How to be compliant when paying salaried workers

Many salaried workers do not have a contractual entitlement to additional pay, meaning, checking compliance against only contractual hours could lead to compliance issues.

Payroll teams, whether in-house or outsourced, typically base their NMW compliance checks primarily on the payroll data and supporting information provided to them. In particular, outsourced payroll departments often lack visibility into the daily operations and working practices of the business, so they may be unaware of the broader implications related to the NMW compliance check.

Some of the main compliance risks to consider are:

Salaried hours

Salaried workers are generally paid monthly for their contractual hours only, unless there is an entitlement to paid overtime. However, many do not have a contractual right to additional pay for extra hours worked and are expected to work the hours as needed to meet business demands, which can vary each month. Employers must ensure that any unpaid extra hours worked throughout the NMW calculation year do not affect compliance.

Unpaid time worked can soon accrue and impact a salary workers NMW pay, for example:

A salaried worker contracted to work 37.5 hours per week and earning £35,000 per year would only have to work an additional 77 unpaid hours across their calculation year to breach NMW – that’s roughly an extra 1.6 hours per week (based on a calculation year running from January 2025 to December 2025 and 4 weeks annual leave being taken).

Excess hours for a salaried worker are assessed at the point contractual hours for the year have been exceeded, not monthly.  Compliance is further complicated as the 12-month assessment period for each employee is unique as each NMW calculation year starts from the date they were first employed.

The employer must prove that they have paid at least the NMW entitlement for all time worked, and so should consider their “at risk” worker population and implement processes to review their actual hours worked over the NMW calculation year to prevent inadvertent NMW breaches. Even with an informal Time off in Lieu (TOIL) policy, it is crucial to record when the time is accrued and recovered, ensuring a full audit trail for NMW compliance requirements.

In February 2020, an amendment to NMW regulations means an employer can now align the NMW calculation year for all employees to a chosen date.  However, this is not a straightforward process and requires some consideration to ensure it is a beneficial move for the business.

Additional working practices and policies outside of payroll may present further risks and should be investigated to prevent unintentional breaches of the NMW.

Working time

All working time must be accurately recorded per NMW requirements and reported to payroll for payment. For example:

• Hourly paid workers should have their actual worked hours reported, not just scheduled hours, to ensure any additional time worked is compensated.
• Workers paid an annual salary should have any unpaid additional hours worked recorded and monitored to prevent an NMW breach.
• Payroll, especially when outsourced, may not be aware of additional working time unless it is reported to them. They need to be informed of extra hours worked, such as:
  • Workers are required to be ready to start their shift by a certain time but need to log onto computer systems or change into workwear/PPE.
  • Opening time at the start of a shift and closing down at the end of a shift.
  • Undertaking mandatory training outside of core working hours.
  • Hybrid/flexible working arrangements where payroll lacks sufficient oversight of actual time worked.
  • Business travel time that exceeds a normal working day.

Deductions/reductions that impact NMW pay

Payroll systems are typically set up to handle pay components and deductions in line with NMW compliance. However, there can be situations where workers need to buy specific clothing/equipment or footwear to meet company policies without reimbursement. The cost of these items would reduce NMW pay in the period the purchase is made. Since payroll might not be aware of this requirement, it wouldn’t be included in their compliance check, and may potentially lead to a NMW breach, e.g.

• A worker paid at the NLW rate is required to provide their black trousers and shoes, costing £70 (£40 for two pairs of trousers and £30 for shoes) to comply with the dress code policy. Since the worker is only paid at the NLW rate, there is no extra pay to cover these costs, resulting in a £70 underpayment that must be reimbursed. Additionally, if the worker needs to replace these items due to wear and tear in six months, the cost must be reimbursed to prevent another underpayment from occurring.

How can I remain compliant when paying salaried workers

Monitoring working hours and identifying excess hours for salaried employees can be complicated and is currently under scrutiny from HMRC so employers must remain compliant.

Payroll alone cannot manage this; it requires support from various departments, including operations, HR, finance, IT, and legal. NMW non-compliance, even if unintentional, poses financial and reputational risks. Penalties include a charge of 200% of the underpayment calculated, along with automatic media naming if total arrears exceed £500. 

Find out how to avoid National Minimum Wage breaches and how at-risk you are by completing our questionnaire.

You will receive a high-level risk report and risk score as well as a free, initial consultation with one of our specialists. We will highlight any potential remedial actions necessary to ensure your organisation is up to date with its compliance obligations.

Alternatively, if you would like to discuss your NMW compliance processes further to ensure that the business's internal controls are incorporating all necessary checks to assure compliance, please do not hesitate to get in touch.

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