The National Minimum Wage (Amendment) Regulations 2016 come into force on 1 April 2016. Employers need to be aware of their new obligations in good time to ensure compliance.

What is the National Living Wage?

The National Living Wage (NLW) is a new, mandatory premium to be paid on top of the current national minimum wage (NMW). This will increase minimum pay for all workers over the age of 25. Workers under this age will be unaffected.

When the National Minimum Wage (Amendment) Regulations 2016 (the Regulations) come into force the current adult rate of the national minimum wage will increase by 50 pence from £6.50 to £7.20 per hour.

The penalty for failing to comply will be 200% of unpaid wages, up to a maximum of £20,000 per worker.

Implications for employers

It is not simply basic rates of pay which will be affected. There will be a knock on effect on pension contributions and more staff may need to be auto-enrolled because of their higher rate of pay. National insurance contributions will also rise and more staff may become entitled to statutory payments such as maternity and paternity pay as a result of exceeding the earnings threshold.

In addition to those workers directly affected by the NLW, higher paid workers may be concerned about reducing pay differentials too. The NLW will have to rise by 6 - 7% per year to hit the Government's target of £9.00 per hour by 2020, whilst salary increases for the workforce in general average out at 2% per year nationally. As NLW rises, higher earners may expect to see proportionate rises in their own salary. Employers should consider the effect on the wider workforce and how to manage this going forward.

Where an employer currently has staff being paid at or around the national minimum wage this will clearly result in greater costs and ensuring compliance could mean difficult decisions have to be made. Possible options include:

  • Passing the cost on to customers
  • reducing headcount
  • cutting overtime
  • improving efficiency
  • engaging more contractors in place of employees
  • investing in technology to reduce staffing costs

Implications for workers

Ironically, the NLW could have unintended consequences for workers, rather than increasing pay, workers could end up receiving a lower income because, for example, overtime is reduced to accommodate the financial impact on the business.

Impact on recruitment

In a recent CIPD poll 9% of employers said they will increase recruitment amongst people under the age of 25 to avoid the Regulations. However, employer would be well advised not to go down this route as it could lead to claims of direct and indirect age discrimination.

Opportunities for change

On the flip side, this also a great opportunity to review existing policies and practices and make positive changes to the business, to coincide with the introduction of the NLW.

For example, goodwill generated from the increased payment to staff may provide to push through other changes such as varying hours of work or revising job roles to enhance productivity. Changes to employment terms would be subject to the usual consultation obligations, whether individual or collective depending upon the numbers concerned.

Of course, the risk of such action is that employees see this as "giving with one hand and taking away with the other" and some employers are managing this by enhancing minimum pay over and beyond the NLW. For example, Lidl has announced that it will enhance hourly rates to £8.20 per hour from October 2016: this is likely to be great for PR and staff morale.

Tips for employers

  • Remember that piecework payments, bonus, commission and other incentive payments can be included in the calculation of the National Minimum Wage or NLW. However premium payments for standby, overtime or shift work, benefits in kind, pension payments and other costs that are not attributable to the employee's performance, (for example London weighting or an on-call allowance), will not be included in the calculation of the NMW or NLW. It may therefore be that even though basic salary is not set at £7.20, a worker is nonetheless still in receipt of a sum equal or in excess of NLW.
  • Employers may wish to review how payments to staff are currently structured and consider effecting a contractual variation to those terms (subject to the usual consultation obligations), to ensure the business is meeting its NLW obligations at minimal cost. For instance, if an individual is in receipt of a London weighting payment, the business may decide to incorporate this payment into basic pay, to absorb the cost of meeting the NLW on the business.
  • This is also an opportunity to look at payment terms and rewards as a whole. For example, to consider other measures to coincide with the increased NLW which are low cost to the business, such as corporate subscriptions, discounted gym memberships etc. in a bid to balance "goodwill" whilst driving forwards such changes the business is considering making.

While the headline impact of the NLW is increased costs for some employers, properly managed, the introduction of the NLW also presents some positive opportunities for business.