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Payroll - mixed Hourly/Salary scenario

  • Member PM.Dip
  • Practice Licence
  • 18 posts
  • # 114187

Hello

Just started my first payroll client and hoping someone can tell me whether this is normal practice.  It's not a situation I've come across in my own experience.

Calculating employees gross pay for the month. I've been told they work a 40 hour week at £7.20.  So for November that would be 22 days at 8 hours at £7.20 = £1267.20.
However that is not what they've been receiving. Instead they are paid the same averaged amount eacy month (in this case £1248).

Any changes - such as working an extra day, or taking unpaid time off, are then adjusted by adding/subtracting 8 hrs@£7.20.

I've not been able to get a straight answer on how the annual/average amounts have been calculated.  All I get is "40 hour week @£7.20".  Although from past figures it is probably (not as easy with some of the employees) 52x5*8*7.20.

I was initially concerned that they were not paying the minimum wage in months with 22 working days. I was assured 'This is just how it's done and it averages out over the year' (I'm sure HMRC would accept that argument when a maximum pay reference period is 31 days!)

However after some research I've identified that they are paying minimum - but only because meal breaks do not count as working time for the mimum wage calculation - despite being paid.

So - Is it really a common practice to take an hourly rate and contract hours, average over the year and pay 1/12th per month?

Am I guilty as charged of being pedantic?

Thanks for the advice.

Ian

  • Fellow
  • Practice Licence
  • 32 posts
  • # 114192

Hi Ian,

 

For a salary calculation , then I would say £1248 is correct . 40 hours x 52 weeks = 2080 hours x £7.20 = £14,976 . Divided by 12 is £1248. I would say it depends on the contract of employment . If they are classed as salaried then this is the correct way to work it.

 

Hope this helps

 

Janette.

  • 794 posts
  • # 114207

Hi Ian,

There is another way of looking at this:

365 days in the year less 52 weekends i.e.104 days = 261 working days

Work 8 hours per day at £7.20 per hour = £57.60 per day

£57.60 daily rate x 261 annual working days = £15033.60/12 = £1252.80 per month

I would always work to the advantage of the employee as an employer should always seem to be fair when it comes to staff wages.

As Janette says depends on their contract of employment as staff should always be able to work out how their wages are being calculated.

Marilyn

  • Member PM.Dip
  • Practice Licence
  • 18 posts
  • # 114208

Hi Janette/Marilyn

Thanks for the replies. Unfortunately in trying to keep my post brief I must have been too brief as you both missed my main concern!

I understand the annualising - and agree with Marilyn that taking 261 days is both more accurate and fairer to the employee.

My main worry was that the process of taking an annual figure, dividing by 12 to givew a monthly average results in some months when the hourly rate will be less than minimum wage.

For example:
employees contract specifies a 35 hour week (5, 7hr days) @£7.20 an hour.
Using Marilyns 261 days we get - 261*7*7.2 = £13154.40 total per year.
Or 12 months at £1096.20
 
For the month of November that contains 22 working days this would mean the employee
working 22*7 = 154 Hours
 
Taking their monthly average of £1096.20 this means 1096.20/154 = £7.12 per hour in November.
 

According to the HMRC minimum wage rules
https://www.gov.uk/national-minimum-wage/employers-and-the-minimum-wage.

The maximum pay reference period is 31 days, and the minimum wage must be met within any reference period - so annual compliance is not accceptable.

By my literal reading of the rules this process results in the minimum wage rules being broken. 

I've since been informed by someone with many years more experience than me that this is common practice, and has never caused an issue with HMRC. So I guess pragmatism is winning over accuracy. 

Regards Ian

  • Member PM.Dip
  • Practice Licence
  • 742 posts
  • # 114209

Hi Ian

 

Yes it is common practice and the easiest way to do it, otherwise some months staff would get paid differently, it allows for the fact that some months have 31 days and  some only 28. As long as they are paying £7.30 an hour I dont see a problem, especiially if they are actually getting paid for lunch breaks as most people dont. 

  • 491 posts
  • # 114213

If it's averaged out over 12 months in this way, then it can't be below minimum wage, plus, there's less room for error in miscalculating how many working days in a particular month. It's definately common practice.

Many of my clients employees work odd days - i.e. 5 days over 7, but this could include Saturdays, or Sundays - so this helps to cut down on the amount of clarification you may need each month, by it being a clear 5 days in 7 - with the length of day being enforced by the employer - and which days that are worked being irrelevant unless there is an issue such as sick pay etc.

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