Are you ready for the National Living Wage?

A new National Living Wage (NLW) was George Osborne’s ‘rabbit out of the hat’ announced in the July 2015 Budget, surprising many businesses and commentators. A recent Government survey showed that most employers are not yet ready for the NLW. Even employers currently paying around £7.20 per hour could be caught out by the changes. With less than 3 months to go, what do employers need to know about this and other changes to the National Minimum Wage this year?

The first crucial point to remember is that the NLW is unrelated to the ‘Living Wage’. The NLW is being introduced by the Government as a compulsory change affecting all employers, whilst the ‘Living Wage’ is a voluntary rate of pay championed by the Living Wage Foundation. The new NLW will be £7.20 from 1 April 2016, whereas the Living Wage is currently set at £9.40 per hour for London and £8.25 outside London.

Secondly, the NLW is effectively a new, additional rate of the National Minimum Wage (NMW). This means that the enforcement regime and all the rules about which payments count towards the NMW will apply in the same way to the NLW. The draft National Minimum Wage (Amendment) Regulations 2016 published in December set out the new rate, as well as the existing rates of the NMW which remain the same. The hourly rates from 1 April 2016 are:

• 25 and over: £7.20
• 21-24: £6.70
• 18-20: £5.30
• Under 18: £3.87
• Apprentices under 19 or within the first 12 months of apprenticeship: £3.30

The draft Regulations also dramatically increase the financial penalty for underpayments of the NMW from 100% to 200% of the arrears due to the worker for pay reference periods beginning on or after 1 April 2016. This was announced in September along with a series of other measures to tighten up the NMW regime. The maximum penalty payable remains at £20,000 per worker.

The Government’s survey in December found that, whilst the NLW was broadly supported, only 45% of employers had updated payroll systems, only 39% had communicated the change to staff, and only 29% had looked online for further information about the NLW. 63% of employers said they knew which workers would be eligible.

There has been much debate about the NLW’s impact on businesses that currently pay only the NMW, particularly in the retail, health and charity sectors, but the change doesn’t only impact them. Employers who currently pay around the new NLW level of £7.20 are likely to be particularly affected, because until now they may not have been concerned with the details of the NMW rules. This will change, because even if they already pay £7.20 per hour, certain NMW rules could bring workers below the NLW. For example, the retailer Monsoon was recently ‘named and shamed’ because its practice of requiring staff to buy clothing, albeit at a discounted rate, took some workers below the NMW.

For the time being the NLW will be increased each year in April. The other NMW rates will continue to be increased in October, but in the future the timing of the increase in rates may be aligned. The Low Pay Commission has yet to recommend the NMW rates to take effect from 1 October 2016, but is expected to do so by February.

The introduction of the NLW has been controversial, with some businesses concerned about affordability as well as the impact on pay rises for other employees and pressure to adjust pay up the scale. Clearly the impact will be different depending on the region and local pay rates – for example, a much deeper impact is likely to be felt in certain parts of Wales, and cities such as Sheffield, Nottingham and Birmingham. The CIPD has recently commented that the Bank of England and OBR forecast of wage growth was ‘too optimistic’, citing the NLW as one of the factors which may restrict employers’ ability to afford pay rises. Some businesses may attempt to pass costs onto customers and others are considering redundancies, but businesses are being urged to boost productivity to fund the increase. This may in itself involve changes to working practices, so forward planning is essential.