18 February 2008

Millions of employees are counting down their unpaid overtime this week to the point where they effectively begin getting paid for the first time this year. Although an employee is not necessarily entitled to any additional pay for extra hours worked, excess hours performed under a contract for salaried work would still attract the National Minimum Wage. Is it only a matter of time before compliance officers knock at your door?

The TUC campaign to raise awareness of the culture of long hours in UK workplaces, will receive emphasis this week through Work your Proper Hours Day, on 22 February. According to the TUC, 5 million employees work over 7 hours of unpaid overtime each week. They estimate that, if all the unpaid hours were worked at the beginning of the year, the 22nd February would be the first day that the average person would get paid. To mark the occasion they are urging all employees to start and finish work at the contracted time and to take full advantage of their lunch break.

It may often be the case that these hours are worked “voluntarily” by the employee in question. If this is the case, employers do not need to include these hours for the purposes of ensuring compliance with the National Minimum Wage Regulations. Although, where the employee feels compelled to put in the extra time, there can be other associated risks including stress and motivational issues, which could result in higher attrition.

However, in some cases, employees may be required by the employer to work hours in excess of their normal basic working hours. In a contract of employment for a salaried worker, it is not unusual to have a clause which requires the employee to work any additional hours as are necessary for the performance of their duties, and to specify that the employee is not entitled to additional remuneration in respect of these hours. Employers should be cautious when relying on this contractual term to require an employee to work overtime which is unpaid as these hours will be taken into account when determining compliance with the National Minimum Wage (NMW). Due to the calculation method used for salaried workers, employers may be sitting on a time bomb!

In summary, a contract to work salaried hours is a contract under which a worker is entitled to be paid: 

• For a “basic number of hours” in a year. The hours do not have to be specified for the whole year but can be expressed weekly or monthly
• An annual salary in equal weekly or monthly instalments

A contract can still fall into this definition if the worker can be required under the contract to work, and does in fact work, any hours in addition to the basic hours. Any hours which are required to be worked outside of the basic hours will need to be recorded and, unless these are paid each month as overtime, they will accumulate over the year. Once the annual hours under the contract are exceeded, all hours worked in excess of this are considered to be without pay, for which the worker must be paid at least the NMW. Pay in excess of the NMW rate in previous pay reference periods cannot be used to offset any future liability. This could result in an underpayment of the NMW, as effectively, the worker is treated having worked the sum of the basic hours and the actual hours worked that month.

For example, if you took an employee, aged 22, employed to work for an annual salary of £15,000, paid monthly, and contracted to work 37 hours a week, but who also was also required to work an additional 2 hours a week in unpaid overtime, their calculation for NMW purposes would be as follows:

• Annual basic hours of 1929 equates to basic hours of 160.75 per month
• Annual salary equates to £1250 per month
• In any pay reference period in which the employee does not exceed a total of 1929 hours in the year, the average hourly rate is £1250 divided by the basic hours of 160.75 hours i.e. £7.77 per hour. This is compliant with the current NMW rate of £5.52 per hour.
• However, taking into account the 2 hours unpaid overtime which accumulates over the year, the employee will exceed the 1929 basic hours 49.5 weeks (or 346 days) into the year. Therefore, in month 12, the employee must be treated as having worked the sum of : 
  • the proportion of the basic hours from the 1st to 11th before the annual hours were exceeded i.e. 58 hours 
  • the proportion of the basic hours from the 12th to 30th after the annual hours were exceeded i.e. 100 hours
  • the number of hours actually worked from 12th to 30th the date the annual hours were exceeded to the end of the pay reference period i.e. 106 hours
• In month 12, the employee is treated as having worked a total of 264 hours for the monthly salary of £1250. His average hourly rate is therefore reduced to £4.73 per hour. As this is below the NMW the employee would need to be paid an extra payment in month 12 of £207 to ensure compliance.
• This is despite the fact that the average hourly rate over the full course of the year, taking into account the unpaid overtime, would have been £7.37 and more than the NMW.

Similarly, if an employee exceeds the total hours earlier than month 12, all the remaining pay reference periods in the calculation year are treated as if the worker had worked his basic monthly hours in addition to his actual working hours. All of which must be paid at least the NMW.  When deciding the point at which the basic hours are exceeded, any absences for which the employee is not being paid their normal rate of pay for can be excluded, and it is therefore possible to offset any additional hours over the year against any periods of sickness etc.

Employers should not assume that they are compliant simply because the annual salary when divided by the number of working hours, including unpaid overtime, equates to an average hourly rate higher than the NMW rate. Compliance must be calculated over each separate pay reference period.

The risk of non-compliance in relation to a salaried worker is heavily weighted to the end of the calculation year, which is set according to the employee’s start date. In the event of a claim for arrears, the employee can turn the clock back 6 years, so if you are exposed, don’t waste another minute!