Equal Pay and the National Minimum Wage

For some time now, the NMW and Equal Pay obligations have been quite separate concerns for organisations. In recent years, however, there have been two key trends which we believe are set to change the conversation:

1. Equal Pay claims are no longer a primarily public sector concern, with a wave of very public cases in large corporations making the news as they move through the courts
2. NMW rates have increased at a much faster rate in the last few years than they had been doing for the two decades prior to the coronavirus pandemic, including the rate for workers 21 and above referred to as National Living Wage or NLW

?Reward Heads’ Consulting Manager,?James Du Val?has some advice.

Equal Pay

Let’s start with a bit of context around Equal Pay.

All employers in the UK have an obligation to provide male and female staff with ‘equal pay’ for ‘equal work’, under the Equality Act 2010 (we’ll refer to this as the Equality Act). There are three kinds of ‘equal work’ defined under the Equality Act, and for most purposes this will include any employees in the same Level or Grade in any pay framework in place; not just those employees doing exactly the same role.

There can be allowable differences in pay for employees doing ‘equal work’, known as ‘material factors’, which can include individual skills and performance and external market forces. There needs to be a careful balance and well evidenced processes in place to justify any significant differences, however, in the context of the overriding need to provide fair and equitable pay rates.

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If organisations do not meet their obligations in this regard, there are serious consequences; not only reputational, but also financial. Should an Equal Pay claim be successfully brought against you at tribunal, you could be liable for up to 6 years of backpay for underpaid employees. There are well-documented examples of this bill running into hundreds of millions!

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It is also important to remember that, although the wording of the ‘equal pay’ provisions in the Equality Act focus on gender, the same legislation also protected against discrimination based on eight further protected characteristics including Age, Disability and Race. In this context, discrimination includes unjustifiable differences in pay and other terms of employment, so we would always recommend analysing your pay differentials on all characteristics (provided you have the data), not just gender.

National Minimum Wage

All employers are also required to follow the provisions of the National Minimum Wage Act 1998 and its subsequent amendments (we’ll call this the NMW Act). The NMW Act provides a minimum hourly rate of pay for apprentices, a National Minimum Wage (or NMW) for all those of school leaving age – currently divided into three age groups and apprentices – and finally a National Living Wage (or NLW) for those aged 21 and over.

Unfortunately, meeting your obligations under the NMW Act is not as simple as paying all employees at the relevant hourly rate specified by the legislation, and there is a huge amount of complexity which can (and does!) cause headaches for many organisations. For the purposes of this article, however, we will focus purely on the rates as they are written.

The prevailing rates can always be found at?gov.uk?here, and in this article we will be focusing on the NLW rate which from April 2024 is ￡11.44 for all employees aged 21 and over. In our experience, the lower age-related rates are not used by many large businesses; Reward Heads has just carried out a survey across Retail and Hospitality and found only 24% were using age-related pay.

How has the National Living Wage changed over time?

The April 2024 and April 2023 NLW rates were each nearly 10% increases on the previous year (9.8% and 9.7% respectively), and apart from a dip in April 2021 – where the increase was only 2.2% - we have seen the NLW increase by an average of 6.9% annually since 2019/2020.

Although any employees on or very close to the NLW will have seen their pay rise by the same amount in this time period, the trend has not carried over into pay awards for the wider working population in the UK. This year many data providers and consultancy firms are predicting between a 4% and 5% average pay award for 2024, which will be roughly the same or slightly lower than the awards that were typically given last year.

What does this mean for Equal Pay?

The rapid rise in NLW rates, alongside a slower increase to wages for other employees, will result in a number of challenges:

1. Compression of pay rates where previously there was a pay range or step points for progression in entry-level roles; for example, where an organisation has three levels of retail assistants’ pay based on their knowledge and skills, in recent years the pace of NLW increase may have resulted in all three being paid at the same rate with no differentiation
2. Similarly, compression of pay rates between multiple entry-level roles paid differently due to external market conditions, perhaps due to the field in which they work or the location that their role is based (most commonly, London compared to other regions)
3. Erosion of the pay differential between roles typically paid at or around the NLW, and more senior roles such as specialists and team leaders/supervisors

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The second challenge is less likely to present an equal pay challenge, though organisations will certainly need to consider their ability to recruit and retain employees in high-cost fields or regions where their rates of pay no longer command a premium over less market sensitive roles.

Where individuals are in distinct roles with clear differences in levels of responsibility and knowledge or skills required to do the job, however (number 3 above), a much clearer equal pay risk emerges alongside the recruitment and retention issues.

The legislation expects employees performing ‘equal work’ to receive ‘equal pay’, but there is an inference here whereby those performing work requiring higher levels of skill, knowledge and responsibility – such as a supervisor or specialist compared to an entry-level role – there should not be ‘equal pay’ but rather a sensible differentiation to recognise the different levels of work.

In many pay frameworks, supervisors or specialists would be in a different level or grade than their direct reports, and if their pay differential has been significantly reduced or removed entirely by NLW increases, these employees may be able to claim unfair treatment under the Equality Act as a result.

Similarly, where there was previously pay differentiation based on knowledge and skills (number 1 above), there should have been justification for this as a ‘material factor’ under the Equality Act. If pay rates have been compressed by NLW/NMW rises, however, we are left with a situation where there is a robust process and evidence to justify differences in pay between individuals in a given role, but no such differentiation is being offered. Employees who used to be paid on a higher pay point, or higher within the range for the role, may therefore also be able to claim they are being unfairly treated as a result of this change.

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In both examples, employers would be advised to consider taking action to maintain some form of pay differential where this are necessary and justifiable, recognising of course that this comes at a cost and needs to be balanced against affordability and sustainability for the organisation.

How we can help

At Reward Heads we have the knowledge and skills you need, and are very happy to support clients in the complex areas of Equal Pay compliance and broader obligations around National Minimum Wage, as well as – this year in particular! – how these can interact and cause particular risks and issues.

We would love to help you. Please contact our team at?[email protected]

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