For the next in a short series of pieces offering his take on and experiences of UK Employment Taxes and National Minimum Wage, Ian Thomas from People and Workforce at EY UK explores the intersection between bonuses and the National Minimum Wage.
When is a bonus not a bonus? When it reduces pay for National Minimum Wage ("NMW") purposes of course!
But how can that happen, you ask? Here’s how…
Firstly, the NMW Regulations identify 4 types of work:
- Salaried hours work (probably the majority of those reading this article),
- Time work (eg. junior staff working in the hospitality industry),
- Output work (eg. those in the textiles trade) and
- Unmeasured work (anyone not falling into one of the 3 categories above)
For many businesses, it will be advantageous to categorise workers as working ‘salaried hours work’ as any peaks and troughs in hours tend to be averaged over the year. However, there are a number of conditions to meet to enable this which we won’t go into in this article, safe to say it’s not that straightforward. If any one of the conditions is not satisfied, then, in all likelihood, the employee will fall into the unmeasured category.
The broad implication of this is that, instead of considering whether NMW has been met over the course of a year, it is necessary to consider whether NMW has been paid in each pay period. This can result in a breach of NMW in periods where the pay is the same (typical for a salaried employee) but the hours happen to have spiked in that period (eg. in a campaign period or at year-end).
One of the conditions to meet to be classed as a salaried hours worker is that the worker must only be entitled to receive an annual salary or an annual salary and performance bonus. Here’s where things got a bit perverse for our client who pays monthly bonuses to staff based on performance against sales targets.
The definition of a performance bonus itself is not straightforward but, of course, if the definition is not met then an employer paying a salary which, for a salaried hours worker, would meet NMW, could suddenly find itself in breach of NMW if the worker is reclassified as unmeasured.
So, as ridiculous as it might seem, the simple act of paying an employee more money could cause their pay to fall below NMW. My advice – review the terms of those bonus schemes carefully!
Author: Ian Thomas
Ian is a partner in EY’s People Advisory Services team, specialising in UK Employment Taxes and National Minimum Wage. A former HMRC Inspector of Taxes and a member of the Chartered Institute of Tax, Ian has over 30 years’ experience advising clients on employment tax and NMW matters. He has supported numerous employers of all sizes with their HMRC investigations, negotiating significant reductions in settlements and saving his clients many £millions.
For the next in a short series of pieces offering his take on and experiences of UK Employment Taxes and National Minimum Wage, Ian Thomas from People and Workforce at EY UK explores the intersection between bonuses and the National Minimum Wage.
When is a bonus not a bonus? When it reduces pay for National Minimum Wage ("NMW") purposes of course!
But how can that happen, you ask? Here’s how…
Firstly, the NMW Regulations identify 4 types of work:
- Salaried hours work (probably the majority of those reading this article),
- Time work (eg. junior staff working in the hospitality industry),
- Output work (eg. those in the textiles trade) and
- Unmeasured work (anyone not falling into one of the 3 categories above)
For many businesses, it will be advantageous to categorise workers as working ‘salaried hours work’ as any peaks and troughs in hours tend to be averaged over the year. However, there are a number of conditions to meet to enable this which we won’t go into in this article, safe to say it’s not that straightforward. If any one of the conditions is not satisfied, then, in all likelihood, the employee will fall into the unmeasured category.
The broad implication of this is that, instead of considering whether NMW has been met over the course of a year, it is necessary to consider whether NMW has been paid in each pay period. This can result in a breach of NMW in periods where the pay is the same (typical for a salaried employee) but the hours happen to have spiked in that period (eg. in a campaign period or at year-end).
One of the conditions to meet to be classed as a salaried hours worker is that the worker must only be entitled to receive an annual salary or an annual salary and performance bonus. Here’s where things got a bit perverse for our client who pays monthly bonuses to staff based on performance against sales targets.
The definition of a performance bonus itself is not straightforward but, of course, if the definition is not met then an employer paying a salary which, for a salaried hours worker, would meet NMW, could suddenly find itself in breach of NMW if the worker is reclassified as unmeasured.
So, as ridiculous as it might seem, the simple act of paying an employee more money could cause their pay to fall below NMW. My advice – review the terms of those bonus schemes carefully!
Author: Ian Thomas
Ian is a partner in EY’s People Advisory Services team, specialising in UK Employment Taxes and National Minimum Wage. A former HMRC Inspector of Taxes and a member of the Chartered Institute of Tax, Ian has over 30 years’ experience advising clients on employment tax and NMW matters. He has supported numerous employers of all sizes with their HMRC investigations, negotiating significant reductions in settlements and saving his clients many £millions.