The John Lewis Partnership has a reputation as an excellent employer, but the news has recently come to light that after adopting `pay averaging’ arrangements they have unintentionally fallen foul of the National Minimum Wage regulations as the payments for some `pay reference periods’ had fallen below the minimum wage.
So what is a `pay reference’ period and what do you need to be aware of in order to comply with the rules?
Briefly, employers are required to pay `workers’ aged 25 and over the National Living Wage (NLW), set at £7.50 per hour from 1 April 2017. Younger workers must be paid the National Minimum Wage (NMW) appropriate to their age. The worker must be paid at least the minimum wage, on average, for the time worked in the pay reference period. The pay reference period is normally determined by the frequency by which the employee is paid, so weekly for weekly paid employees or monthly for monthly-paid employees. Crucially, the pay reference period cannot be more than 31 days.
The NLW and NMW are worked out as an hourly rate, even if the worker is not paid by the hour. Different checking procedures apply depending whether the worker is paid by the hour, paid an annual salary, paid by what they produce (piece or output work) or paid in other ways (unmeasured work).
Where the worker is paid hourly, it is simply a case of checking what the worker is paid in the reference period against what he would be paid at the NLW/NMW for that period.
In May 2017, Susan (aged 43) works 140 hours. She must be paid at least £1,050 (140 hours at the NLW of £7.50 per hour).
Where a worker is paid an annual salary, the basic annual hours in the worker’s contract are divided by the number of times the worker is paid each year (so by 12 where the worker is paid monthly). The minimum pay for each pay period is found by multiplying the average hours for the pay period by the minimum wage appropriate to the employee’s age. So a monthly paid worker age 27 contracted to work 1980 hours a year must be paid at least £1,237.50 a month (1980/12 x £7.50).
It is important that you understand how to work out the minimum wage for the type of work that your workers do and have checks in place to check that this is being paid for each and every pay reference period.