This guide deals with the legal issues relating to pay in employment. It should be read in line with our Guide to Equal Pay INTRODUCTION TO EQUAL PAY and having regard to our [Guide to Equality and Diversity].
Terms as to pay
It is a term implied by law into every contract of employment that where an employee undertakes work, he is entitled to be paid for that work. The amount of pay an employee receives in their employment is usually set out in the contract of employment and in any event should be set out in the Section 1 statement. This statement should explain the basis on which payment is made i.e. is it a specific rate or to be calculated by some method e.g. piecework; and how often payment will be made e.g. weekly, monthly etc [SECTION 1 STATEMENT OF TERMS AND CONDITIONS]. It should also provide details of terms in relation to holiday and sick pay. (Our guide to the Working Time Regulations A GUIDE TO MANAGING WORKING TIME deals with holiday pay for the Working Time holiday entitlement.)
Either before or when an employee is paid, they must also be provided with an itemised pay statement. This should state both the gross and net amount of pay, the amount and reason for any deductions including tax and N.I and, if payment is made in different ways e.g. part cheque and part BACS, how much is being paid by each method.
Whilst an employer has freedom in theory to set the rate of pay for its employees, this is subject to not discriminating against employees on grounds of any protected characteristic and ensuring that entitlements to the National Minimum Wage are met. In addition it is unlawful to treat part-timer workers less favourably, for example, putting them on lower pay rates, than comparable full-timer workers, unless this can be objectively justified. However it is acceptable to pay part-time workers on a pro-rata basis for the hours they work.
Similarly it is unlawful to treat fixed-term workers less favourably than comparable permanent employees, unless this can be objectively justified. For example, an employer may be able to justify less favourable treatment if the overall remuneration package of the fixed-term worker is no less favourable.
In addition to this there are statutory payments payable to employees when they are not working due to authorised leave, for example, statutory maternity pay for employees on maternity leave. For details of payments made to employees whilst away from work on sick leave, paternity leave, maternity leave etc please refer to the relevant guidance note.
Similarly if an employer has the right to 'lay-off' employees from work or place them on 'short-time working', a statutory guarantee payment may be payable (see our Guide to lay off and short time working). The statutory payments are minimums and an employee is free to provide greater pay in such circumstances.
Many contracts provide for discretionary bonuses or similar payments to allow the organisation flexibility in making the payment. Such clauses need to be carefully worded to ensure that the discretion is applied to the right element of the clause; is it the intention of the clause to allow the Company discretion to decide whether to pay a bonus, or is the discretion applied to the amount to be paid? In any event, a Company must not act 'perversely' when exercising its discretion.
Pay increases
Where an organisation recognises a trade union, it is usual that rates of pay and variations in pay rates are determined by way of collective bargaining. Such agreements will normally apply to all employees in the bargaining unit, whether union members or not. Most other organisations tend to review pay on a periodic basis but there is no legal obligation on an employer to increase pay, unless it is in order to remain compliant with legislation e.g. equal pay, national minimum wage or there is a contractual obligation to do so, such as guaranteed progression along a defined pay scale.
Pay deductions
The employer may make some deductions from an employee’s pay but this is limited to the following situations:
- The employer may make statutory deductions e.g. deductions for tax and national insurance or under an Attachment of Earnings order.
- It may also make deductions where the employee’s contract allows the employer to do so.
- The employer may make deductions if the employee has agreed to the deduction, in advance and in writing, and the deduction relates to a future, not past event.
A deduction takes place where the employee is paid less than is properly payable under his contract, so this will cover a non-payment of wages as well as well as a payment of a lesser amount. Shortfalls due to mathematical errors are not considered deductions.
There are also some deductions which are not covered by the unlawful deduction of wages legislation. These are as follows:
- Where the deduction is to recover an overpayment of wages or expenses.
- Where the deduction is made for time when the employee was taking part in industrial action.
Where the deduction is the recovery of an overpayment of wages etc then the employer should tread carefully so as not to act in breach of the implied term of trust and confidence. Advice should be taken from your HR Rely adviser.
It is not unusual for organisations that recognise trade unions to provide for 'check-off' arrangements. This allows employees to elect for their trade union membership fees to be deducted from their salary and paid direct to the union. It is important that this has been authorised by the employee in writing before any deduction is made. Note that changes to the rules re 'check-off' are proposed, by which public-sector employers must give affected workers the option to pay their trade union subscriptions by another means. However, these changes are not yet in force.
National Minimum Wage
The national minimum wage (“NMW”) legislation provides that workers are entitled to a minimum hourly rate. The rate is regularly updated in our [Pay Updates.] There are various rates that apply depending on whether the worker is over 21 (adult rate), between the age of 18 and 20 (development rate) or under the age of 18 but over the compulsory school leaving age (young workers rate). There is a separate rate for apprentices under the age of 19 or, if over the age of 19, within their first year of apprenticeship.
NMW applies not just to employees but to all workers i.e. persons who have a contract with the company to personally perform work or services. Home workers and piece workers qualify for NMW as do agency workers, although agency workers will be paid by whomever they have the contract with, usually the agency.
To determine whether a worker has received the NMW, the total pay earned by the worker in their pay reference period needs to be divided by the total number of hours worked in the same reference period. Note that it is pay earned in the reference period that counts, and it may be that a worker earns the pay during the reference period but is not paid it until the next pay interval. The pay reference period will be one month unless the worker is paid in shorter intervals.
The following pay counts towards the NMW:
- The total gross pay which should include any bonuses etc
- Accommodation provided by the employer. This is calculated by multiplying the accommodation rate by the number of days in the reference period for which the accommodation is provided. Click here for further information.
Deducted from this should be the premium element of any overtime or shift working and any special allowances that are not consolidated into basic pay.
Calculation of the hours worked will vary depending on the type of work the worker is engaged in. The different types are as follows:
- Time work – this is work that is paid based on the number of hours that a worker works e.g. 35 hours per week. The hours that count are the hours that the worker is actually working as well as hours when the employee is required to be at work and available for
work, even though no work is actually provided. On call or standby time generally does not count if the employee is not required to be at or near the workplace whilst on call. Where the worker has to sleep at or near the workplace, usually only those hours where the worker is "awake for the purposes of working" will count as time work (see the Supreme Court's decision in Royal Mencap Society v Tomlinson-Blake 2021) . If you have such arrangements in your workplace, you may wish to take specific
advice from your HR Adviser. Travel to and from home to the normal place of work does not count as time work but travel during normal hours of work will usually count. Training during normal working hours, or outside of these hours but at the workplace, will usually count as time-work
Time spent on holiday, sick leave or maternity leave does not count towards the hours to be calculated. Similarly any payment received by the worker for such leave is excluded from the NMW calculation.
- Salaried hours work: This is where an employee is paid for a fixed number of hours per year and is paid in equal instalments. The hours that count are as per the time worked. If the worker is paid their normal pay whilst on holiday, sick leave or maternity leave, then these also count towards the worker’s hours.
- Output work: Output work is work that is paid based on a worker’s output e.g. the number of sales completed or items packed etc. The employer must either pay the worker NMW for each hour worked or pay the worker a fair piece rate for each piece produced.
If the employer is using the fair piece rate then the employer needs to
determine how many pieces are produced or tasks completed by an average worker in an hour (“average hourly rate”). They can obtain a rate by testing all the workers or a representative sample. - To work out the fair rate the employer should find the average rate of work per hour, divide the minimum wage by the average number of pieces to establish a base rate per item and multiply
this figure by 1.2 to establish a fair rate for each piece completed. Rated output workers must be given a written notice containing details of, amongst other things, their mean hourly output
rate and how it is calculated, the rate to be paid for each item/task and the telephone number for the NMW helpline. Travelling on business also needs to be included in calculating working hours. - Unmeasured work: This is the 'catch-all' category where the above categories do not apply. The working hours of this category of worker can be measured either by recording all hours worked or for the worker and employee to agree, in writing, a daily average of hours to be worked. Travelling on business also needs to be included in calculating working hours.
Employers must keep records showing that they are paying the NMW because the presumption is that the employer has not paid NMW unless it can show evidence to the contrary. Further, it is a criminal offence to fail to keep records or to produce false records. Whilst NMW legislation only requires records to be kept for 3 years from the end of the relevant pay reference period, it is sensible for an employer to keep the records for six years as that is the time period in which a worker can bring a claim for failure to pay NMW in the courts.