In April this year the national living wage (NLW) was introduced by the government with the aim of increasing living standards for UK workers and subsequently reducing the burden on the benefits system.

The burden on employers to balance the requirements of increasing mandatory legislation, however, has certainly increased in the short-term. The introduction of the NLW has obvious cost-implications for companies in terms of staff pay, but also places additional administrative requirements on businesses, such as a need to review HR systems and update payrolls accordingly.

A Resolution Foundation report last year highlighted the magnitude of the impact of the NLW, stating that the rise from the National Minimum Wage (NMW) of £6.70 to the NLW of £7.20 represented a 7.5% nominal increase, the largest seen since 2004. In addition, the report highlighted the possible ‘spill-over’ effect of the NLW where higher earning staff might expect a pay increase to reflect the historic difference in pay levels when compared to staff on the new NLW.

In the wake of these cost implications famous brand names have hit the headlines with B&Q reporting to have forced staff to sign away additional benefits, whilst the waiting staff at Zizzi have allegedly had the amount they earn from tips cut. These reports are just a sample of many that claim employers are removing or cutting staff benefits as a method of compensating for the increased spending on staff salaries. Whilst the legality of any changes to remuneration, benefits or working hours will ordinarily be rooted in employees’ contracts of employment and will be specific to each individual employer, age discrimination affects all employers equally. It's an area that, once again, has been thrown into the spotlight following the introduction of the NLW.

The NLW only applies to workers age 25 and over, effectively creating a two-tier pay system with employees entitled to either the NLW or the NMW based on their age. Could employers to be tempted to favour the under 25’s in recruitment exercises and to consider dismissing older workers in order to avoid the NLW? Such policies would be in serious danger of falling foul of age discrimination legislation; an employees’ age is a ‘protected characteristic’ under the Equality Act and any action that adversely affects an employee by virtue of their age will be discriminatory.

Such discriminatory actions can be justified in certain circumstances. To defend a policy that is discriminatory as regards to age, employers need to demonstrate that they are pursuing a legitimate aim, such as promoting access to employment for younger people or facilitating the participation of older workers in the workforce. Employers may feel that the increased costs of the NLW are a sufficient reason to, for example, reduce the staff headcount of those eligible for the NLW, but case law tell us that using cost as a justification is not enough to avoid being caught by the age discrimination legislation.

In addition to the legal ramifications of age discrimination, employers will want to avoid the reputational damage that circumventing the ‘spirit’ of the NLW might cause; the government has previously called for employers to be ‘publically shamed’ who have cut overtime and bonuses in relation to the NLW.

Employers should therefore avoid:

  • implementing a recruitment policy that favours under 25s;
  • unilaterally imposing a cut in benefits/pay;
  • factoring in NLW eligibility in redundancy exercises; and
  • dismissing any employee on the basis that they are eligible for the NLW.

Yet the NLW is here to stay and is forecast to reach £9.02 by 2020. So what options are available to employers to help alleviate the cost burden of the NLW without incorporating any discriminatory practices?

The CIPD has suggested that employers should see staff pay as an ‘investment rather than an expense’ and encourages employers to think laterally when it comes to alleviating costs. Rather than slashing benefits/incentive schemes across the board, employers could examine the take-up of particular schemes and potentially withdraw schemes that do not appear to have a high uptake. In addition, a focus on creative ways to improve productivity would help mitigate costs and chimes well with the intention of the NLW - to stop the perceived cycle of ‘low - pay, low productivity’ in the UK.

There is clearly no ‘one size fits all’ solution to the cost implications of the NLW for employers, however ensuring there are no discriminatory practices in place in relation to the NLW is a solid starting point from which employers can meet the challenges that come with employing a higher paid workforce.