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Are you ready for the National Living Wage?

It has been all over the press that, from April 2016, employers will have to pay a new ‘National Living Wage’ to those in their workforce aged 25 and over. So, what is this new premium, how will it impact the different industry sectors and what can you do to prepare?

What is the National Living Wage?

The so-called National Living Wage (NLW) was a surprise announcement made by George Osborne as part of his July 2015 Budget. While the NLW is expected to benefit six million working people in the United Kingdom, the Office of Budget Responsibility has suggested that 60,000 people are likely to lose their jobs as a result of the wages hike. So what is the National Living Wage and who stands to benefit?

Campaigners, such as the Living Wage Foundation, have long been seeking the introduction of a living wage which takes into account the cost of living. This is currently set at £7.85 per hour (and £9.15 per hour for London). While a number of high profile employers have decided to pay their employees such a living wage, this has been on an entirely voluntary basis.

George Osborne's heralded National Living Wage is something of a misnomer, as the rate of pay will have no link with the cost of living. The NLW will instead provide for a new premium to be paid on top of the National Minimum Wage for those aged 25 and over. The basis for the premium appears to be compensating workers in that age bracket for their increased experience over younger workers.

How much is the National Living Wage?

The NLW will apply from April 2016 and will initially be set at the rate of £7.20 per hour. The National Minimum Wage at this date will be £0.50 less at £6.70 per hour, making younger employees cheaper and, as a consequence, potentially more desirable to employers.  

The NLW will continue to increase year on year, reaching a proposed rate of over £9 per hour by 2020. The government’s objective is for the NLW to reach 60% of median earnings by 2020 and for it to continue to reflect any rises in median earnings. As currently proposed, this means there will be a 34% rise in the wage bill for workers aged 25 and over between now and 2020.  

Consultation

At the end of July, the Low Pay Commission (LPC) opened a consultation seeking views on the existing National Minimum Wage rates and the potential impact of the NLW. As an outcome of the consultation, the government has asked the LPC to recommend future rates for both the National Minimum Wage and the NLW. The precise detail of future rises in the NLW is, consequently, unknown at present.

Impact of the NLW

Commentators in the hospitality and leisure sector have raised concerns that the planned wage hike would be particularly detrimental on their businesses due to the impact that wage costs have on profits in this sector. There have been suggestions that job losses will result, but questions posed over whether head counts can really be reduced in an industry where standard of service is so important. It remains to be seen whether the combination of these factors could lead to more serious consequences for businesses in the sector.  

The care sector is likely to be similarly impacted, with the wage bill typically accounting for the majority of care home costs. As a result, commentators have suggested that the NLW could lead to care home closures, particularly by small providers who will find the increase harder to bear, and larger providers reducing the scope of their services.

In the retail sector, it is thought that large retailers will not be so hard hit, as many already pay higher hourly rates than the National Minimum Wage. However, it is the smaller retailers that will feel the impact, and may have to reduce staff hours or numbers to accommodate the increased wages bill.

Minimum impact may be felt by businesses providing outsourced services, such as cleaning. The reason being that large outsourcing contracts often have protection built in for such government-enforced wage hikes, which means that providers should be able to accommodate the change without negative consequences.

Having focused on the negative, a positive effect that has been highlighted is improved staff retention. This is likely to be seen in industries where the National Minimum Wage is paid to a large proportion of workers, and should have knock-on positive consequences for both staff morale and consistency of service.

What can employers do about it?

The new rate of pay is compulsory and failure to pay would, as with the National Minimum Wage, result in civil or criminal enforcement action or non-compliant employers being 'named and shamed'.

As an initial step, you may consider responding to the Low Pay Commission’s consultation, which runs until 25 September. It asks for views on: 

  • the likely impact of the NLW on employment, hours and profits;
  • whether the impact will vary for different sectors and types of business;
  • whether other changes to business costs (eg national insurance cuts and corporation tax) will affect the impact of the NLW;
  • the impact of the NLW rate being set at over £9 by 2020; and
  • the best trajectory for increasing the NLW rate.

These are key questions, the answers to which will feed into the government’s policy on the NLW going forwards. It may therefore be worth investing time to put forward your business’s views and concerns for consideration.

How can you prepare for April 2016?

If you are hiring new employees you do have the option of hiring under 25s in order to reduce staff costs. However, you would need to be mindful of the provisions of the Equality Act, which prevent employers from treating a job applicant less favourably than they would treat others on the grounds of age. While such conduct would not be discriminatory if it can be shown that the treatment was a proportionate means of achieving a legitimate aim, it is unlikely that cost alone would justify a policy of age based hiring decisions.  

If you are not already paying your age 25 and over employees at the NLW rate of £7.20 per hour, you may want to consider the financial implications of the wage hike and whether your existing staff costs are sustainable. As has been mentioned, it is anticipated that the introduction of the NLW will result in redundancies. When considering potential job losses, careful thought will need to be given to the staff numbers required to maintain sufficient service standards.  

When planning for any redundancy exercise, there are strict legal procedures that need to be considered (as well as the related redundancy costs) that need to be factored into any decision making process. Employers who reach discriminatory hiring decisions, or who institute poorly thought out redundancy processes, may well find themselves on the receiving end of litigation, the costs of which can be significant.

While the government's intention in introducing the NLW is laudable, it creates new challenges for employers. Given the April 2016 introduction date, you need to be thinking about the changes as soon as possible to limit the impact.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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