Employment Law Update (September 2009)

National Minimum Wage changes from October 2009

The National Minimum Wage (NMW) has been with us now for almost 10 years following its introduction in the National Minimum Wage Act 1998. This placed a responsibility on employers to pay its workers a certain amount for work performed. The rates of NMW are set each October and are currently:

            October 2008 to September 2009

            £3.53 an hour for workers aged 16 to 17

            £4.77 an hour for workers aged 18 to 21

            £5.73 an hour for workers aged 22 and over.

            October 2009 to September 2010

            £3.57 an hour for workers aged 16 to 17

            £4.83 an hour for workers aged 18 to 21

            £5.80 an hour for workers aged 22 and over.

Whilst there are many items that cannot be counted in the calculation of NMW there are a few that at present can such as performance-related incentive pay, bonuses, tips, gratuities, service or cover charges and accommodation offset. The changes that come into force from October 2009 impact on the treatment of tips, gratuities, service charges and cover charges.

Where these are paid to the employee directly by the employer or via a TRONC over which the employer has control or decides how they will be distributed, the payments are subject to tax and NI and should be paid via the payroll. The amounts paid can, in these circumstances, be included in the calculation of NMW i.e.

• A 33 year old employee works for 20 hours per week and is given £30 in tips
• The elements of pay under NMW are £4.23 wages plus £1.50 tips totalling £5.73 NMW.

This does not restrict an employer from paying the tips in addition to NMW i.e. £7.23 per hour in the above example.

Where payment is made via an independent TRONC such payments are subject to tax but no NI is due. Such payments cannot form part of NMW calculations.

From October 2009 tips, gratuities, service charges and cover charges, whether mandatory or non-mandatory, paid to employees via a payroll cannot be counted towards NMW.

These changes could have a severe financial impact on many businesses where they have taken advantage of inclusion in the calculation. They will have to make the decision to pay tips and gratuities in addition to NMW or not pay them and retain the income in the business.

It is important that you get the calculations of NMW right as to get them wrong can be expensive. Any arrears due now have to be paid at the rate current when physically paid and not at the historic rates when the original underpayment occurred. You may also incur a penalty of 50% of the underpayment with a minimum of £100 and a maximum of £5,000. This may be in addition to any employers NI that may be due on the arrears payment.

The Department for Business Enterprise & Regulatory Reform consultation document of November 2008 estimated that these changes could impact as many as 44,800 employees and could cost employers up to £73 million.

The Government is seeking to empower the consumer through clear information on what happens to the tips they leave, for example

• Who the tips go to;
• What proportion might be absorbed by the business to cover costs; and
• How the tips are distributed amongst workers.

They are currently working with key stakeholders in the leisure, hospitality and service sectors on a suitable solution and best practice for informing consumers.