John Lewis had applied a pay averaging policy, which spread workers' pay evenly over the year. Workers annual pay was calculated and then paid in equal monthly instalments regardless of variations in hours worked in particular months.
Employees were paid the correct amount over the course of the year. However, the pay of those on hourly rates had sometimes dipped below the minimum wage when they worked extra hours, technically in breach of the rules.
The issue arose because the National Minimum Wage rules differentiate between workers who are salaried and workers who carry out ‘time work’ who are paid at an hourly rate.
For those paid a salary, it does not matter for the purpose of the National Minimum Wage legislation if the actual hours worked per month vary because the regulations allow for pay averaging over the course of a year
However, for time work, under the legislation the average hourly rate is calculated based on a ‘pay reference period’ of between one week and one month depending on the worker’s normal pay reference period. The pay reference period cannot be longer than one month. The worker’s pay for a particular period is divided by their hours worked during the same period, giving the average hourly rate. If this is less than the National Minimum Wage, the worker’s employer, in this case John Lewis, is in breach of the legislation.