Many employers assume that paying a fixed annual salary ensures compliance with the National Minimum Wage (NMW). In practice, this is not always the case.
The law requires employers to ensure that, when an employee’s pay is divided by their hours worked, the resulting hourly rate does not fall below the NMW, whether the employee is paid hourly or salaried.
Issues may arise if salaried employees consistently work beyond the hours set out in their contracts, particularly where those additional hours are unpaid. In such cases, this can bring their pay below the National Minimum Wage threshold.
Without proper monitoring of working hours, employers may unintentionally underpay the NMW.
Understanding Salaried Hours Work and Its Importance for NMW Compliance
Under the National Minimum Wage (NMW) rules, a worker is considered to be performing salaried hours work if their contract states a set number of hours annually and they receive a fixed salary paid in regular instalments, such as weekly or monthly.
This salary is meant to cover those basic hours and is not calculated per hour. Although this setup seems simple, problems can occur if employees work beyond their contracted hours without extra pay.
From April 2026, the National Living Wage for workers aged 21 and over will be £12.71 per hour. For workers aged 18 to 20, the rate will be £10.85 per hour, while those aged 16 to 17 and apprentices will be entitled to £8.00 per hour. Employers must ensure their pay calculations meet or exceed these rates.
How Excess Hours Can Affect NMW Compliance
Many employers face issues with National Minimum Wage compliance without realising it. For workers paid based on salaried hours, compliance is checked within each pay period, usually aligned with their pay cycle (e.g., monthly).
Employers need to ensure that the total pay divided by the hours counted for NMW calculations does not drop below the minimum wage.
Issues frequently arise when salaried employees regularly undertake overtime beyond their contractual obligations without receiving supplementary compensation. In such circumstances, as these employees work additional hours while their pay remains unchanged, their effective hourly rate may drop below the minimum wage.
Common Mistakes That Lead to Unintentional Underpayments
Many violations of the National Minimum Wage (NMW) happen unintentionally. They often stem from payroll systems, contracts, and working practices that do not accurately reflect how employees actually work.
Common reasons include:
● Contracted hours that no longer accurately reflect reality.
Contracts might specify a 37.5-hour workweek, but employees often work extra hours in practice. If these additional hours are not included in pay calculations, the actual hourly rate could drop below the NMW.
● Salary sacrifice arrangements reducing NMW pay
Salary sacrifice arrangements, such as pension contributions or cycle-to-work schemes, reduce the pay used for National Minimum Wage calculations. Employers are required to ensure that employees’ pay remains above the NMW threshold following these deductions.
● Lack of accurate working time records
Employers are required to demonstrate that employees receive at least the National Minimum Wage (NMW). In the absence of comprehensive records of hours worked, providing evidence of compliance becomes challenging in the event of a review by HMRC.
● Incorrect classification of work type
The NMW rules differentiate among various categories of work, including salaried hours work, time work, output work, and unmeasured work. Incorrect classification may result in erroneous calculations and possible underpayment.
The Importance of Record-Keeping in NMW Compliance
Employers are required to maintain records demonstrating compliance with the National Minimum Wage regulations and retain them for a minimum of 3 years. In addition to statutory obligations, meticulous record-keeping is crucial in the event of a review by HMRC.
Effective record-keeping entails:
· Monitoring contracted hours against actual hours worked for salaried employees;
· Explicitly documenting salary sacrifice arrangements and other deductions affecting NMW entitlement;
· Recording any modifications to work schedules, contracts, or pay structures along with supporting dates;
· Preserving an audit trail of the methodologies used in calculating NMW for each pay period.
Being able to demonstrate how pay and hours were calculated is just as important as ensuring the calculations are correct.
How The Infinity Group Can Help
We assist businesses in ensuring that payroll is not only processed accurately but also fully compliant with current laws.
For employers with salaried employees, our managed payroll service provides regular reviews of National Minimum Wage (NMW) compliance. This includes checking actual working hours against contractual agreements, identifying potential excess hours, and highlighting risks before they become liabilities.
We also assess how salary sacrifice arrangements and employee benefits affect NMW-qualifying pay, as these can often lead to compliance issues.
If there is uncertainty about current payroll practices, we can undertake a targeted compliance review. This includes an assessment of employment contracts, pay structures, and record-keeping processes, providing a clear, informed view of your current position and any areas that require attention. Addressing these issues proactively is usually less disruptive than dealing with HMRC inquiries.