National Minimum Wage (NMW): why you need to review your salaried workers

The significant increases in the NMW rates from April 2024 mean that the buffer in hourly pay above NMW is likely to reduce. This brings a greater risk of inadvertently breaching the NMW rules. This is particularly true for higher paid employees whom employers typically assume present no NMW compliance risk, and do not therefore monitor as closely as those employees whose hourly pay rate is close to NMW. This assumption can prove to be a costly mistake. This article looks at the increased risk that salaried workers on relatively high salaries can be underpaid NMW, and what employers could consider to manage that risk. 

In our experience, many employers who breach the NMW rules actually pay at least NMW as an hourly pay rate but fall foul of technicalities in the legislation.

Many employers assume that salaried workers present a low risk of being underpaid NMW because their headline salary rate exceeds £25,000 per annum.  The legislation governing the NMW calculations for salaried workers are, however, peppered with complexities that employers need to be aware of before establishing the processes and controls to monitor compliance.

Failing to pay the NMW results in having to make good unbudgeted back pay to affected employees, a penalty of 100-200 percent of the underpayment, and the reputational risk of being publicly named for contravening the rules.

Broadly, for salaried hours workers, NMW compliance is assessed over the course of the salaried worker’s ‘calculation year’ (i.e. overall, the worker must receive NMW for their total hours worked over that period). So, whilst most salaried workers will not be identified as breaching NMW for each pay period in which additional hours are worked, the breach may occur when taking a view of the full year. The review for the year is a particularly complex calculation that can cause salaried workers to fall below NMW.

By way of illustration, a worker being paid an annual salary of £50,000 contracted to work 40 hours per week, working just one hour of unpaid overtime each day will breach NMW by month 11 of the 2024/25 tax year.

In our experience, employers ask salaried workers to be flexible about the hours they work based on the needs of their role and don’t closely monitor their working time. This offers a lot of flexibility, but if working hours are not monitored across the calculation year (see below), this leads to a significant risk of inadvertent and technical NMW breaches arising.

Please note that, whilst this article is focussed on salaried workers, employers need to have robust systems and processes in place to monitor NMW compliance for all categories of workers and to review NMW compliance by reference to all potential risks that might reduce pay or increase working hours.

Employers need to understand the detailed rules in the NMW legislation and how they apply to different worker types in the workforce (i.e. in addition to salaried hours workers, there are rules in place for time workers, output workers, and unmeasured workers). 

Questions to consider as you review compliance for salaried workers include:

• How can you demonstrate that you have assigned the correct worker type – and therefore processes and controls – for monitoring NMW compliance to your workforce? 

The definition of ‘salaried work’ changed with effect from 6 April 2022 – how could you prove to HMRC that you’ve identified any workers who, based on the terms of their employment and work patterns, changed category and became salaried workers from that date and have monitored NMW accordingly?; and

• What are the technicalities that might cause failures in NMW compliance for salaried workers?  The main issues include:

i.  Compliance is monitored by reference to the employee’s calculation year – note it is not the employer calculation year and this needs to be identified for each individual (it is, however, possible to change this with employees’ agreement);

ii.  There is a requirement to measure actual working hours and there is rarely a reliable process in place for doing this;

iii.  Workers’ basic contractual hours need to be identified and cumulated across the calculation year so that employers can identify when they have been breached and can therefore undertake an excess hours calculation; and

iv.  Once excess hours have started to accrue, the employer needs to calculate whether pay should be topped up. 

Our team of NMW, employment tax, and payroll experts have helped many employers design, implement, operate, and remediate their NMW compliance systems and processes.

Please contact: Jos Greenall, Gareth Dennett, Justin Stokes, Caroline Laffey, or your usual KPMG in the UK contact to talk through how you can ensure compliance with your NMW obligations.

For further information please contact:

• Jos Greenall
• Gareth Dennett