnightly, 4-weekly or monthly.
The definition of pay for HMRC purposes is actual money paid to an employee before any deductions are made. Keep in view that pay for MW purposes does not include overtime payments, allowances, expenses, benefits in kind or advances on wages.
Timed Worker Example:
Employee is paid £9.50 per hour and works 142 hours per month. This is made up of:
- 140 hours at £9.50 per hour = £1,330
- 2 hours overtime at £14.25 per hour (time and half) = £28.50
Total paid £1358.50.
When assessing MW, the calculation is stripped back to the lowest rate of pay for all hours worked in the PRP, so checks would be made to ensure the rate of pay for the 142 hours was no less than £9.50 per hour. £1358.50 / 142 hours = £9.56. So this is ok.
Warning: For timed workers earning MW, any unpaid working time issues or deductions may result in an underpayment.
Special allowances over and above standard pay: i.e. performs special duties over and above normal duties, don’t count towards MW unless consolidated into an employee’s pay. An example of this would be where someone might get a fixed payment each month for doing SEND for example, that wouldn’t count, but if their rate of pay reflected the additional SEND duties then that would be fine. However, rather unhelpfully there is no definition to determine when an allowance is consolidated into standard pay.
Example: Attendance bonus at Christmas of £100.
- Pay 120 hours at £9.50 per hour plus £100 bonus = £1240.00 pay in PRP.
For MW purposes only £1140 is considered (bonus not consolidated into her pay): £1140 / 120 hours = £9.50. So this is ok.
Deductions:
Some deductions can take pay below MW for PRP. For example: deduction for items or expenses connected to the job. i.e. uniform.
Exemptions include accidental overpayment of wages that are deducted or voluntary payments for goods.
Here are a few worked examples which relate to early years and childcare settings:
Example: Setting has a dress code policy.
- Employee paid at MW is given 3 tops free of charge but told to wear black trousers and black shoes.
- Employee spends £30 on trouser & £60 on shoes: Total £90.
The employee could use the items outside of work but the cost was incurred in connection with their employment. The employee has a reduction in pay of £90, and therefore there will be an underpayment for MW purposes.
Possible Solutions:
- Employer reimburses the employee with the cost of the work-related purchases or
- Employer does not specify a required uniform.
(PATA are reviewing our Clothing and Appearance guidelines on the back of this information).
Example: Nursery Fees deducted from an employee’s pay who is paid MW.
- 120 hours @ £9.75 per hour: £1,170
- Nursery fees £360 deducted from salary
- Gross pay £1,170 - £360 = £810
For MW purposes £810 / 120 hours = £6.75 which is an underpayment.
Solution: employee pays for the nursery services outside of her payslip (cash/Bacs) (like other parents/carers) and as there is no obligation on the employee to use the services provided (as they could use a different playgroup/nursery) this is ok.
Example: Training costs deducted from an employee’s pay who is paid MW. Common for employers to recoup training costs from employees if they leave in a certain time of attending training. If training was mandatory then deduction may reduce pay for MW purposes.
Voluntary training is where a worker chooses further training in their field, it’s not a requirement of the job but the employer agrees to fund it. A deduction for voluntary training would NOT reduce pay for MW purposes provided this arrangement is in the employment contract.
Example: A charge for DBS WON’T reduce pay for MW but the admin charge for a DBS is passed to the employee that would reduce pay for MW.
Salary sacrifice can reduce pay for MW purposes, including salary sacrifice pensions.
Working Time:
Working time includes time spent at work or waiting for work.
We recommend keeping records of working times to demonstrate daily working hours.
Small periods of unpaid working time can directly lead to underpayments of MW for workers at or close to MW pay rates.
Example: Employee paid MW rate. Told to arrive 10 mins before shift start time and expected to start work immediately. This is still classed as working time! Unpaid working time often involves a small amount of time but has a cumulative effect if occurring on a regular basis. If these 10 minutes are not paid then the employee will be underpaid.
If an employee chooses to come in early/stay late to complete work then these hours still count as working time. If you don’t want to pay them, then it’s a conduct issue and you need to ask the member of staff not to do this.
It’s fine to ask staff to be ready to work at their start time (i.e. coat off, bag in staff area, finished cup of tea and chat etc!) But if for example your session starts at 9am and you only pay your staff from that time, but they are (understandably) coming in at 8.45am every day so that they can set up before the session, this would be classed as an underpayment.
Other examples – team meetings after business hours, staying late for parents late to pick up children, training at home, travelling between sites (not usual commute), travel time for training, completing admin outside of working hours.
Do you have to pay training if it’s optional and voluntary? No, provided you have an audit trail to demonstrate that it is strictly optional and voluntary.
Term Time Working:
Can we pay employees a fixed amount per month even though some months they will be working more or less hours? (i.e. a salary which is 1/12th of annual hours.)
Answer: Yes. Salaried hours provide flexibility on how hours are worked, i.e. employees are not required to work in the school holidays, but are paid an equal part of their annual salary every PRP.
So the employee can be paid a fixed amount each month, to work a fixed number of hours within the year, but the hours within each PRP can vary.
You need to ensure that a worker does not exceed the annual hours otherwise there could be an underpayment.
An employer must keep working time records to be able to demonstrate the MW was paid for the hours worked in total over the year.
Possible consequences:
If an employer fails to correct an underpayment, there is a name and shame policy by HMRC Complaint’s Team together with a penalty fine, which is 200% of any underpayment (reduced by half if it is paid within 14 days).
If however, an employer realises that there has been an underpayment (possibly after reading this blog) and corrects the issue (before any involvement from HMRC), with backdated amendments to pay to correct the underpayment (this is classed as a self-correction) then there will be no penalties for the original underpayment.
Time Off In Lieu (TOIL):
This is when an employee works additional hours (e.g. to complete training out of normal working hours or to cover for a sick colleague on a day they wouldn’t normally work) and keeps the hours to use in a later month when they have a day off sick etc.
This is acceptable for Salaried Workers as the employee is still being paid for all of the hours on their salary calculation. (HMRC were not clear on when TOIL had to be reconciled however, we would do this at the at the end of the academic year and either carry it forward for use in the Autumn Term or paid if this is the employees preference.)
What about Volunteering?
It is possible for someone in paid employment with a charity to also do voluntary work for the charity, but it must be in a role which is substantially different from their paid role, so that there is no confusion with MW. Hours spent volunteering which are effectively for work included in an employee’s job description would be included in a MW calculation.
Staff can’t waiver their MW rights away even if they say they would be happy to!
The main things that we can take away from this are:
- Keep accurate records of time that staff work
- Make sure your staff all have clear contracts with contracted hours and hourly rates set out, along with any other payments or deductions noted
- Review these regularly to make sure that you aren’t dropping staff below MW
- Be clear with staff about what is expected of them (e.g. start times, payment for training, travel expenses, TOIL)
- If you realise that there has been an underpayment rectify it quickly and keep clear records of what you have done, why you have done it and when you did it.
If you have any concerns about the way your salaries are calculated or how you are applying all of the ‘rules’ mentioned in this blog, then speak to our friendly payroll service team who will be only too happy to help.
Remember also that if you are thinking about changing how you do your payroll or moving over to our PATA Payroll Service then April / May is the best time to make that change.
