Stuart Chamberlain, author and employment law specialist, examines the NLW and its potential consequences and offers some advice to employers in preparing for its implementation on 1 April 2016.

The Government has consistently expressed its objective of moving from a low wage, high tax, high welfare society to a higher wage, lower tax and lower welfare society. In his July 2015 Budget, George Osborne, the Chancellor of the Exchequer, announced that a new mandatory National Living Wage (NLW) of £7.20 per hour would be introduced in April 2016 for all working people aged 25 and over. The Government believes that the new wage will reduce reliance on the state topping up wages through the benefits system.

What exactly is the National Living Wage?

The NLW is essentially a mandatory increase in the National Minimum Wage (NMW) for eligible workers. The NMW currently stands at £6.70 per hour for workers aged 25 and over.

The National Minimum (Amendment) Regulations 2016, which come into force on 1 April 2016, amends the National Minimum Wage Act 1998 and the 2015 Regulations to introduce a single hourly rate of £7.20 for all workers aged 25 and over.

From 1 April 2016, therefore, workers aged 25 and over will get a “premium” of 50p to bring the hourly rate of the new NLW to £7.20. The Government’s intention is to raise the threshold each year with the aim of reaching 60% of median pay across the UK by 2020, when the NLW could be as high as £9.35 an hour. The Office of Budget Responsibility (OBR) estimates that a full-time NLW worker will earn over £4800 more from 2020 from the NLW in cash terms.

The NLW rate will change every year on 1 April. The NMW rates change on 1 October of every year.

The Low Pay Commission (LPC), which has been responsible for recommending the levels for the NMW, has had its remit broadened for the NLW.

The National Minimum Wage and the National Living Wage

The NMW will continue to apply for those workers aged under 25 and those in the first year of their apprenticeship. The current rates for the NMW are as follows.

  • Adult rate — workers aged 21 and over: £6.70. (When the NMW comes into effect on 1 April 2016 workers aged 25 and over will be entitled to receive at least £7.20 per hour).

  • Workers aged 18—20 year olds: £5.30 per hour.

  • Workers aged 16—17 year olds: £3.87 per hour.

  • Apprentices: £3.30 an hour (this applies to apprentices aged 16–18 and those aged 19 years and over who are in their first year; all other apprentices are entitled to the rate for their age).

The Government believes that the lower wage must apply to younger people to enable them to secure work and gain experience.

Who is eligible for the NLW?

Most UK workers (and not just employees) aged 25 and over will be legally entitled to be paid at least the NLW. This includes agency workers, casual workers, part-time workers, pieceworkers, homeworkers and anyone working on commission.

Those not entitled include the self-employed, volunteers, students on work experience, people on certain training schemes, some company directors, workers living in an employer's household, residents of certain religious communities, prisoners, the armed forces and share fishermen.

What is the difference between the NLW and the Living Wage?

The names are similar, but they are quite different things. Whereas the NLW is a statutory entitlement, its rate effectively set by the Government, the voluntary Living Wage is maintained by the campaign group, the Living Wage Foundation.

The Living Wage is an independent rate calculated annually by the Centre for Research in Social Policy at Loughborough University for the UK as a whole. In London, where the cost of living is higher, the rate is set by the Greater London Authority.

The Living Wage rate is currently £8.25 per hour and £9.40 in London. More than 1500 employers voluntarily choose to pay the Living Wage.

How will the NLW be enforced?

The Government has announced a package of measures to ensure people receive the NLW. These measures include the following.

  • A financial penalty of up to 200% of the unpaid wages (capped at £20,000). This will be halved if this penalty is paid within 14 days.

  • The establishment of a new team of compliance officers in HMRC (which currently enforces the NMW on behalf of the Department for Business, Innovation and Skills) to investigate those employers who deliberately do not comply with the NLW. This team will have the power to use all available sanctions, including penalties, criminal prosecutions and “naming and shaming” exploitative employers.

  • Anyone found guilty will be considered for disqualification from being a company director for up to 15 years.

What could be the potential legal problems for employers?

NLW is mandatory

There is no escape for employers from the NLW: they are compelled to implement a mandatory pay rise for eligible employees. There is no small business exemption.

Nor will workers be able to waive their right to the “premium” or contractually consent to receive other benefits — such as additional holiday or bonuses — in lieu of the minimum level of the NLW.

Rise in costs and job losses

This is likely to result in a rise in costs for more than half of UK employers, particularly in sectors that are labour-intensive, such as retail and the hospitality trade (particularly pubs and restaurants). There will also be a “knock-on” effect on pension contributions and more staff may need to be auto-enrolled to occupational pensions as a result of their higher rate of pay. National insurance contributions will also increase and more staff may become entitled to statutory payments such as maternity and paternity pay.

Data from the Centre for Retail Research has forecast a large increase in retailers’ costs as a result of extra pay, national insurance and pensions, the cutting of jobs and hours and the possible closure of over 6000 stores in the period up to 2020.

There will be job losses. Indeed, the OBR forecasts that the implementation of the NLW could result in 60,000 job losses.

The Federation of Small Businesses says that its research indicates that 38% of small businesses expect the introduction of the NLW to “negatively impact” their business, increasing to 54% when the rate reaches an hourly rate of £9 in 2020.

Effect on other workers

Higher paid workers may be concerned about reducing pay differentials and, in line with the “premium” on 1 April 2016, may expect to see proportionate rises in their own salary.

Dangers of age discrimination claims

The introduction of the NLW may have an impact on an organisation’s present pay scales and erode pay differentials. This has the potential to affect employee relations. The employer could face contractual claims over failure to pay discretionary payments, such as overtime and bonuses.

As a result of a substantial hike in the wages bill, there may be a consequent pressure for the employer to start cost-cutting and reduce the level of current and future recruitment. Employers intending to reduce the headcount by making older employees redundant and only recruiting workers aged under 25 years of age should be aware of potential dangers of claims of direct age discrimination. Cost alone would be unlikely to be an effective legal defence against such claims.

It is also automatically unfair to dismiss or select an employee for redundancy because the employee qualifies for the minimum wage.

Tips for employers

The announcement of the NLW came as a bombshell to many employers. Some employers may still not be ready for the required increase in wages, but the following tips could be helpful.

  • Remember that there is no choice: if the worker is eligible (ie 25 years or over) he or she has to be paid the hourly rate of £7.20 from 1 April 2016.

  • Plan and budget carefully: ideally, before 1 April 2016, the employer should undertake a costing exercise to identify eligible workers entitled to be paid the new NLW rate, calculate the financial implications for the organisation of its introduction and develop an overall strategy leading up to 2020.

  • Take appropriate payroll action and check that any staff (employee or worker) under 25 years of age is receiving the correct rate of the NMW.

  • Explain to the workforce in good time what is going to happen on 1 April 2016 and its practical implications for them. Be prepared to answer staff questions on the issues and their concerns.

  • Consider the effect of the NLW increase on the wider workforce, particularly where there are clear and intended pay differentials, and decide how to manage this.

  • If an employer intends to take a “hard-nosed” response to introduction of the NLW (and in order to minimise any possible drop in profits), he or she could consider restricting future pay increases, offering less generous pension contributions and a reduction in “perks”, such as overtime and bonuses.

  • An alternative would be to employ fewer people to do the job (initially through less recruitment), although employers might like to consider a rise in efficiency and productivity to achieve savings before resorting to cost-cutting through redundancies. Employers should also be aware of the potential legal traps in any redundancy exercise outlined in the previous section, particularly that of claims of age discrimination.

  • There may also be opportunities to rely more on technology to reduce staffing costs.

  • Of course, there may be some real and positive benefits in an organisation embracing the introduction of the NLW, leading to an increase in its reputation as a good employer, a consequent drop in absenteeism, and also to staff being less inclined to leave for another employer.

HMRC and Acas provide advice and tutorials on the NLW.

Conclusions

A substantial pay increase will come into effect in April 2016 for many workers. In its 2015 report on the NLW, the Resolution Foundation expects that 2.8 million workers will receive a direct pay rise from April 2016 and forecasts that another 3.2 million will get an indirect pay increase as employers seek to maintain the current pay differentials.

In order to soften the blow for smaller businesses, the Government has announced an increase in the current employment allowance to £3000. The Government has said that this will allow an employer to take on 4 workers aged 25 or over without any increase in overheads.

The NLW is an attempt by the Government to get to grips with the UK’s low pay problem. It is difficult to be precise about the exact effect that it will have on individual workplaces. As always, there will be winners and losers, and the impact may be radically different from sector to sector. It is certainly worth reminding readers that similar sorts of alarms were raised when the NMW was introduced in 1997.

Last reviewed 17 March 2016