Clarification on 'basic hours' raises NMW risk for part-year workers

The Employment Appeal Tribunal (EAT) has upheld a teacher’s appeal regarding her basic hours, which could increase National Minimum Wage (NMW) risks associated with employing part-year workers.

Establishing whether a worker is paid at least NMW first requires an analysis of what type of work the worker is doing - salaried work, time work, piece work or unmeasured work. Categorising a worker as doing salaried work is helpful for employers as it can simplify the administration of paying NMW. The worker can be paid in equal monthly instalments so long as over the course of the year they are paid at least NMW for their basic hours in that year. 

However, to be categorised as doing salaried work, four conditions must be met, of which the worker’s basic hours are a critical factor. In a recent case, the EAT has considered the meaning of ‘basic hours’ for the purposes of NMW compliance. 

The teacher was employed on a part-time basis working 21 hours over three days per week, on a term-time only basis. Her annual salary was paid in 12 equal monthly instalments. Crucially, her contract stated she was entitled to take off the usual school holidays and would be paid her normal pay during this time. 

The teacher brought an unlawful deductions from wages claim alleging she had not been paid at least NMW for her basic hours. The basis of her claim was that her basic annual hours should have been calculated over 52 weeks rather than 40 weeks (which was the school’s position following a prior HMRC NMW inspection).

Whilst the teacher was initially unsuccessful at the employment tribunal, she appealed and the EAT overturned that decision, deciding:

• her basic hours must be identified by reference to her contract of employment, rather than the hours she had in fact worked;
• basic hours can include periods of absence for which contractual salary is due, so long as the employer is not entitled under the employment contract to reduce the annual salary during those periods; and
• NMW entitlements apply in relation to time spent on contractual holiday under a worker’s contract.

Because the teacher’s contract referred to her being entitled to take off the usual school holidays and be paid her normal pay during this time, this period of absence should be included in calculating her basic hours.

The impact of the decision is that the pay the teacher received over the course of the year will now have to be divided by the basic hours calculated over 52 weeks, rather than 40 weeks, which will now end up in her hourly pay falling below NMW and therefore creating a NMW underpayment.

The immediate learning point is that what the contract of employment says will be crucial to establishing NMW compliance and, therefore, particular care should be taken in its drafting.

It is possible that the school will appeal against the EAT’s finding. In the meantime, the case demonstrates the challenge facing employers with NMW compliance. An HMRC NMW inspection had previously been carried out which held there had been no underpayment. This conclusion has now turned out to be flawed. With HMRC tasked with enforcing NMW and Department for Business, Energy & Industrial Strategy (BEIS) responsible for publishing guidance (none of which is statutory), it raises the question of whether the current approach to enforcement is fair on employers trying to do the right thing given the considerable penalties arising from non-compliance and the reputational harm from naming and shaming.

If you have any concerns regarding NMW, please contact Charlie Barnes.