As an employer, you have a number of legal obligations when paying your workers, including making statutory and other payments, making only lawful deductions and providing an itemised pay statement.

Overview

As an employer, you have a number of legal obligations when paying your staff.

These include:

• providing workers with an itemised pay statement
• complying with national minimum wage law
• making statutory payments, eg maternity, ordinary paternity, additional paternity, adoption, sick and guarantee pay
• only making lawful deductions from wages

This guide provides an overview of your obligations, you can find detailed guidance on pay on the Acas website, or you can call the Acas helpline on 08457 47 47 47.

Registering as an employer with HMRC

If you are taking on your first employee, you must check if you need to register with HM Revenue & Customs. If you need to register, you can do so up to four weeks in advance of their first pay day. You can register as an employer on the HMRC website.

What counts as pay?

The following count as pay:

• fees
• bonuses and commission
• holiday pay
• statutory payments, eg statutory sick, maternity, ordinary paternity, additional paternity and adoption pay

Pay does not include:

• loans to the worker
• refunds for expenses
• redundancy payments
• tips paid directly to the worker
• employer contributions to a pension scheme

Paying the national minimum wage

Most workers who are above compulsory school age must be paid at least the national minimum wage (NMW).

The rate you must pay varies depending on the worker's age and whether they are an apprentice.

Issuing pay statements

As an employer you are legally obliged to give each employee a writtenitemisedpay statement, usually known as a payslip or wage slip. You must issue it at, or before, the time you pay your employee.

This right to receive an itemised pay statement does not apply to:

• people you pay who are not employees, eg freelancers and contractors
• certain other groups, including police and some people who work at sea

Content of a pay statement

An itemised pay statement must show:

• gross wages or salary before deductions
• any fixed deductions - and the reasons for taking them - or the total figure for fixed deductions when you have provided a separate standing statement of the details
• any variable deductions - and the reasons for taking them
• net wages or salary payable after deductions
• a breakdown of each part-payment - such as part by cheque, part in cash

Standing statements of fixed deductions

A pay statement does not have to include the amount and purpose of every separate fixed deduction every time. However, if you don't issue a payslip that does this, you must give the employee a standing written statement of fixed deductions at least once every 12 months.

This must state for each item deducted:

• the amount
• the intervals at which the deduction is made
• the purpose or description

You must give the employee this statement at, or before, the time of issuing any pay statement which quotes the total figure of fixed deductions.

Variations in fixed deductions

If there is any change to an employee's fixed deductions, you must give them either:

• notification in writing of the details of the change
• an amended standing statement of fixed deductions, which is then valid for up to 12 months

Statutory payments

An individual may be entitled to a statutory payment if they:

• become a parent, including through adoption
• are off work due to illness
• are laid-off

To qualify, the individual must be an employed earner, ie someone working for an employer who is liable to pay secondary Class 1 National Insurance contributions on their wages or salary.

Statutory pay for parents

To be eligible for statutory maternity, ordinary statutory paternity, additional statutory paternity or statutory adoption pay, the individual must:

• meet certain qualifying criteria relating to minimum earnings, continuous employment and - in paternity and adoption cases - their relationship with the child and the biological mother/other adoptive parent
• comply with certain notification rules

Statutory sick pay

Under certain conditions, you may have to pay statutory sick pay to an employee.

This is the minimum level of payment you must make to someone who is off work through illness. Their contract with you may also entitle them to more than this.

More information

You can call the HMRC Employer Helpline on 08457 143 143 for more information about statutory payments.

Guarantee pay entitlement

Under certain circumstances, you may have to pay your employees a guarantee payment if you cannot provide them with employment on a day when they would normally work for you under their contract of employment.

This is to compensate for the loss, through no fault of their own, of what they would have earned in normal circumstances.

Entitlement to guarantee pay

Individuals are entitled to guarantee pay if they meet the following conditions:

• they are an employee, ie they are working under a contract of employment
• they are not an excluded employee, as defined below
• they have worked for at least one month's continuing employment up to the day before the one that guarantee payment is being claimed for
• they have normal working hours and are normally required to work in accordance with their contract of employment
• the day they claim for is not a day they were on holiday, were sick or not required to work under the contract of employment
• they must not have worked at all on what would be a normal working day (a day being the 24-hour period from midnight to midnight)
• the absence of work was not caused by industrial action, involving any of your other employees or employees working for your subsidiary or parent company
• the reason they did not work is because there was a recession in the employer's business or anything else disrupts the normal working of the employer's business, for example a natural disaster or failing power supply
• they have not unreasonably refused an offer from you of suitable alternative work - this can be work other than what they normally do
• they have complied with any reasonable requirements imposed by you to ensure their services are available

Excluded employees

You do not have to pay guarantee pay to excluded employees. These are:

• an employee who works outside the UK under their contract of employment (most employees on offshore oil and gas installations in British sectors of the continental shelf are entitled to guarantee pay)
• masters and crew members involved in share fishing who are paid solely by a share in the profits or gross earnings of a fishing vessel
• members of the police service and armed forces

Calculating guarantee pay

To calculate guarantee pay, multiply the number of hours your employee would normally have worked on the day in question (as stated in their terms and conditions of employment) by their hourly rate.

Statutory guarantee pay is subject to an upper limit of £23.50 per day. This amount changes on 1 February every year. Statutory entitlement is limited to five days in any three-month period. This entitlement is reduced pro rata for employees who work fewer than five days a week.

You do not have to pay guarantee pay for voluntary overtime.

Exemptions from the statutory guarantee pay provisions

You can be granted an exemption from the statutory provisions if you have your own collective agreement. For this agreement to be valid, all parties to the agreement must be making the application for exemption, ie you and your employee, and the guarantee payment must be as favourable overall to your employees as the statutory provisions.
 
The agreement must also provide a complaints procedure that either includes a right to independent arbitration in the event of deadlock, or specify that your employee may complain to an employment tribunal - in which case the tribunal would have jurisdiction over the agreement.

You do not have to pay statutory guarantee pay on top of any contractual entitlement.

Employment protection rights

It is unlawful to dismiss an employee for seeking guarantee pay. It is also unlawful not to pay guarantee pay to an employee if they think they are entitled to it.

In both of these cases, the employee can complain to an employment tribunal.

Paying workers holiday pay

A worker is entitled to take at least 5.6 weeks'paid annual leave.

This is equivalent to, for example:

• 28 days for those who work five days a week
• 14 days for those who work 2.5 days a week

Bank and public holidays

The minimum paid annual leave entitlement includes bank and public holidays - the number of these vary across the UK.

Workers have no statutory right to take a day's leave on any bank or public holiday or to higher rates of pay if they work on such days.

You must set out in an employee's contract of employment their holiday entitlement, including arrangements for bank and public holidays, and holiday pay.

Payment in lieu of annual leave

The only time you can make a payment in lieu for any outstanding holiday is when a worker's employment ends.

Rates of pay

The rate of holiday pay is generally the normal rate for the worker. So for those workers who are paid monthly, their annual salary is divided into 12 equal payments and when they take holiday it has no effect on their pay slip.

You only have to work out a special payment where your workers have varying pay rates, such aspiece work. In those cases, the holiday pay will be equal to the average rate over the 12 weeks before the holiday.  

This only applies to the statutory holiday periods. If you offer extra leave over and above the 5.6 weeks (including bank and public holidays) the rate of pay for these can be whatever is agreed with your employees.

In reality, holiday pay, like normal pay, is dictated bymarket rates. If you offer less annual leave and lower rates of pay than your competitors, you may find it difficult to recruit and/or retain the best workers.

Rolled-up holiday pay

It's unlawful not to pay a worker while they are on holiday and instead include an amount for holiday pay in the hourly rate of pay - something known as 'rolled-up holiday pay'.

You must always pay a worker their normal pay while they are actually taking their leave.

Making deductions

You must not make deductions from a worker's pay unless:

• they are legally authorised, eg PAYE (Pay As You Earn) income tax, National Insurance contributions, deductions from earnings orders, student loan repayments
• they are allowed by the worker's contract - workers must have a copy of the relevant contractual term or a written explanation before you make the deduction
• they have agreed to the deduction in writing

You don't always have to meet these conditions, for example when:

• you make deductions to refund an overpayment of wages or expenses
• the worker is on strike
• the deduction is to satisfy a court order, eg to recover debts

Deductions for child maintenance

The Child Support Agency (CSA) may ask you to make deductions from an employee's pay for child maintenance purposes. They may issue you with a deduction from earnings order and ask you to establish a regular pattern of payments.

Deductions from the wages of retail workers

If your workers do retail work, you may make deductions from wages to recover cash shortages or stock deficiencies only if, in addition to meeting the above conditions, you:

• inform the worker, in writing, of the total shortfall you are recovering before you make the deduction
• issue a written demand on a pay day for the repayment
• make the deduction - or the first in a series - no sooner than their first pay day after telling them of the shortfall or, if you tell them on a pay day, not before that day
• do not deduct more than one tenth of the worker's gross pay on any given pay day - you can recover any remaining shortfall on future pay days
• make the first deduction within 12 months of discovering the shortage

Calculating final pay

When a worker leaves your employment, you must give them:

• any outstanding pay, including overtime
• pay in lieu for any untaken holiday
• bonus payments, if earned
• any statutory sick pay, if they are entitled to it
• pay instead of notice if they are not working their notice period
• redundancy payment, if due

If they are entitled to one, you must also pay them a statutory redundancy payment.

If the worker leaves before or during their statutory maternity, additional paternity or adoption pay period, you must also start paying - or continue to pay - them statutory maternity, additional paternity or adoption pay.

You could also give them:

• a pension refund, depending on the rules of the scheme
• a lump-sum payment as compensation for loss of their job
• an enhanced redundancy payment if you have made them redundant - this might be either contractual or paid on a discretionary, case-by-case basis

What you should deduct from a worker's final pay

You must deduct the following items from what you owe the worker:

• income tax
• relevant National Insurance contributions

You might also need to deduct, for example:

• money given for season ticket loans
• any other outstanding loans
• amounts to be paid under any car leasing agreements

Read our guide Set the right pay rates.