2020 is a leap year which means an extra days work for some and it is important to consider the effects of this for your business and your employees. In 2020 the 29th of February falls on a Saturday.
There are potential National Minimum Wage/National Living wage (NMW/NLW) issues for employers to consider when calculating their employees leap year wages, I’ll be covering salaried and hourly paid employees in this post.
Ordinarily, assuming that salaried employees are paid the equivalent of the National Minimum Wage/Living Wage for hours worked, employers do not need to worry about the number of days in a month as salaries tend to be calculated on 365 days in a year or 12 months.
To ensure compliance with NMW/NLW, a salary is converted to number of contracted hours in the year. For instance, a 5 day working week (37.5 hours per week), with a salary of £20,000 converts to an hourly rate of £10.25. This poses no problems since the hourly rate paid is well above the NMW/NLW.
By adding in an extra 7.5 hours of work for the 29th February, the hourly rate falls to £10.21, which is again well within the NMW/NLW rate.
Now let’s look at a worker on the NMW/NLW, currently £8.21 per hour, again working 37.5 hours per week. The salary is £16,009.50 (calculated by using the total number of worked hours in the year, 52 x 37.5 = 1950.)
By working the extra day the total number of hours increases to 1957.50. On a salary of £16,009.50, the hourly rate drops to £8.18 per hour.
This is a NMW/NLW failure, non-compliance with NMW/NLW legislation. It is only a small failure, but a failure nevertheless and therefore if HMRC come along and undertake a NMW enquiry, large fines could result, along with the risk of being named and shamed.
By introducing a salary of £16,100 you can ensure that the leap year does not impact on NMW/NLW rates for anyone over 25 years old within your business. We advise that you review your employee’s salaries now. Of course part time workers should also be reviewed if they are on the NMW.
Whilst we have concentrated on the rate for over 25 year olds, the same principle will apply to the other rates of NMW payable for other age groups.
Hourly paid staff should pose less of an issue for your leap year payroll, if you pay the NMW/NLW rates for the additional day worked, full compliance will be maintained.
Now let’s look at the knock on effects of underpaying NMW/NLW to a salaried worker, however it should be borne in mind that the amounts will be relatively small.
Underpaid wages/salary will result in underpaid pension contributions for both the employee and employer. This will also have implications for leap year annual leave. Currently holiday pay is calculated on a 12 week average of pay (this increases to 52 weeks from 6th April 2020). Holiday Pay will be underpaid if NWM/NLWM has similarly been underpaid.
In this case, statutory payments may be also have been affected as may the workers claim for Tax Credits or Universal Credits. All such knock on effects can be avoided, as can potential penalties imposed by HMRC, if NMW/NLW is calculated correctly for 2019/2020 to take account for the extra day worked.
For further details contact Paul Chappell, Head of Legislation and Compliance on 03331 123456