Is your business ready for the new national living wage?

Minimum wage clock

Although the Government’s new national living wage (NLW) comes into effect from 1 April 2016, there is still some concern, particularly among some smaller employers, around the full impact it will have on their businesses.

Although firms recognise that they will have to pay workers aged 25 and over £7.20 per hour and that this will have a direct impact on their wage bill, many have not decided how they will deal with pay differentials and the inevitable employee relations issues.

Managing higher wage costs

You can respond to higher wage costs, for example, by:

  • improving productivity
  • taking lower profits by absorbing costs
  • raising prices or fees
  • reducing overtime and bonuses
  • changing terms and conditions of employment
  • changing working practices to increase productivity and efficiency
  • restructuring to create flatter structures (lessening the impact of pay differentials)
  • reducing the number of employees through redundancies or by not recruiting

Improving efficiency and boosting productivity is a no-brainer but it can prove very challenging and difficult to achieve, particularly where firms are already cut to the bone, where staff feel they’re working as hard as they can, and where quality and customer relationships must be maintained – if not improved.

Whatever options are chosen, they all affect your staff – and successful outcomes can only be achieved by communicating and involving those same people. Staff engagement will be key in ensuring your business can respond positively to the new national living wage on top of the existing pressures of the national minimum wage.

Pay differentials

It’s inevitable that the NLW will reduce the pay gap between staff who will receive it and others who are already on higher pay grades. Not only can this cause dissatisfaction between colleagues but it can damage the relationship between staff and their managers where the greater differential previously reflected management responsibilities.

Rather than just maintaining the current pay differentials, you should consider:

  • reviewing your overall pay and grading
  • undertaking job evaluation
  • planning a robust pay and reward strategy

This will also iron out any historical inconsistencies in pay and avoid potential discrimination or equal pay claims.

Are you at risk of age discrimination?

To clarify, the Equality Act 2010 includes an exception that states that it is not unlawful age discrimination to pay workers of different ages at different rates if the pay structure is based on the age bands set out in the national minimum wage legislation.

It also gives you flexibility to vary pay rates within the bands and still avoid discrimination; as long as the workers are being paid within the relevant band for their age.

For example, you could pay a 28-year-old £8.50 an hour, while paying a 24-year-old £7.00 an hour, as the 24-year-old is in a lower minimum wage age band and is paid less than £7.20 an hour. However, the exception would not cover payment of £7.50 for the 24-year-old, as this does not fulfil the criterion of being lower than the highest rate of the national minimum wage.

Also, beware that the exception does not cover different pay rates for workers within the same minimum wage age band, which would have to be objectively justified.

Got that?

There are inherent risks of discrimination, however, if you base your recruitment or redundancy (or other) decisions on age, for example discounting job applicants in the higher wage band with the prime objective of avoiding paying the NLW.

A reminder of the national living wage

  • It’s the new statutory minimum wage rate for workers aged 25 and over
  • It comes into force on 1 April 2016
  • It will initially be £7.20 per hour
  • Rising to £9.00 per hour by 2020

Lower minimum wage rates already apply to workers on lower age bands, and for apprentices, and these are updated in October. You can find the current rates on the Government’s website.

Please be aware that the NLW is not related to the living wage rate used by the Living Wage Foundation, which campaigns for minimum pay levels to reflect the basic cost of living.

Beware – penalties can be ruinous

From 1 April, if HMRC identify an underpayment of the NLW, the following penalties will apply:

  • you will be required to pay the arrears to the worker
  • plus a financial penalty to the Secretary of State
  • the penalty will be 200% of the total underpayment
  • with a minimum payment of £100 and a maximum payment of £20,000
  • the maximum payment applies for each worker who has been underpaid, not to the total payment for all workers
  • for serious cases including producing false records or non-cooperation, you may be criminally prosecuted with the potential of an unlimited fine
  • the Government also operates a scheme to publicly name and shame employers that do not comply with the law on NMW/NLW

You may also face individual claims from employees for unlawful deductions from wages or breach of contract.

So what’s your strategy?

Please contact us to to discuss how we can help you plan and implement your response to the the legal, technical and employee relations aspects of the new national living wage.