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Summer 2004 Bulletin

National Minimum Wage

From Friday, 1 October 2004 the National Minimum Wage will rise from £4.50 to £4.85 an hour and the Development Rate (payable to 18- to 21-year-olds and to some new employees undergoing formal training) from £3.80 to £4.10.

For the first time, there will also be a minimum wage of £3 an hour for 16- and 17-year-olds. However, this will not apply to children who are still of compulsory school age (which includes most 16-year-olds, until the end of the Summer term), or to apprentices, who are not entitled to the minimum wage until they have completed their first year’s apprenticeship and are aged 19 or more.

New rules for pieceworkers

There are also important changes to the National Minimum Wage rules for pieceworkers. For NMW purposes, an employee is only a ‘pieceworker’ if the employer does not set the working hours. So someone who is contracted to work at his employer’s factory from 8am to 5pm every day is not a pieceworker for NMW purposes, even if he is paid on a piecework basis – instead, he must simply be paid at least the NMW for each hour he works. In practice, the NMW ‘piecework’ rules mainly apply to people working in their own homes – including not only traditional ‘outworkers’ such as seamstresses but also (for example) telephone sales staff paid on a commission-only basis.

At present, piecework rates for outworkers must be set so that an averagely proficient employee can earn at least 80 per cent of the NMW. For example, if an average seamstress can make four garments an hour, the rate must be at least 90p for each garment, to allow her to earn £3.60 (80% of £4.50) an hour. From 1 October 2004 the rate must be set to allow an average worker to earn the whole NMW – so in the same example, the rate per garment would have to be set at £1.21¼ (4 x £1.21¼ = £4.85) – an increase of nearly 35%. Furthermore, from April 2005 the rate will have to be increased again, to allow the average outworker to earn 120% of the NMW (making the rate per garment £1.45½).

The importance of employment status

Some firms assume their outworkers are not covered by the NMW rules because they are self-employed subcontractors. However, the NMW is payable to all ‘workers’, defined to include both employees and self-employed people who are not carrying on a genuinely independent business. Employment Tribunals have reached conflicting decisions on the status of outworkers, but the likelihood is that the overwhelming majority are ‘workers’ entitled to the NMW. Certainly, what is important is the real relationship between the parties, not the terms of any written agreement.

Employment status also has implications for PAYE and National Insurance. Here, the determining factor in drawing the line between employment and self-employment is likely to be the degree of control exercised by the firm, for example in tightly specifying the work to be done, or providing a sales script and list of ‘prospects’. Again, the wording of any contract the worker may have signed will not be conclusive.

Getting employment status wrong is likely to be expensive for the firm, as it can create a backdated obligation to make pay up to NMW levels and to account for PAYE and National Insurance liabilities. The true status of workers treated as independent contractors may be challenged by the Inland Revenue and, increasingly, by Trade Unions, which have recently been prioritising NMW claims by outworkers.

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