The National Minimum Wage was introduced in April 1999, at a rate of £3.60 per hour. There was a “development rate” of £3 per hour for workers under 22, or for those over 22 who were starting a new job with a new employer and were doing a course of “accredited training”. From 1 October 2006, the development rate was abolished for those over 22, so that all employees over 22 had to be paid the full rate.
In 2004, a special rate for school leavers under 18 was introduced, set then at £3 per hour. The rates are upgraded on the first of October each year, and there are penalties for employers who fail to pay their employees at least the minimum rate. The only deductions allowed from the NMW are for accommodation – if the employee is provided with accommodation by the employer, the maximum of £31.22 per week can be deducted from his pay in respect of this.
The current rate for the National Minimum Wage is £5.73p per hour, with a lower development rate of £4.77p for employees between 18 and 21, and a rate for school leavers under 18 of £3.53.
Failure to pay employees at these rates will now give rise to an automatic penalty of a minimum of £100 and a maximum of £5,000, and there is also a new right to prosecute offenders in the Crown Court, where unlimited penalties can be imposed for failure to pay the minimum wage, or for obstructing HM Revenue and Customs officials who are carrying out a minimum wage enquiry.
The automatic penalties are calculated on the basis of 50% of the amount of the underpayments, and those underpayments are now calculated using the current rate of the NMW, even if the underpayment arose in an earlier year when the rate was lower.
The NMW rate for the period from 1 October 2004 to 30 September 2005 was £4.85p per hour, so if an employer paid an employee only £4 per during that period, the underpayment might be £1,657.50p (85p per hour for 37.5 hours per week, times 52). Because of the change in the rules for calculating arrears, however, the calculation would be:
£1,657.50p/4.85 times 5.73 = £1,958.24p
The arrears are divided by the NMW rate at the time, and then multiplied by the current NMW rate. The idea is to restore the purchasing power which the employee has missed out on by compensating him at today’s rate.
The employer would have to pay the £1,958.24p to the employee, and the penalty (at 50% of the arrears) would be £980.
The good news is that if the employer pays the full arrears to the employee, and half the penalty (£490), within 14 days of being served with the notice of arrears, then the other half of the penalty will be cancelled.