Pay - overview

Pay can take many different forms. Basic pay will probably be agreed at the start of employment and must be recorded in the written statement of particulars. There is a variety of other types of pay which employers may agree to pay quite apart from any obligation to do so under statute, such as bonuses, commission, and contractual holiday, sick and maternity pay.

Statutory provisions also require employers to make certain payments, such as statutory holiday, sick, and maternity pay, guarantee payments and payments whilst medically suspended.

Employers must pay a wage which is at or above the National Minimum Wage.

Employees and workers are given rights to protect their wages by ERA 1996, Part II. Here, 'wages' includes all fees, bonuses (although not always discretionary bonuses), commission, holiday pay, statutory sick, maternity, paternity and adoption pay, guarantee payments and payments whilst medically suspended, and excludes loans, advances of wages, expenses, pension payments, redundancy payments, pay in lieu of notice and tips.

For more information, see Definition of wages.

National minimum wage

Statute guarantees a minimum hourly rate of pay to most workers who work in the UK - the National Minimum Wage. You cannot agree not to pay or receive the minimum wage. The minority of workers not covered includes some apprentices, trainees on certain government-funded training schemes, work experience students, nannies and au pairs, members of the armed forces, and voluntary workers.

The current rate is £6.08 an hour for those over 21 - lower rates apply to younger workers and some apprentices.

The right to the minimum wage is defined as a right to be paid at or above the minimum wage on average for time worked over a 'pay reference period'. The correct period will be fixed by the periodic basis on which the worker is paid. Most payments are included in the calculation, except loans, advances, retirement payments, redundancy payments, staff suggestion rewards, and payments above basic rate for overtime or shift pay.

Workers not receiving the minimum wage can bring tribunal claims for unlawful deductions. HM Revenue and Customs also has enforcement powers.

Workers who exercise their rights under the minimum wage legislation are protected against reprisals by the employer.

For more information, see National minimum wage; and our checklists Minimum wage calculation checklist and Minimum wage compliance checklist.

Deductions

Statute controls what deductions may lawfully be made from someone's wages. This includes bonuses, commission, holiday pay, statutory sick pay and statutory maternity pay, but excludes advances, expenses, pension payments, redundancy payments and other termination payments.

Most deductions are not permitted, but an employer may lawfully make deductions where it is permitted or required to do so by statute, by the employment contract, or by a written agreement from the worker, and also where there has been an overpayment, or the deduction is due to industrial action, or a court or tribunal order requires it.

A claim may be made in tribunal for unlawful deductions as long as it is within three months of the deduction (or, if a series, the last of the series).

For more information, see Deductions from pay.

Calculating a week's pay

Compensation for the breach of many statutory employment rights is calculated as a multiple of the claimant's weekly pay.

The appropriate date from which to calculate a week's pay will be the date of the event to which the claim relates - if the claim is about dismissal, it will be the effective date of termination.

Pay includes bonuses, overtime, and expenses which are part of the salary package (eg car allowance). The rate of pay is taken as at the appropriate date. It is subject to a statutory maximum cap, currently set at £430, where the claim is about flexible working, unfair dismissal or redundancy.

Working out the proper figure for an employee's 'week's pay' can be more or less complex depending on the type of the employment, and the regularity of the way in which the particular claimant's remuneration is structured. Different calculation methods apply to employees with fixed hours and pay, employees with fixed hours but variable pay, rota workers, employees without regular hours, employees who have not worked continuously for 12 weeks (perhaps because they do not work every week), and new employees who have worked less than 12 weeks.

For more information, see Calculating a week’s pay.

Pay statements and records

An employee is entitled to be given a written itemised pay statement at or before the time wages are paid. It must give details of gross pay, deductions, net pay and any subdivisions into different types there may be within net pay. Deductions do not have to be itemised on each individual pay statement provided the employer has instead given the employee a written standing statement of fixed deductions. Standing statements must be re-issued at least every 12 months, and may be amended in the interim.

Where an employer fails to provide a pay statement or it is inadequate, the employee can bring a claim in the tribunal but no compensation can be awarded. The tribunal will instead make a declaration. Claims may also be brought to resolve any question about the contents of a pay statement or of a standing statement of fixed deductions.

Employers are required to maintain records of hours worked and payments made. If a worker believes he is getting less than the minimum wage, he may require his employer to produce any relevant pay records. If an employer fails to produce pay records or fails to allow a worker to exercise rights in accordance with the National Minimum Wage Act, he may bring a claim to tribunal, which can make a declaration and award the worker 80 times the hourly amount of the national minimum wage.

For more information, see Pay statements and records.

Bonus and incentive schemes

Bonus schemes are generally intended to ensure that employees focus their efforts on key objectives of their employer's business, and should aim to be self-financing by increasing revenue by more than the scheme costs. Schemes normally make it clear whether entitlement is discretionary or contractual. Discretionary schemes usually give a contractual right to be considered for a bonus but not necessarily actually to receive one. Bonus entitlement may sometimes be implied on the basis of custom and practice.

Bonus payments are usually linked to performance of an individual employee, a team, or the entire business. Performance is usually measured by reference to targets, such as sales targets. Payments may also be linked to other factors such as attendance levels, customer satisfaction, or health and safety issues.

For more information, see Bonus and incentive schemes.

Commission

Under commission schemes, part or sometimes all of an employee's earnings are paid as commission rather than as basic pay. This is most common in sales roles. Commission is generally dependent on the level of sales, either of the individual or of a team. Team managers often earn commission based on their own individual sales and also on the level of performance of their team ('override commission') - encouraging them to assist the team to maximise performance. There may be threshold sales levels below which commission is not paid at all, which is less likely where basic salary is very low. Many commission schemes also provide for different tiers of commission to be paid, divided by bands of sales levels, with the percentage increasing as you go up through the tiers.

Entitlements to commission should be included in the written statement of employment particulars.

For more information, see Commission.

Holiday

In addition to the right to take a minimum amount of holiday there is also a right to be paid for them.

The Working Time Regulations 1998 entitle a worker to be paid during his statutory holiday entitlement, and also paid in lieu of any accrued, unused statutory holiday entitlement outstanding on termination. The statutory rate is a week's pay for each week of holiday.

A workforce or collective agreement or other legally enforceable written agreement may specify what pay in lieu of holiday should be paid on termination (but it cannot state that none should be paid). This may also be used to require a worker who has taken more than his accrued holiday entitlement when he leaves to reimburse his employer.

Contractual holiday pay arrangements may be more generous than the statutory scheme. Generally, there is no implied contractual right to pay in lieu of untaken accrued holiday: such a right must be expressly stated, and the method of calculation must be specified precisely.

Any contractual holiday pay which is given to workers goes to discharge the liability to pay statutory holiday pay.

For more information, see Holiday pay.

Sickness

Employees' entitlement to receive pay while they are sick may be covered by both contractual and statutory provisions.

There is no requirement to provide a contractual right to sick pay and no presumption that such a right exists but, if an employer does give such a right, it must be included in the written statement of particulars. Contractual sick pay provisions should specify the rate and duration of the entitlement, in default of which a reasonable duration and/or an appropriate rate will be implied. Express terms often allow for full pay for a period, followed by half pay for the next period, followed by nil pay.

Any person who is under a contract of service, except for certain defined exceptions, will be entitled to Statutory Sick Pay (SSP). To qualify for SSP, an eligible employee must have been too sick to work on at least four consecutive days (there is no SSP for the first three days), and must have notified his absence and supplied evidence of incapacity to his employer (self-certificates for up to seven days, doctor's certificates for more).

SSP will be paid for a maximum of 28 weeks for one period of incapacity for work. It is paid at £85.85 per week. Employers can recover from the state any amount paid as SSP to the extent that it exceeds 13% of liability to pay NI contributions in any income tax month. Employers are under a duty to keep records of all periods of incapacity more than four days long and details of all SSP paid.

Payments of contractual sick pay will go towards discharging the liability to pay SSP.

For more information, see Sick pay.

Maternity

Employees may be entitled to various types of payment relating to pregnancy or maternity. A pregnant employee is entitled to be paid for the time she takes to attend an appointment for ante-natal care. An employee is entitled to be paid while suspended from work on maternity grounds, unless she has unreasonably refused alternative work.

An employee is entitled to Statutory Maternity Pay if she earns more than the lower limit for the payment of NI contributions, and has been employed for at least 26 weeks as at the 14th week before her expected week of confinement. SMP can be claimed once she reaches the start of the 11th week before her expected week of confinement (or once she is confined, if earlier), and ceases work. An employee must give notice to her employer at least 28 days before she expects her entitlement to SMP to begin (or if that is not reasonably practicable give as much notice as she is able), and also provide a maternity certificate.

The higher rate of SMP is paid during the first six weeks, calculated as 9/10ths of the employee's normal weekly earnings. After that the lower rate applies, which is either £135.45 per week, or the same as the higher rate figure, if the higher rate is less than £135.45. SMP is paid by the employer but can mostly be recouped through deductions from the employer's NI contributions.

Employers and employees may not agree to opt out of the right to SMP. Entitlement to SMP is not dependent on the employee intending to return to work. SMP is payable for up to 39 weeks.

Employers may choose also to provide contractual maternity pay, and/or other contractual sums relating to maternity - unlike SMP, these can be made dependent on the employee returning to work. Any contractual payments made will go towards discharging statutory entitlements.

For more information, see Maternity pay.

Other

Where an employee who has been employed for over a month would normally be required to work on a particular day but is instead given no work to do, he may be entitled to a minimum fall-back payment called a 'guarantee payment'. This may arise because the employer doesn't have enough work available, or because something prevents work occurring. There is no entitlement where there is no work due to a trade dispute, where the employee unreasonably refuses alternative work, or where the employee does a job in which he is entitled to turn down work. The maximum daily guarantee payment is currently £23.50, and an employee cannot receive more than five guarantee payments in any three months. Contractual pay for a particular day goes towards discharging any guarantee payment, and vice versa. An employee may claim unpaid guarantee payments at the tribunal.

An employee who has been employed for over a month is entitled to be paid for up to 26 weeks while he is suspended from work on certain medical grounds, unless he either unreasonably turns down suitable alternative work or is incapable of work during that period through disease or disablement. Pay during medical suspension goes towards discharging liability to pay contractual pay for the relevant day, and vice versa. An employee may make a tribunal claim to recover payments during suspension on medical grounds which have not been made.

For more information, see Other types of pay.