National Living Wage - April Fool's Joke?

We have read the headlines, we have seen the TV advert, and we all know that the National Living Wage (NLW) comes into force on April Fools Day. Since the proposal was announced in the Summer Budget 2015, there has been much debate and media coverage surrounding the NLW. In a press release on 17 January 2016, Chancellor George Osborne said “The new National Living Wage is an essential part of building the higher wage, lower welfare, lower tax society that Britain needs and it’s great to see that over a million people will see their living standards boosted when this comes into force on 1st April”. But what does this all actually mean for businesses and workers?

The NLW is a compulsory minimum wage premium for workers aged 25 and over. The government has set the initial rate at 50p per hour, however all future rates shall be determined by the Low Pay Commission who will make rate recommendations in April each year in the same way that it makes recommendations for changes to the National Minimum Wage (NMW) in October each year. It is important to note that the NLW is a premium and will be paid on top of the NMW (currently ￡6.70 per hour for workers aged 21 or over). As a result, workers aged 25 and over shall be entitled to receive an hourly rate of ￡7.20 from 1 April 2016. It is estimated that this will result in an increase of ￡910 per annum for a full-time worker, 25 and over, on the current NMW. The NLW will not apply to workers aged under 25 whose hourly rate will remain at the NMW rate applicable to their age group.

To be ready for the changes, employers should identify those workers who are (or will be) 25 and over as at 1 April 2016 and ensure that they are paid in accordance with the NLW from the date the legislation comes into force. Employers should also ensure that they keep track of when an employee will turn 25 and increase their hourly rate accordingly. Likewise, employees should check their payslips to ensure that they are being paid the NLW as of 1 April 2016.

We reiterate again that the NLW is compulsory – there is no opt out or transitional period. Provided that the worker is eligible, that is they are a worker/employee and aged 25 and over, they must be paid the NLW of ￡7.20 or more per hour from 1 April 2016. If an employer already pays above this hourly rate then it will not be necessary to make any changes in order to comply with the new law. Employers should view the NLW in the same way as the NMW and not deviate from it. It shall be enforced by the HMRC in the same way as the NMW. Where an employer breaches the NLW the HMRC will investigate the breach and may penalise the employer as appropriate. Penalties include a financial penalty of up to 200% of the total underpayment (capped at ￡20,000) per underpaid worker, potential criminal proceedings, and being ‘named and shamed’ on an online government list. Therefore the implications on a business of breaching the NLW could be crippling, both financially and in terms of reputational damage.

Whilst in principle the NLW is a positive change for workers, there are likely to be a number of teething problems. For example, what happens in cases where a worker’s accommodation is offset against their wage, when they are on training time or ‘on call’? In such scenarios, how does an employer ensure that they are complying with the National Living Wage? At this early stage it will be for the government or the HMRC to provide clarity and issue guidance on these points.

Recent reports have also suggested that some employers will start cutting overtime, bonuses and/or enhanced rates for those working nights, Sundays and Bank Holidays, as a result of the NLW. In a recent article, The Independent newspaper reported that a number of large retailers who are already paying above the NLW for all staff, regardless of their age, are simultaneously cutting overtime and bonuses, or reducing the enhanced rates for night, Sunday and Bank Holiday work. This seems counterintuitive since the consequence of such action is that anything gained by workers as a result of the introduction of the NLW, is offset by the loss of overtime, bonuses and enhanced hourly rates. Thereby leaving workers no better off or in some cases resulting in less pay overall.

Another potential issue is that although the NLW would in theory boost the incomes of the low paid, some critics claim that as a result businesses could cut back on recruitment and thereby harm the job market at a time when unemployment rates are at their lowest in more than 10 years. Further on that point, it may also result in businesses recruiting more under 25s who will be on lower rates of pay than those who qualify for the NLW, resulting in an increase in unemployment rates for those aged 25 and over. However, if a business chooses to implement this strategy we would recommend that it does so with caution and after taking legal advice. Whilst on the one hand the strategy may limit the effects of the NLW, on the other hand it may result in discrimination claims which in the long run could prove far more costly.

For workers/employees, the idea behind the NLW is to be able to afford everyday things like food, transport and paying bills. This is of course all relative – for example a worker in Newcastle will have a much better standard of living on an hourly rate of ￡7.20 compared to a worker in London on the same rate. Further, the Living Wage Foundation (who campaigned for the National Living Wage) calculates the current UK Living Wage at ￡8.25 per hour and the London Living Wage at ￡9.40 per hour, with both calculations being higher than the proposed compulsory National Living Wage. The reason for this marked different is that the government rate is based on median earnings while the Living Wage Foundation’s rate is calculated according to the cost of living.

Of course we must not forget businesses and business owners for whom the consequences of paying NLW may well result in a reduction of profits, reduction in the workforce or, in extreme circumstances, business closure in the event they can no longer afford to employ a workforce. Whilst the large national retailers may well be in a position to cope with the mandatory NLW (bearing in mind even they are cutting overtime and enhanced rates, albeit they say this is unrelated to the NLW) how will the high street and small businesses cope? It is likely that small businesses employing a large number of workers on the NMW will feel the negative effects the most and they may well find a need to reduce the workforce due to increased payroll costs. Businesses will effectively be dealt a double blow, an increase to the NMW in October each year and then an increase to the NLW rate a few months later in April. For a small business relying on a large task force and paying NMW this could be crippling. Either the taskforce will need to be reduced, or in the case of retailers the cost will need to be passed onto the consumer. Also, let’s not forget that the rate of NLW will continue increasing year on year and thus businesses that may be able to cope now may not find themselves in such a fortunate position further down the line.

Leaving private companies to one side, what about charities and the third sector who are already suffering from cuts? Some believe that the change will have the biggest effect on third sector organisations because they tend to employ a lot of staff over 25. What is uncertain is who will foot the bill for the annual increase to the NLW – will the local authorities and other public sector funders increase funding to accommodate the NLW or will the providers, that is the charities and not for profit organisation, have to find the money themselves either through additional fund raising or reducing funding/delivery of certain services to cover the cost of the NLW? If the latter, this would inevitably have a detrimental effect on the local communities and the low paid who benefit from the work and assistance provided by the third sector.

Most shocking of all however, are statistics obtained following a Lib Dem Parliamentary Question which show that the Government has spent nearly ￡5 million to advertise the NLW. This is a staggering figure and includes ￡750k on posters, ￡250k on newspaper advertising, ￡350k on social media advertising, ￡1.7million on TV, ￡300k on radio plus over ￡500k on digital display advertising and pay per click. One cannot help but wonder whether this money would have been better spent subsidising the third sector and small businesses to enable them to pay the NLW without simultaneously being crippled by the cost. Indeed, it is thought that the money spent on promoting the scheme would pay the wages for 372 people over the next year, calculated at ￡7.20 per hour.

In conclusion, the idea and intention behind the NLW appears to be a good one however the amount of money spent to implement it, the effects on business and the limited benefits to workers makes the reality very different to what we may have expected.

If you have any questions regarding the NLW or require assistance with an employment issue please contact our Employment Law team on 0207 226 0570 or email [email protected]

Published on 29th March 2016.

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