| National Minimum Wage Act 1998 (c. 39)
1998 Chapter 39
What is the Act about?
Very simply, the Act is to ensure that all UK employees receive a
minimum income rate of £5.73 per hour (for those aged 22 and over from
1st October 2008).
The Act does not cover the self employed.
When was it effective from? 1st April 1999.
How does this affect Contractors?
As with most cases, this will depend upon the method of trading used
by the Contractor:
Agency/PAYE
The impact here of the National Minimum Wage Act should be
negligible. It is unlikely that Contractors working in IT and
Engineering will be earning less than the minimum wage. The Agency has a
duty to maintain records relating to hours worked but the Working Time
Regulations will have enforced pretty much the same record keeping from
1st October 1998.
Umbrella Company
For the majority of Umbrellas, the situation is very much the same
as for Agency/PAYE. Again, it is unlikely that any Contractors will be
earning less than the minimum wage. Record keeping should already be in
place as above. There are some Umbrella providers which provide the
opportunity for income to be taken as dividends by adopting a complex
class structure of shares. In these cases, all the Contractors under
each Umbrella are employees and will have to comply with the Minimum
Wage.
Owned Limited Company
This aspect merits individual attention:
The issue as to whether the Act applies to One Man Limited Companies
(where the Contractor is a Director and a shareholder) revolves around
one fundamental question:
Does a Director come within the definition of an employee as defined by
the Act?
The Act states:
54. - (1) In this Act "employee" means an individual who has entered
into or works under (or, where the employment has ceased, worked under)
a contract of employment.
The Department of Trade and Industry's own guidance notes state:
It (the Act) will not apply to the genuinely self-employed, office
holders, directors (unless they have an employment contract)....
This would appear to imply that if a Director has no Contract of
Employment, then the Act does not apply. However, a number of potential
problems appear on the horizon at this point:
a) Section 54. - (2) In this Act "contract of employment" means a
contract of service or apprenticeship, whether express or implied, and
(if it is express) whether oral or in writing. Thus, if the
circumstances of trading through a limited company allows the Inland
Revenue to show an implied contract of employment, then the Rules will
apply. The Department of Trade and Industry has verbally told us that a
Director is an employee within the meaning of the Act; the rationale
being that by a process of elimination he/she is not self-employed.
Whether this interpretation has any legal basis is beyond our field of
expertise. However, it would appear to indicate the authorities intent.
What is the likely cost to a one man
limited company?
Assume a 40 hour week x 52 week year x £5.73 per hour = salary
(minimum wage) of £11919.00.
This will result in a potential annual National Insurance liability of
£713.24.
You would need to take a salary of only £5435 to avoid paying any NI
What should Directors of one man
limited companies do?
Our advice would be to pay yourself the minimum wage based on the
hours you work. Then, if any litigation occurs to suggest otherwise, you
could act according to the result. If you feel that the rules should not
apply to you then we strongly urge you to consult a specialist
employment law practitioner. |
