Allowing employees to bank additional hours or take time off in lieu can seem like a straightforward way to give both the business and its employees greater flexibility around overtime. An employee works additional hours when the business needs them and then takes the equivalent time away from work at a later date, rather than receiving additional overtime pay.
Although the arrangement may appear fair when viewed across several weeks or months, National Minimum Wage rules can make the position considerably more complicated. The difficulty arises because compliance is generally assessed within individual pay reference periods, rather than by looking at whether the employee eventually receives equivalent paid time away from work. An employee who works additional hours without receiving additional pay during one period could therefore create a National Minimum Wage issue even if they later take those hours back as paid leave.
Understanding this distinction is particularly important for employers that regularly use banked hours or TOIL, especially where employees are paid at or only slightly above the applicable National Minimum Wage rate.
Why the Pay Reference Period Matters
National Minimum Wage compliance is generally assessed by reference to a worker's pay reference period. This will usually correspond with how frequently the individual is paid, such as weekly or monthly, and a pay reference period cannot be longer than one calendar month.
Within the relevant period, the employer needs to establish the pay that counts for National Minimum Wage purposes and compare it with the hours that must be treated as worked. When the relevant pay is divided by those hours, the resulting hourly rate must be at least the National Minimum Wage rate that applies to that worker.
This is where banked hours can create a problem. An arrangement may appear perfectly reasonable when the employer looks at the employee's hours and pay across several months, but National Minimum Wage compliance cannot necessarily be averaged across that entire period. If additional working time falls within one pay reference period without a corresponding increase in the pay that counts for minimum wage purposes, the employee's effective hourly rate for that period could fall below the statutory minimum.
Why Taking TOIL Later Does Not Necessarily Solve the Problem
Banked hours usually arise when an employee works additional time but records those hours to take as paid time away from work later instead of receiving overtime pay. From an operational perspective, the additional work and later time away may appear to balance each other, but National Minimum Wage legislation does not simply treat TOIL as a separate form of payment for the additional hours.
HMRC guidance explains that when TOIL is eventually taken, it is essentially time during which the employee is not working. The later period of paid absence does not necessarily cancel out additional working hours that had to be counted during an earlier pay reference period.
Whether a particular arrangement actually results in an underpayment will depend on several factors, including the worker's contractual arrangements, the type of work they perform for National Minimum Wage purposes, the number of hours involved and the amount of pay they receive. This means employers should not assume that having a TOIL system automatically deals with the minimum wage implications of additional working time.
The Risk Can Be Particularly Clear for Hourly Paid Workers
For employees who are paid according to the number of hours they work, the potential problem can be relatively easy to see. If an hourly paid employee works additional hours but receives no additional pay because those hours have been banked, the extra working time still needs to be considered when checking National Minimum Wage compliance for the relevant pay reference period.
Consider an employee who normally works 35 hours each week and receives an hourly rate only slightly above the applicable minimum wage. If that employee works several additional hours during a particularly busy week but receives exactly the same pay because the extra hours have been added to a TOIL balance, those additional hours can reduce their average hourly rate for that period.
If the resulting rate falls below the statutory minimum, the employer may have underpaid National Minimum Wage even though the employee has been promised paid time away from work several weeks later. Allowing the employee to take that time later does not automatically correct an underpayment that has already arisen within the earlier pay reference period.
The closer an employee's normal hourly rate is to National Minimum Wage, the less room there is for additional unpaid working time before a compliance problem potentially arises.
Salaried Employees Require a Different Calculation
The position can become more complicated where employees receive an annual salary rather than straightforward hourly pay. A salaried hours worker is generally paid an annual salary in return for a set number of basic annual hours, and under the relevant National Minimum Wage rules those basic hours are normally treated as being worked evenly across the worker's pay reference periods.
That does not mean employers can ignore the employee's actual working time. Employers still need appropriate records and should monitor additional hours because unpaid working time can become important when determining whether the employee has exceeded their basic annual hours during the relevant calculation year.
Once the worker's total relevant hours exceed their contracted basic annual hours, additional National Minimum Wage calculations may be required. Regular early starts, late finishes, additional work outside normal hours and other unpaid working time can therefore become significant, particularly where the employee's salary does not leave a substantial margin above the statutory minimum.
Employers should also be careful about assuming that somebody automatically falls within the salaried hours rules simply because their contract describes them as salaried. The working arrangement must genuinely satisfy the legal requirements for salaried hours work, and the wording used within the employment contract does not determine the position by itself.
A salary that initially appears comfortably above National Minimum Wage can therefore require much closer examination once the employee's contractual hours, actual working time and any additional unpaid hours are taken into account.
TOIL Can Still Be a Useful Arrangement When It Is Managed Properly
There is nothing inherently unlawful about allowing employees to take time off in lieu, and a properly managed TOIL arrangement can provide useful flexibility for both the employer and the employee. The compliance risk arises when the way additional hours are worked and recorded causes the worker's pay to fall below National Minimum Wage for the hours that need to be included in the relevant calculation.
This becomes particularly important where employees receive the statutory minimum or only a relatively small amount above it. Every additional unpaid hour reduces the margin between the employee's effective hourly rate and the minimum they are legally entitled to receive, which means a TOIL arrangement that creates little concern for a higher paid employee could produce a very different result for somebody whose pay sits close to the statutory threshold.
The important issue is therefore not simply whether TOIL is permitted, but whether the business understands how the arrangement interacts with pay, working time and the employee's particular National Minimum Wage category.
Employers Need to Know What Hours Are Actually Being Worked
Businesses that use banked hours or TOIL should make sure the arrangements are clearly documented and that managers understand when employees can work additional hours and how those hours should be recorded. Relying solely on contracted hours or planned rotas may not provide an accurate picture if employees regularly start early, finish late or complete additional work that is subsequently added to a TOIL balance.
Payroll and HR records should allow the employer to compare actual working time with the pay counted for National Minimum Wage purposes within the correct pay reference periods. Particular attention should be given to employees whose pay sits close to the statutory minimum because even a relatively small amount of additional unpaid working time could potentially result in an underpayment.
Employers should also consider whether sensible controls are needed around how many hours an employee can bank, how quickly those hours should be taken as TOIL and whether additional working time requires approval in advance. These controls can help prevent large balances from accumulating while also giving managers better visibility of the hours people are actually working.
Simply stating within an employment contract that overtime will be unpaid does not remove the employer's obligation to ensure that the worker receives at least National Minimum Wage for the relevant hours.
Banked Hours Are Only One Part of the Minimum Wage Calculation
TOIL should not be considered in isolation because working additional hours is only one of the factors that can affect National Minimum Wage compliance. Certain deductions from wages, payments connected with uniforms or equipment, salary sacrifice arrangements and other employment related costs can also reduce the amount of pay that counts for minimum wage purposes.
An employee may therefore appear to be comfortably above National Minimum Wage when the employer looks only at their headline salary or standard hourly rate, while the position becomes considerably tighter once actual working hours and relevant deductions are taken into account.
This is another reason why employers should avoid relying on broad assumptions about who is unlikely to create a minimum wage risk. The calculation needs to reflect the individual's actual working and pay arrangements rather than simply the figure written in their employment contract.
Regular Review Is More Effective Than Discovering a Problem Later
TOIL arrangements should not be introduced and then left to operate without oversight. Employers should regularly compare the pay that counts for National Minimum Wage purposes with the hours that need to be included in the calculation, particularly where workloads fluctuate or employees regularly work beyond their contracted hours.
Regular monitoring becomes even more important where banked hours are building up over time because this can indicate that employees are consistently working more than their normal hours. Keeping accurate records allows the employer to identify potential problems before they develop into a pattern of underpayment.
National Minimum Wage calculations can be technical, particularly when salaried hours workers are involved, and the correct treatment will depend on the circumstances of the individual arrangement. Where there is uncertainty, employers should review the relevant employment contracts, actual working time records and payroll information rather than assuming that a TOIL balance means the additional hours have already been dealt with.
The HMRC National Minimum Wage Manual and the Government's minimum wage calculation guidance remain important detailed reference points for employers assessing their arrangements. Ultimately, the key issue is not whether banked hours or TOIL are being used, but whether the employee continues to receive at least the National Minimum Wage required for the hours that count within each relevant period.
If you need help reviewing your National Minimum Wage arrangements, TOIL policies or employment contracts, visit EC Human Resources' National Minimum Wage Compliance service to find out how we can help your business stay compliant.