Julian Hoskins and Nicola Stibbs brief employers on the hidden complexities of the new 'National Living Wage' and set out practical steps to take now.
Not to be confused with the 'living wage' (which is a higher proposed minimum rate of pay, promoted by The Living Wage Foundation), the National Living Wage (NLW) will be a premium, added to the National Minimum Wage (NMW) and paid by reference to NMW rates.
The NMW will remain in force and will continue to be payable. The first NLW premium will be set at 50p, which will bring the total NLW to £7.20.
Recent press headlines have featured the dramatic figure of £9 per hour – but this will only apply following several incremental increases over the next five years, with the expectation that the NLW will rise to around £9, i.e. 60% of median earnings, by 2020.
The NLW will only apply to workers over the age of 25. The NMW will continue to apply to workers under the age of 25.
It has been reported that some large retailers, including Ikea and Lidl, have committed to paying staff more than the NLW and will, instead, adopt the 'living wage', recommended by the Living Wage Foundation.
Currently, HMRC is responsible for enforcing the NMW and they will do the same for the NLW. Similarly to breaches of the NMW, failure to comply with the NLW will attract civil and criminal penalties. Employers who fail to pay the NLW may also risk breaching contracts with commissioners, and expose themselves to serious reputational risk through 'naming and shaming' provisions.
Last month, the government announced a package of measures to strengthen enforcement of the NMW and the NLW, including doubling the penalties for non-payment of the NMW and NLW, from 100% of arrears to 200% of arrears (but halved if paid within 14 days). The overall maximum penalty of £20,000 per worker will remain unchanged.
It is expected the NLW will be introduced from April 2016. The NLW will form part of the remit of the Low Pay Commission, which will make annual rate recommendations (in the same way that it makes recommendations for changes to the NMW). Although the introduction of this change is still some months away, it would be prudent to start taking steps to prepare now.
- As ever, the devil will be in the detail when this change takes effect. A particular concern for employers will be identifying which particular elements of pay 'count' towards calculating the NLW. At present, not all elements of pay can be included when calculating whether a worker is receiving the NMW: for example, earnings from working overtime or unsocial hours can be included, but only at the basic rate. However, additional payments which are linked to a worker's individual performance, can be counted – such as incentive or bonus payments. These calculations will continue to be important after next April, because the NLW premium will be paid by reference to the NMW.
- Employers need to review current payroll arrangements now, and analyse the likely impact of the living wage premium. When undertaking this exercise, it will be important for employers to not only consider how the NLW will impact on basic hourly rates, but also the knock-on effect of the augmented hourly rate. For example, what impact will the starting premium of 50p have on allowances and payments which are based on workers' minimum pay? These rates may increase in parallel with new NLW rates and may impact on wages budgets.
- Unforeseen complexities may arise if you attempt to make cost savings by decreasing one element of a workers' pay but then offset that loss with an increase in a different type of payment. Case law has suggested that this may still amount to an unlawful deduction from wages, even if the worker in question is not worse off overall.
- Many employers will be concerned that the new NLW premium will automatically result in a higher wage bill. However, this does not necessarily have to be the case. With some astute planning and restructuring, properly implemented, it may be possible to re-organise elements of your employees' pay, so that you comply with the NLW but keep your overall costs at their existing level. However, that brings us to the next important point…
- Timing. If you need to make changes in order to minimise the impact of the introduction of the NLW, you need to get the ball rolling now. Even if you have the contractual flexibility to make the changes required, you need to build in time to allow for careful management of the process, in consultation with staff. Ultimately, if agreement cannot be reached and you need to enter into a dismissal and re-engagement process, then remember that statutory collective consultation obligations, including minimum consultation timescales, may bite.
Please do not hesitate to contact us, or your usual Bevan Brittan contact, if you would like us to advise you on the options for your organisation ahead of the introduction of the NLW, such as:
- reviewing your staff's pay packages
- consolidation of separate pay elements and any enhancements so that they can be brought within NLW pay calculations
- safely implementing changes to remuneration packages
- advising on compliance.
We can also provide briefing sessions to your HR, payroll and management teams, as well as step-by-step guides for implementing any changes required.