29th May 2025
TOIL And National Minimum Wage: What Employers Need To Know
Time Off in Lieu (TOIL) can provide valuable flexibility for both employers and employees. It allows employees who work beyond their contracted hours to take time off instead of receiving overtime pay. This arrangement can benefit employers by reducing overtime costs, while employees gain additional leave. It’s particularly advantageous in industries with seasonal fluctuations in workload, as it enables employees to maintain a consistent monthly salary even when their working hours vary throughout the year.
However, TOIL also presents legal risks, particularly when it comes to compliance with the National Minimum Wage (NMW).
TOIL and National Minimum Wage – the Compliance Risk
The National Minimum Wage (NMW) does not recognise TOIL. NMW is only calculated based on the number of hours worked and the pay received. Employers must ensure that employees are paid at least the minimum wage for every hour they work. This means employees should never be expected to work more hours than they are paid for, as doing so could result in their average hourly pay falling below the legal minimum.
National Minimum Wage compliance is based on a ‘pay period’. For weekly-paid Employees, the pay period is a week, and for monthly-paid Employees, the pay period is a month.
This can present a risk for salaried workers who work at or close to minimum wage. The risk arises when these Employees accrue TOIL in one pay period, but do not take their TOIL until another period. If their salary works out at or close to minimum wage, the Employee may technically have worked more hours than they have been paid for for the first pay period. This is considered a ‘technical breach’ of the NMW, as although over the course of a longer period, such as a year, the Employee will not have worked more hours than they have been paid for, for this pay period, they will have worked more hours than they have been paid for.
The Potential Consequences
Failing to comply with the NMW obligations can expose employers to serious risks.
An employee who believes they’ve been underpaid can report their employer to HMRC, triggering an investigation. Alternatively, and often more significantly, HMRC can initiate investigations independently, particularly in sectors with a history of non-compliance or where record-keeping is poor.
These investigations can occur without notice and may involve interviews with staff and a review of up to six years of records.
If HMRC finds a breach, Employers must repay any underpaid wages and may face a Notice of Underpayment, which includes a financial penalty of up to 200% of the arrears (up to £20,000 per employee). Employers may also be publicly named and shamed, regardless of whether the breach was accidental or has since been corrected, and regardless of the size of the organisation.
How To Avoid the Risk
Employers should start by identifying salaried Employees who work at, or close to, minimum wage. To do this, they should do the following:
- Calculate the Employee’s monthly basic hours: E.g. Shannon works 48 hours per week. Her monthly basic hours are 48 hours per week x 52 (weeks in a year) ÷ 12 (months in a year). Shannon’s monthly basic hours: 208.
- Calculate the minimum wage for the Employee for a month: Shannon is 32. The National Living Wage for over 21s is £12.21 per hour. Shannon should be paid a minimum of £2539.68 per month (£12.21 x 208 hours).
- Calculate the Employee’s monthly wage: Shannon earns £31,200 per year. Shannon’s monthly wage is £2600.
If an Employee is earning at or close to the minimum wage, their hours should be carefully monitored, as they present a National Minimum Wage compliance risk.
If employees are paid at or near the National Minimum Wage (NMW) and are required to work additional hours, such as during busy periods, employers have two main options:
- Carefully manage TOIL (Time Off in Lieu); or
- Pay for the additional hours as overtime.
If an employer chooses to continue using a TOIL system, they must ensure that it does not result in the employee’s average hourly pay falling below the NMW. To stay compliant, the employer should either:
- Restrict employees from working additional hours that would cause their average pay to dip below the NMW; or
- Ensure that any TOIL accrued is taken within the same pay reference period (e.g. if extra hours are worked in February, the corresponding time off must also be taken in February).
For many Employers, this may not be feasible. This is particularly the case for Employers who operate with seasonal demand. If Employees are required to take time back in lieu within the same pay period, this could be difficult to manage.
If this arrangement is ultimately unfeasible, Employers will be required to pay overtime for additional hours worked.
Key Takeaways
Whilst National Minimum Wage compliance can be complex, the key takeaways are as follows:
- TOIL can lead to a breach of National Minimum Wage (NMW) rules if employees work additional hours without corresponding pay in the same pay period. This is especially risky for salaried employees earning at or near the NMW threshold.
- If HMRC finds a breach, employers may be required to:
- Repay underpaid wages going back up to six years;
- Pay a financial penalty of up to 200% of the arrears (capped at £20,000 per employee); and/or
- Face public naming and shaming, even for accidental breaches or small businesses.
- To minimise the risk, Employers should:
- Identify employees close to the NMW and monitor their hours closely;
- Ensure TOIL is taken within the same pay reference period it is earned;
- Where this isn’t feasible, pay overtime instead of offering TOIL; and
- Keep accurate records of hours worked and TOIL taken.
As always, if you require any further information about this, please speak to our employment law team.
