HR Insights - National Living Wage

In July 2015, when the Chancellor of the Exchequer (‘Curious George’ as I like to call him ) announced that the UK Government will introduce a compulsory minimum wage premium for all staff over 25 years of age, and referred to it as the ‘National Living Wage’, the Living Wage Foundation were reportedly not too impressed. This is because he nicked their ‘living wage’ terminology for essentially what is another tier of the national minimum wage, and in fact the new requirements for employers sit within the same ‘minimum wage’ legislation.

In this article we look at the impact for employers which began this month. All employers have been affected by the introduction of the National Living Wage (NLW) since the 1 April 2016, so if you haven’t taken some action (at least to review your position) now is the time to start.

NLW is the new statutory minimum wage rate that must be paid to workers aged 25 and over. The rate of the NLW is initially set at £7.20 per hour, an increase of 50 pence per hour to the current National Minimum Wage rate of £6.70 per hour.

The National Minimum Wage will still apply to those workers aged 21 to 24 years old. There is a separate rate for apprentices who are aged under 19 or in the first 12 months of the apprenticeship (£3.30). Just to be clear the NLW is different from the ‘Living Wage’ as set by the Living Wage Foundation. The NLW is based on median earnings while the Living Wage Foundation rate is calculated according to the cost of living. 

Isn’t it Ironic (Don’t ya think?)

We have it on good authority that the Government spent £5 million pounds of taxpayer’s money to produce the advertising for the new NLW (16 models were used in a campaign splashed on buses and on billboards). £5 million! That is the equivalent of creating 331 new jobs. If ever you lapsed into a false sense that Governments spend wisely, I’d say now is the time to snap out of it.

What are the implications for Employers?

The NLW will clearly result in greater costs to a number of employers who currently have staff being paid at or around the national minimum wage in the 25+age group. Compliance for some employers could therefore mean making alternative resourcing decisions. The potential knock on effect of NLW for employers include:

• Clearly, some employers (particularly those in traditionally low pay industry such as hotels, retail and restaurants) will be faced with an increase in their overall wage bill and will need to manage the gap between pay bands.
• Increasing the 25+ group only will create natural discrepancies for some employers, e.g. where young ‘supervisors’ end up on a lower rate than their reports.
• Increase in pension contributions (more staff may need to be auto-enrolled because of the higher rate of pay.)
• A potential increase in entitlement to statutory payments such as maternity and paternity as a result of exceeding the earnings threshold.

Possible Options:

• Employers in the favourable position of being able to absorb extra cost may consider reviewing (and possibly increasing) all employee salaries (as part of an annual pay review). A total review, rather than one targeted solely at over 25’s will avoid creating discrepancies such as employees in the same job grade getting paid more or less than their colleagues. Whilst this may not be unlawful, it will certainly cause some pay structure complexities which may take a long time to undo and may possibly cause unnecessary ill feeling amongst employee colleagues.
• This, then, is an opportune moment in time to use good practice and take a more in-depth look at your reward offer overall, perhaps conducting benchmarking and /or a job evaluation exercise. A total reward approach including non financial benefits as well as pay is not only good practice, but a real differentiator for employers seeking to attract and recruit committed and skilled people.
• For those Employers who are unable to bear extra costs, this is the time to look to ways in which cost can be reduced. A redundancy exercise will not be unlawful per se, if the principle reason is that the business is no longer viable and therefore needs to cut some posts in order to contain the salary bill. It will, however, be unlawful to make age the principle selection criteria (by targeting over 25s). Although direct age discrimination [unlike other forms of discrimination] can be justified via citing a ‘legitimate aim’, it is highly unlikely the courts would accept an attempt to avoid paying the national living wage as an acceptable justification for selection.
• Others may seek to contain costs related to the National Living Wage by trimming discretionary payments such as bonuses. This may raise contractual issues. Employers would be wise to abide by contractual terms and consult on changes with the employees concerned, rather than attempting to push through without agreement. Do not rely on variation clauses to make unilateral changes which could have a detrimental impact on the employee. Employers may also seek to cut costs in other ways, such as reducing overtime (in an effort to cut the overall bill).

Some important things to be aware of…

• The penalty for non-payment where the NLW applies has doubled and will be 200% of the amount owed, unless the arrears are paid within 14 days.
• The maximum fine for non-payment will be £20,000 per worker.
• Directors may also face criminal charges and, if found guilty, may be disqualified from being a company director for 15 years.

Another pitfall related to the National Living Wage is recruitment practice if employers look to focus recruitment on people aged under 25 in an attempt to reduce costs. Again, employers could find themselves at risk of age discrimination claims. The need to reduce costs may not, on its own, amount to a legitimate aim capable of justifying indirect discrimination. Where potential employees have scored the same at interview, organisations should always look to recruit those who are best for the role and not take age into account during the recruitment process.

Important minimum steps to relating to NLW compliance:

1. Check who is eligible in your organisation and identify any in the 21-24 age group who fall below the NLW rate.
2. Take the appropriate payroll action
3. Communicate to those who are eligible about their new pay rate
4. Check that all staff are earning the right rate of the National Minimum Wage
5. If possible review salaries for anomalies. Benchmarking against similar employers and/or the market is a good exercise to carry regularly (we recommend every 2 years).