Present Position
When it introduced
the minimum wage in 1999, the Government wanted to apply the minimum wage to
output workers, i.e. those paid by the piece produced or task performed, who
often had no time limits on their work and operated without employer
supervision. The Government decided to enable employers and workers to enter
into ‘fair estimate’ agreements, under
which employers must set a fair estimate of the hours needed to complete each
block of work, and the minimum wage must be paid for the hours actually worked
up to the limit set in the estimate. The estimate will not be ‘fair’ if it is
less than four-fifths of the time that an average worker would take to do the
same amount of work in the same conditions.
If no
fair estimate agreement is in place, then output workers
must be
paid the minimum wage for all hours actually worked. The current Regulations
24, 25 and 26 of the National Minimum Wage Regulations 1999 set out the position
in detail.
The Government and the Low
Pay Commission have received representations from both employers and homeworker
representatives arguing that these agreements were not working well. In
February 2003 we therefore consulted on replacing ‘fair estimate’ agreements
with a system which would enable the setting of ‘fair piece rates’.
Responses from all sides supported a move to fair piece rates and the removal of
the four-fifths rule.
The Government in November
2003 further consulted on the draft regulations designed to introduce a system
which would enable the setting of fair piece rates. Once the consultation had
finished, the Government confirmed that employers would no longer be allowed to
set the rate of pay using four fifths of the time that it takes an average
worker to complete a set block of work (part of the present ‘fair estimate’
agreement system).
Summary
From October 2004
employers will have to pay their output workers the minimum wage for every hour
they work or, in effect, a fair piece rate derived from the time that a
worker working at the average speed would have taken to produce the piece in
question or perform the the type of task in question.
The crux of the new “rated
output work” system is that the time taken by a worker of the employer in
producing a certain number of pieces (or performing a certain number of tasks)
of a certain type is deemed to be the same amount of time that a worker of the
employer working at the mean speed would have taken to produce the same number
of pieces (or perform the same number of tasks) of that type. From this concept,
“fair piece rates”, based on the hourly rate of the national minimum wage, are
derived.
For example, from 1 October
2004, when the adult rate of the minimum wage will go up to £4.85, if the
output worker of an employer working at the mean speed produces 10 items of a
certain type of piece in an hour, the fair piece rate for that item will be 48.5
pence. 10 times 48.5 pence = £4.85.
From April 2005, the time
taken by a worker of the employer in producing a certain number of pieces (or
performing a certain number of tasks) of a certain type is deemed to be 120% of
the amount of time that a worker of the employer working at the mean speed would
have taken to produce the same output. This follows through into a raising of
the rates derived from this deemed time worked concept. Using the example above,
if the output worker of an employer working at the mean speed produces 10 items
of a certain type of piece in an hour, the fair piece rate for that item will be
58.2 pence (120% of the rate of 48.5 pence).
Setting the deemed time worked at the initial
level of 100% will mean that slower than average workers will earn less than the
minimum wage and that faster than average ones will earn more. Moving, in
April 2005, to a deemed time worked of 120% of the time taken by the worker who
works at the mean speed will mean that most output workers producing the piece
or performing the task in question will earn the minimum wage.
Removal of the four-fifths rule will mean
employers will not be allowed to pay their workers 80% of the minimum wage.
For the new system of
“rated output work” to apply each worker must be given a written notice
containing certain prescribed information including the rate to be paid the
worker for the piece or task in question; an explanation of how the employer has
determined such rate; and the number of the minimum wage helpline. The
regulations were approved by Parliament in March 2004.
What follows is draft
guidance on the new Regulations (The National Minimum Regulations 1999
(Amendment) Regulations 2004) which guidance we expect to finalise in May.
Comments are welcome but must be received by the end of April 2004. They can be
sent to
Mike.O’Donnell@dti.gsi.gov.uk
What is output work?
For the purposes of the minimum wage ‘output
work’ has a precise meaning which is defined in Regulation 5 of the 1999
Regulations. Briefly, it is work that is paid wholly by reference to the number
of pieces made or processed by the worker, or to some other measure of output
such as the number of transactions completed by the worker.
Output work can cover a
range of tasks, from packing envelopes or cutting cloth to door-to-door
newspaper distribution (where payment is by number of deliveries). Output work
is often done at home, but equally can done at the employers’ premises.
What is a homeworker?
Homeworkers are people who
work for an employer but do not work at the employers’ premises. They are
entitled to the minimum wage, but are often paid according to a piece or output
rate and in those circumstances will be output workers for the purpose of the
Regulations.
The Regulations: The National Minimum
Regulations 1999 (Amendment) Regulations 2004
This guidance summarises in simple terms how they are intended to work.
Regulation 1
Provides for
the new “rated output work” system to come into force on 1 October 2004. This
will give affected employers sufficient time to prepare and plan for the
changes.
Regulation 2
Amends the principal
regulations ie. The National Minimum Wage Regulations 1999 by substituting new
Regulations 24, 25, 26 and 26A.
Regulation 3
Has the effect that, from 6
April 2005, most output workers of an employer , including those who work a
little slower than the speed of the worker working at the mean speed (what the
Regulations term the “mean hourly output rate”), will be entitled to the minimum
wage. .
Regulation 4
Contains transitional
provisions, but also provides that tests or estimates of the average speed,
which comply, with the requirements of these Regulations are valid
notwithstanding that they predate the coming into force of the Regulations.
Output Work (New Regulation 24)
Regulation 24 (1) provides
that output workers should be paid either according to the new fair piece rate
system - called rated output work - or the minimum wage for all hours
actually worked.
If the employer has not met
all of the conditions attached to rated output work, including
issuing each worker with a notice setting out prescribed information, then the
employer must pay each worker for every hour that they work.
Rated Output work: conditions and notice
(New Regulation 25)
For
a system of rated output work to apply, a number of conditions must be
met. It must be the case that:
a)
the employer does not control the hours that a
worker works i.e. his starting or finishing time, or the length of time spent
producing the items of work;
b) the
employer has determined the “mean hourly output” rate in relation to the type of
piece or type of task in question (the average number of pieces produced in
an hour or the average number of tasks performed in an hour by workers of the
employer who produce that piece or perform that task) in accordance with
the Regulations; and
c)
as stated
above, the worker must have been given a written notice containing specified
information before the start of the relevant pay reference period (the period
for which he or she is normally paid).:
Written notice:
(Regulation 25 (2))
The notice
must:-
-
be issued before the start of the
pay reference period. But if the terms of the notice have not changed, there
is no need for a new notice before every pay reference period;
-
state that the employer has
completed a test or estimated the average speed at which the piece/task in
question can be produced/performed;
-
state what the “mean hourly output
rate” has been determined to be;
-
state that, for the purposes of
securing compliance with the national minimum wage legislation, the worker
will be treated as working for the period of time that it would have taken him
– working at “the mean hourly output rate” – to produce the number of pieces
made or perform the number of tasks performed;
-
State the rate or sum to be paid
to the worker for the production of the piece or performance of the task in
question; and
- give the
telephone number of one of the national minimum wage helplines.
The DTI will work with employer
and output workers’ representatives to develop a model notice which will be
included as an Annex in the final guidance.
It is important to repeat
that if a worker is not provided with a written notice that complies with the
conditions outlined above, the worker has to be paid for each hour they work.
All homeworkers may therefore wish to record the number of hours they work, if
they do not already do so.
Rated output work: determination
of hours worked (New Regulation 26)
To determine whether the
worker has been paid the minimum wage, you must calculate the number of hours
that the worker is deemed to have worked. The time taken by a worker of an
employer in producing a certain number of pieces (or performing a certain number
of tasks) of a certain type is deemed to be the same amount of time that a
worker of the employer working at “the mean hourly output rate” would have taken
to produce the same number of pieces or perform the same number of tasks. It is
from this concept that “fair piece rates are derived”. For example, if the mean
hourly output rate is two pieces per hour and a worker makes twenty pieces, he
will be treated as having worked for 10 hours (regardless of how many hours it
actually took him). If for this deemed 10 hours of work the worker has been paid
at least £45 (ie. the national minimum wage hourly rate of £4.50 multiplied by
10), we know that the legislation has been complied with. This will mean that
the minimum piece rate for the item produced – the fair piece rate for the item
that the employer must set and include in his notice to the worker – would have
to be at least £2.25 (ie. £45 divided by 20).
Rated output work; determining
the mean hourly output (New Regulation 26A)
This Regulation deals with
how the employer determines the “mean hourly output rate” i.e. the average
number of pieces of a certain type produced in an hour by workers of the
employer who produce that piece, or the average number of tasks of a certain
type performed in an hour by workers of the employer who perform that task. The
Regulations allow employers to determine the mean hourly output either by
carrying out a test of speed at which his workers work or (under certain
circumstances) by estimating the mean speed.
a) Conducting a
satisfactory test (New Regulation 26A (1,2))
An employer can carry out a
test of all his workers making a particular piece or performing a particular
task. To calculate the mean hourly output, he then simply divides the total
number of pieces/tasks produced/performed in an hour by the total number of
workers tested.
Alternatively, the employer
can test a sample of his workers. In this case the sample must be
representative in the terms of the speed at which they work. In both cases the
test is only satisfactory if it is conducted in circumstances similar to those
in which the workers actually work.
It is clearly vital that
any sample of workers is representative.
It would not be fair for an
employer to choose a sample of his fastest workers or indeed a mixture of
average to fast workers. If a worker were to make a complaint against a company
that the average number of subject pieces that could be produced was set
unfairly, or the Inland Revenue were to make a targeted inspection visit (which
they have the powers to do), the employer would have to be able to show that
the test was set fairly.
As
mentioned above it is also vital that the test is conducted in circumstances
similar to those in which the workers actually work.
It would clearly not be fair to
conduct the test, for example, with better equipment available to the workers,
or with components that have already been unpacked (if unpacking them is, in
practice, part of the job).
It is
important that employers take these requirements seriously. If
the matter were to end up in the Courts the onus would
then be on the employer, under the provisions of the National Minimum Wage Act
1998, to prove that he has complied with his obligations to pay the minimum
wage.
b) Making a satisfactory estimate (Regulation 26 A (3,4))
The
Regulations also allow an employer to estimate the mean hourly output rate in
two ways. First, an estimate may be made where an employer has already tested to
determine the mean hourly output (in accordance with these regulations) for
another piece which is reasonably similar to the one in question.
The employer may then make a fair adjustment to the mean hourly output
for the other piece to take account of the increased or decreased time
needed to produce the item in question. If this approach is adopted we
recommend that the employer should monitor a sample of workers afterwards to
validate the estimate.
An employer
may also make a fair adjustment to the mean hourly output rate where this has
already been tested for the same piece made in different working
circumstances. The thinking here is that this method could be used to set
the rates for a factory worker and homeworkers making the same piece.
It should go without saying that the original tests must have
been conducted fairly in accordance with Regulation 26A(1) and any adjustments
made in making the estimates must be reasonable.
If for
example an employer wishes to compare homeworkers with factory workers, the
employer should be able to show how adjustments have been made if there are
tools that are not comparable or the homeworker does tasks which the factory
worker does not, such as unpacking materials. If factory workers are paid under
a different system to the homeworkers, then that may also be a factor that
should be taken into account.
As
mentioned above, if the matter were to end up
in the Courts the onus would be on the employer to prove that he has complied
with the obligation to pay the minimum wage, under the provisions of the
National Minimum Wage Act 1998.
Any
comments on this draft guidance should be sent to Mike O’Donnell at the address
below or to
Mike.O’Donnell@dti.gsi.gov.uk by the end of April 2004
Mike
O’Donnell
Employment Relations Directorate
DTI
UG 66
1 Victoria Street
London
SW1H 0ET
April 2004
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