Consultation finally called on National Minimum Wage Regulations for salaried workers and salary sacrifice schemes

The aggressive application of National Minimum Wage (NMW) rules by HMRC over the past few years has left many of us wondering where the line of compliance and non-compliance can be drawn. The national minimum wage regulations ‘owned’ by BEIS had for many years since their introduction in 1998 been interpreted by employers in a range of situations without any challenge, most noticeably in term for what constitutes a salaried worker and what deductions from net pay served to reduce gross pay for NMW. Recent rigorous policing by HMRC has led to a number of us musing at what point, and after how much feedback, they might be asked to consider if their approach is in fact a mis-interpretation and application of the regulations?

I agree that ‘robust enforcement action against employers who underpay their staff’ should take place, ‘including financial penalties of up to 200% of the value of the underpayment and public ‘naming of non-compliant employers’, but I’m extremely concerned at the number of cases over the past few years where employers have been named and shamed, and also financially sanctioned, unfairly for an interpretation of the regulations which has never historically been explained or challenged (1).

As such, news that the Government’s latest consultation concerns proposed changes to National Minimum Wage, to bring about greater clarity and common sense to its application, has been welcomed across our profession.

The consultation covers ‘National Minimum Wage regulations which relate specifically to salaried hours work and where employers feel rules unfairly penalise them without generating any benefit or protection for workers’, and the ‘practical operation of salary sacrifice schemes’ (1).

Currently the rules recognise that ‘people who perform salaried hours work are paid an annual salary in equal weekly or monthly instalments, for an annual number of hours’ (1) – bear in mind this is already restrictive if taken and policed literally. This is because the conditions that need to be met for someone to be able to be paid on a salaried basis are complex  – so much so that virtually no employer with salaried staff has compliant contracts, as they must:

  1. be able to show that the contract has an annual salary – no problem – and
  2. have on the face of the contract or in another readily accessible document a specific annual number of hours – big problem, as just saying 37.5 hours per week is no good as there aren’t 52 weeks in a year – and
  3. Any pay other than bonus and salary cannot be averaged over the year but paid based on actual ours eg overtime – fine – and
  4. the worker must be entitled under his/her contract to be paid in equal weekly or monthly instalments (excluding overtime payments and a performance bonus) regardless of the number of hours actually worked – no problem unless this isn’t your pay frequency!

so, condition two trips up most employers who don’t show an annual number of hours, so they aren’t salaried workers, meaning that every single hour has to be recorded depending upon the length of the month; it cannot be averaged. This problem is not being addressed in the consultation but it’s vital to understand, as the other proposals flow from whether somebody is a salaried worker in the first place.

Even if you are able to satisfy condition number 2, what happens if your pay frequency isn’t weekly or monthly? At the moment the national minimum wage regulations do not except a frequency is other than weekly or monthly and no pay reference period can be more than 31 days – clearly this is at odds with the organisational structure of many businesses. Amazing isn’t it, that 21 years after the regulations were laid, this is the first time that this has being discussed. If it is the case that vulnerable workers felt they had been exploited there would have been numerous tribunal cases over that period of time – there have been none.

The other key point within the consultation is in regard to salary sacrifice and the fact that employees close to national minimum wage are being denied benefits that their higher paid colleagues have access to. The consultation asks for evidence that benefits are being withdrawn and questions whether any workers would be at risk if the rules were relaxed to allow salary sacrifice to take people below National Minimum Wage.

I would hope in responding to the consultation that both agents and employers also feedback to BEIS on the vexed question of HMRC’s interpretation of the regulation that treats deductions from net pay as reducing gross pay for national minimum wage if the deduction is ‘for the employer’s own use or benefit’. The inappropriate interpretation of this has led to many employers being named and shamed, when in fact the deduction was for the employees’ benefit e.g. staff discount.

This is a hugely important consultation to amend national minimum wage regulations so that they truly deliver for the vulnerable workers they were intended to protect, rather than demonising all employers for perfectly reasonable pay practices and also denying employees the opportunity to participate in reward schemes that would be beneficial to them.


(1) The Consultation is here and closes on 1st March.