In July 2015, the government announced that from April 2016 it will introduce a National Living Wage at a rate of £7.20 an hour for workers aged 25 and over. This rate will rise gradually to £9 an hour by 2020. The National Living Wage is effectively a premium on the National Minimum Wage for workers aged 25 and over, and the National Minimum Wage will otherwise remain in place. This week’s Insight considers the requirements and application of the National Living Wage, and its potential implications for employers.

Currently, there are different National Minimum Wage rates for four different categories of worker, namely the standard adult rate, the development rate, the young workers rate, and the apprenticeship rate. By introducing a National Living Wage, the government plans to effectively introduce a fifth rate of minimum wage. Our understanding, following conversations with the Department for Business, Innovation and Skills, is that the National Living Wage will be subject to the same requirements as the National Minimum Wage, including that the rate of pay will be calculated in the same way. Employers will in each case need to identify that those assessments are being undertaken correctly.

The government’s introduction of the National Living Wage generally came as a surprise, and many employers have raised concerns about both the lack of warning and consultation. Furthermore many organisations, especially small employers and businesses in particularly competitive sectors, are concerned about the economic impact of what they may consider to amount to enforced pay rises. Sectors including the hospitality, retail and social care sectors have raised particular concerns about the potential impact which the National Living Wage may have on margins and the ability of such organisations to sustainably provide quality services. Conversely, the Living Wage Foundation has questioned whether the new rate really is a living wage at all, particularly in London where it estimates that even the 2020 rate would not be enough to live on today.

Adults below the age of 25 are specifically ineligible for the National Living Wage. The government stated in its Budget Paper that the priority for younger workers should be securing work and gaining experience. Therefore, it has restricted the National Living Wage to ‘experienced’ workers in order to prevent employers from reducing the number of opportunities available for young people to get into the job market. It remains to be seen whether the introduction of the National Living Wage will have any impact on the age profile of the labour force of organisations in particularly low wage and/or competitive sectors, as well as staffing and employment levels generally.

Of course, many organisations already pay in excess of the National Living Wage, and in those cases its introduction should have limited or no impact on their operations. For organisations which will need to increase wages in order to comply with the new National Living Wage, one advantage of the new scheme is that whilst labour costs will increase, organisations will be able to plan their staffing budgets up until 2020, on the basis that the relevant National Living Wage rates for that period have already been published (assuming of course that the legislative scheme is not changed by a subsequent government).

For organisations that do not comply with the new National Minimum and Living Wage requirements, the government has announced new enforcement measures. These include doubling the penalties for non-payment of the National Minimum and Living Wage, the establishment of a new HMRC team dedicated to pursuing the most serious cases of employers deliberately not paying those rates, and a new penalty of disqualification from being a company director for up to 15 years for the non-payment of those rates.

Posted on 18/09/2015 in Legal Updates

Back to Knowledge