If you’ve got salaried employees on your payroll, you’ve probably wondered whether you’re legally required to carry out an annual excessive hours analysis for National Minimum Wage compliance.
Maybe not surprisingly, the answer isn’t straightforward.
It depends on how your workers are categorised.
Understanding the requirement
Not all employees require an annual excessive hours analysis. The requirement only applies to workers who fall into the specific category of “salaried hours work” under the National Minimum Wage Regulations 2015. If your salaried employees don’t meet this classification, no annual analysis is required from a legislative standpoint.
But here’s where it gets interesting – and where many employers are getting caught out.
What the legislation says about worker categories
The National Minimum Wage Act 1998 and the National Minimum Wage Regulations 2015 set out four main categories of work for NMW purposes. Each category has different rules for calculating compliance, and understanding which category your workers fall into is absolutely critical.
The four categories are;
- Time work (paid by the hour for time worked)
- Salaried hours work (paid an annual salary for a set number of basic hours per year)
- Output work (paid by the piece or task completed)
- Unmeasured work (paid in other ways).
The annual excessive hours calculation specifically applies to workers performing salaried hours work. According to Regulation 21 of the National Minimum Wage Regulations 2015, a worker is only classified as performing salaried hours work when all of the following conditions are met:
- They’re paid for an ascertainable basic number of hours per year (the “basic hours”)
- They’re entitled to an annual salary for those hours
- They’re entitled to no other payment for the basic hours except a performance bonus and/or salary premium
- They’re paid in equal instalments (monthly or otherwise) or in equal quarterly amounts.
If even one of these conditions isn’t met, the worker is not performing salaried hours work, and therefore, the excessive hours calculation doesn’t apply.
How the calculation works
For workers who do meet the criteria for salaried hours work, employers must evaluate NMW compliance over the worker’s “calculation year” – typically a 12-month period based on either their start date or a standardised year if the employer has chosen to implement one.
The legislation requires that over this calculation year, the worker must receive at least the National Minimum Wage for their total hours worked. This is where the excess hours calculation becomes essential.
If a worker’s cumulative actual hours worked exceed their contracted basic hours during the calculation year, the employer must pay at least NMW for every excess hour. This typically becomes an issue in the final pay periods of the calculation year when the cumulative hours breach the annual threshold.
According to HMRC guidance, once a worker exceeds their basic hours, complex adjustments must be made to the hours treated as worked in subsequent pay reference periods. Get this wrong, and you’ve got an NMW breach on your hands, even if the monthly salary seemed adequate.
What HMRC is finding in their reviews
Since the regulations were amended in April 2020, HMRC has significantly increased its focus on excessive hours calculations for salaried workers. Reviews conducted from late 2022 onwards have identified this as one of the main compliance risks.
The big problem is that many employers simply aren’t tracking actual hours worked by salaried employees. Without this data, it’s impossible to know whether an NMW breach has occurred.
Consider this real-world scenario that highlights the risk.
- An employee earns £45,000 annually and is contracted for 40 hours per week.
- They participate in a 6% salary sacrifice pension scheme.
- If they work just one hour of unpaid overtime every day, they would exceed their annual hours in month 11 and breach NMW requirements by month 12 if no top-up payment is made.
That’s a seemingly well-paid employee, earning well above minimum wage on paper, but falling into non-compliance because of the actual hours worked versus salary received.
The legislative requirement versus practical reality
The legislation doesn’t explicitly mandate that employers must conduct an annual excessive hours analysis as a standalone compliance exercise. What it does mandate is that employers must pay at least the National Minimum Wage for all hours worked.
However, you cannot demonstrate compliance with NMW legislation for salaried hours workers without performing this calculation. It’s a practical necessity rather than a direct legislative requirement.
If HMRC investigates your business and discovers you haven’t been tracking actual hours worked or calculating excess hours for salaried workers, you won’t be able to prove you’ve met your NMW obligations. That’s when the trouble starts – back pay at current NMW rates, financial penalties, and potentially being
publicly named for non-compliance.
The alternative approach to consider
While the letter of the law doesn’t say “thou must complete an annual excessive hours analysis,” the spirit and enforcement of the legislation make it unavoidable if you want to demonstrate compliance.
The real question becomes – have you correctly categorised your workers in the first place?
Many employers could avoid the complexity of excess hours calculations altogether by categorising eligible workers as performing “unmeasured work” instead of salaried hours work. For unmeasured work, there’s no excess hours calculation required – employers simply need to ensure the worker receives at least NMW when their pay is divided by the actual hours worked in each pay reference period.
This is perfectly legitimate if the worker meets the criteria for unmeasured work, and it can significantly reduce administrative burden while maintaining full NMW compliance.
Getting your approach right
Whether legally mandated in name or not, here’s what employers need to be doing to stay compliant:
Review your worker categorisations carefully
Not all salaried workers automatically fall into salaried hours work. Check they meet all the criteria in Regulation 21, and consider whether an alternative classification might be more appropriate and less administratively burdensome.
Track actual hours worked
If you’ve got workers classified as performing salaried hours work, you need reliable data on actual working time. This includes time spent working before or after shifts, responding to emails outside hours, and any other activity that counts as working time under the regulations.
Implement annual excess hours reviews for salaried hours workers
You need to monitor cumulative hours throughout the calculation year and perform the necessary calculations when basic hours are exceeded. This isn’t optional if you want to prove compliance.
Document everything
Keep clear records of your classification decisions, the methods you’ve used for calculations, and how you’ve determined what constitutes working time. If HMRC comes knocking, comprehensive documentation is your best defence.
Consider salary sacrifice schemes carefully
These reduce pay for NMW purposes and can tip otherwise compliant arrangements into breaches when combined with additional hours worked. Factor them into your calculations.
NMW compliance is complex, and the penalties for getting it wrong are severe. Back pay, penalties of up to 200% of the underpayment, and public naming can all flow from failures in this area. With HMRC actively targeting excess hours calculations in their enforcement work, this isn’t something to leave to chance.
At Ascend, we work with complex payrolls every day and understand the intricacies of NMW compliance inside out. Whether you need help reviewing your worker categorisations, implementing excess hours tracking, or just want the peace of mind that comes from having experienced payroll professionals handle your compliance, we’re here to help.
Don’t wait for an HMRC investigation to discover compliance gaps. Get in touch with our team to discuss how we can help ensure your payroll meets all NMW requirements without the stress and guesswork.
