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Changes to National Minimum Wage

Ensure your business stays compliant

On 11th February the Department of Business (BEIS) announced a number of significant changes to the National Minimum Wage (NMW) legislation and enforcement regime including changes to the conditions necessary to meet the definition of a ‘Salaried Worker’.

The first step of NMW compliance is correctly identifying which categories your workers fall into as it is the worker category that dictates how NMW is calculated.

Currently workers in receipt of an annual salary but eligible for an allowance (for example for unsocial working arrangements or an area premium), or workers with a salary that is paid other than weekly or monthly, are defined for NMW purposes as ‘Unmeasured Workers’ rather than ‘Salaried Workers’. The impact of this is that the employer has to assess both working time and pay for these workers for each and every pay period rather than being able to look at their time worked over the course of a year.

What are the changes to NMW?

As a result of these changes it will in future be ‘easier’ for workers to meet the definition of a ‘Salaried Worker’. Importantly, neither the employer nor the worker can select a worker category as it is dictated by the legislation. If a worker meets the conditions they will be a ‘Salaried Worker’ (subject to transitional rules) and if not it is likely that they will be an ‘Unmeasured Worker’ or a ‘Time Worker’.

The NMW calculation required for ‘Salaried Workers’ is very different to the other calculations. It requires working time and NMW to be assessed across a 12 month period (known as the ‘Calculation Year’). The new legislation also changes the method for establishing the 'Calculation Year', enabling employers to opt for a ‘standard’ year (subject to communicating and agreeing with affected workers). Importantly, these changes need to be communicated and implemented during the 2 year transition period that closes in April 2022, thereafter the employer may have to measure their compliance with NMW across up to 366 different definitions of a year.

What are the effects of these NMW changes?

How will the changes affect your workforce?

We expect that a large number of workers that are currently defined as ‘Unmeasured Workers’ will change to become ‘Salaried Workers’ as a result of this change in legislation. For example, workers receiving an annual salary and a salary premium (e.g. shift allowance) may now fall to be ‘Salaried Workers’ instead of ‘Unmeasured Workers’.

This will require a very different NMW calculation to ensure compliance.

Unless a ‘standard’ calculation year is elected for (and communicated and agreed with workers) then working time may need to be assessed across an annual period unique to each and every worker (usually based on their employment start date). This would involve the employer having to run up to 366 different definitions of ‘a year’ for their workers. It is very important therefore that Employers take action now to identify who is impacted, what the implications are and how to plan to address the practical challenges this change presents before the 2 year transition period ends.

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When do these changes come into effect?

These changes will be effective from April 2020 following which there will be a transition period which will be in place until April 2022. During the transition period any workers meeting the new definition of a ‘Salaried Worker’ will need to be communicated to, explaining when the change will take place (eg: the start date of their new calculation year and the implications).

The date the worker will change to a ‘Salaried Worker’ and the NMW calculation year starts must be before 6 April 2022. Otherwise the worker will become a ‘Salaried Worker’ at this date and their calculation year based on their original employment start date which, as above, will mean that an employer will have to measure their workers’ working hours across up to 366 different definitions of a year rather than a single one.

Neither an employer nor a worker can choose their NMW worker category. It is defined under the legislation, therefore, there will not be an option to remain an ‘Unmeasured Worker’ from 6 April 2022 if all of the conditions are met.

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What is the Calculation Year and why does it matter?

The calculation year is the period over which a ‘Salaried Workers’ working time is assessed. Whilst a pay period check is still required ‘Salaried Workers’ must be paid for their working hours over the course of a year.

Whilst spreading actual working hours over an annual period can be beneficial in certain circumstances it requires the tracking of working time throughout the year. Currently, for the majority of workers the calculation year will begin on the date on which the individual began employment, this creates potentially 366 different calculation years for the employer to track and manage.

The new legislation enables employers to define a standard calculation year, although care is needed as once set that definition cannot be changed for 6 years.

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What do you need to consider to ensure compliance moving forward?

As a result of both the financial costs of having to repay all workers (including former workers) any underpayments at today's NMW rates, the 200% penalty and the reputational impact of publicly being named and shamed as a “rogue employer” means NMW compliance is one of the largest people related risks for employers today.

As a result of these changes employers now need to:

  • Assess their current workforce and their categorisation for NMW purpose.
  • Identify those workers who will change from ‘Unmeasured Workers’ to ‘Salaried Workers’ because of this change in the legislation.
  • Model the impact of changing worker category.
  • Identify the most suitable NMW calculation year based on current payroll and HR practices - this will be important given the restrictions in changing years more than once every 6 years.
  • Assess whether payroll has the capabilities to manage the various NMW calculations required for ‘Salaried Workers’.
  • Design a communication exercise for those workers impacted, those who are not and any nuances within these groups.
  • Draft an appeals process for those workers who object to a change in their Calculation Year.
  • Identify any updates required to future onboarding process, contracts, etc.

This will need input from a number of stakeholders including HR, Payroll, Operations, Finance, and Legal. Forward planning is key and employers must start early in the transition period to fully assess the impact of the changes, consider their approach and put plans in place. Unfortunately, doing nothing until April 2022 is not an option for employers who wish to be compliant with NMW.

How we can help

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Our approach

As a first step, we encourage all employers to meet with our NMW experts to guide them through these changes and undertake an initial Impact Assessment. The benefit of this is that it will identify who is impacted, how they are impacted, what your options are and what actions need to be taken by when.

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To date our NMW experts have helped over 150 employers manage and improve their NMW compliance. Their detailed understanding of the legislation, HMRC guidance and knowledge of the background to the changes that BEIS have introduced, together with their practical operational expertise means we are ideally placed to help you through this process in what is a tight timeframe.

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As a result of the work we have done to support our clients we have a variety of technology solutions available to help employers assess the impact of these changes right through to performing the required NMW calculations.

What other changes were announced

While the changes to Salaried Worker Rules are the most important change, there are also changes to both the naming and shaming regime BEIS operate, details of which pay elements will in future count for NMW purposes for ‘Salaried Workers’ as well as updated guidance around the treatment of salary sacrifice and deductions in calculating National Minimum Wage.

Who should I contact for more information

The impact of these changes is not always immediately clear, to chat through what it may mean for your business please contact one of the following experts:

Contact us

John Harding

John Harding

Partner, Employment, PwC United Kingdom

Tel: +44 (0)7801 042607

Anna Vishnyakov

Anna Vishnyakov

Director, Employment, PwC United Kingdom

Tel: +44 (0)7808 030257

Emily Webster

Emily Webster

Director, Employment, PwC United Kingdom

Tel: +44 (0)7808 035641

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