On 1 April 2016, the Government introduced the National Living Wage (NLW). The NLW is a compulsory minimum wage for all staff of 25 years of age and over. Its introduction means that the hourly minimum wage entitlement for this age group rises from the National Minimum Wage (NMW) of £6.70 an hour to the NLW rate of £7.20 an hour. The NMW continues to apply to those aged 24 and under.
National Living Wage vs the Living Wage
The introduction of the NLW is part of the Government’s plan to “move towards a higher wage economy”. The rate of £7.20 an hour is based on 55% of median earnings and the Government’s ambition is that the NLW should continue to increase to reach at least 60% of median earnings by 2020, subject to sustained economic growth. On this basis, the NLW may be worth roughly £9 an hour by 2020.
However, the NLW is different to the actual Living Wage, promoted by the Living Wage Foundation http://www.livingwage.org.uk/what-living-wage.
The Living Wage is an hourly rate set independently and updated annually which employers can choose to pay on a voluntary basis. It is calculated according to the basic cost of living in the UK, which is currently £9.40 an hour in London and £8.25 an hour for the rest of the UK.
There are employer penalties for non-compliance with the NLW in place – these mirror the penalties for failure to comply with the NMW. Penalties can be up to 200% of the money owed, with a maximum penalty of £20,000 per worker, and directors of the employing company can be disqualified for up to 15 years. There is also a ‘naming and shaming’ scheme in place which may result in reputational damage for companies who are reported to have breached their NLW obligations.
The Department for Business, Innovation and Skills has issued guidance on compliance and a new enforcement team has been set up at HM Revenue and Customs to pursue criminal prosecutions.
Impact on employers
According to the Chancellor, the Office for Budget Responsibility has assessed the impact on businesses and concluded that it will be equivalent to 1% of their profits by 2020, which he considers fair. However, the OBR also anticipates that the NLW is expected to result in 60,000 job losses and reduce hours worked by four million a week.
The British Retail Consortium has claimed that as many as 900,000 jobs could be lost in the sector, as a result of both the NLW and the apprenticeship levy.
Some industries, such as cleaning, hospitality and care might struggle to meet the increased wage bill without restricting new hires and potentially having to make redundancies.
Employers proposing 20 or more redundancies at one establishment within a 90-day period are required to put into place procedures for collective consultation and to notify the Secretary of State.
Changes to terms and conditions
Employers who do not make redundancies might instead seek to cut the bonuses and benefits of workers in a bid to recoup the cost of additional basic pay.
It is reported that B&Q, for example, had planned to cut its bonus scheme, worth 6% of salary, reduce hourly rates for working on Sundays and bank holidays and cut back on territorial allowances for workers in certain areas. Wilko also announced it would no longer provide premiums for working Sundays and bank holidays and Caffe Nero are reportedly no longer offering staff a free lunch during their shift.
Whilst employers usually have discretion to vary non-contractual employee benefits, employers who unilaterally vary an employee’s contractual terms risk claims of breach of contract and unfair dismissal. In addition, employee collective consultation obligations may be triggered by the proposed changes and any proposal as a result to dismiss 20 or more employees.
An alternative that businesses might consider is to seek to recoup the additional cost from customers and consumers by increasing prices. However, this option may be particularly unattractive in competitive sectors with low profit margins and unachievable for public sector providers.
Some employers may also seek to reduce reliance on agency workers who are paid above NLW or consider engaging self-employed contractors who are not entitled to the NLW. However, there are legal implications associated with making such workforce adjustments.
Employers should be wary of seeking to avoid the NLW by recruiting younger employees to whom they are only obliged to pay the NMW. This would constitute discrimination on the grounds of age against those who are 25 and over. Such discrimination is a particular risk within the retail, hospitality and catering sectors that routinely recruit staff without the need for particular skills or qualifications and pay them the NMW.
There are a number of options for employers seeking to minimise the financial impact of the NLW but employers should think carefully and take advice before making changes to their workforce and/or working practices in an effort to reduce cost.