An analysis of the Government's proposals and the impact that these will have on employers and employees.

The current state of play

Since October 2013, in excess of 400 employers have been "named and shamed" for not paying the National Minimum Wage ("NMW"). Fines have been increased from a maximum of £20,000 per employer, regardless of the number of employees affected, to a maximum  of £20,000 per employee affected. In an effort to combat the rising levels of poverty in the UK, the Government has sought to introduce a National Living Wage, to take effect from April 2016.

The National Living Wage and the confusingly similarly named Living Wage are entirely separate from each other. The Living Wage is merely a recommended figure based on study by the Living Wage Foundation on the cost of living across the UK and is not compulsory whilst the National Living Wage, to be implemented from April 2016, will be: 

NMW is currently set at £6.70. The Living Wage Foundation has set the recommended Living Wage at £8.25 across the UK (£9.40 in London).

The National Living Wage ("NLW") will be brought in in April 2016 and will guarantee individuals over the age of 25 a wage of £7.20 per hour. The intention is that the hourly rate will rise year on year until it reaches £9 per hour in 2020. This proposed increase is estimated to affect 2.5 million workers.

Eligibility

NMW should be paid to most UK workers over school leaving age who are legally entitled to be paid. However, there are exceptions. Amongst those not entitled are: the self-employed, volunteers, students on work experience, people on certain training schemes, some company directors, workers living in an employer's household, residents of certain religious communities, prisoners, the armed forces and share fishermen. Therefore, these groups of people will be unaffected by the new NLW and will not benefit from the increases to pay.

Concerns with the NLW

Although designed to aid those in a state of poverty, there are concerns that the NLW will not go far enough in its mission to achieve this. 

Due to the age restriction imposed in order to qualify, the increase will not help over 2 million workers who are currently below this age. There is the additional problem of the higher cost of living in London which means that the increase will have little practical impact for the 596,000 lowest paid workers in London.

Furthermore, when the NLW is introduced, it will have a significant impact on the payroll budget for many businesses. It may not only be those employees currently on NMW, who will see their pay increase.  It may become necessary for employers to pay more to those above the lowest paid in the wage hierarchy, in order to maintain pay differentials. This will increase the wage bill for employers further than originally anticipated and budgeted for.

Employers will need to think carefully over the next few months in order to prepare for this additional cost to their businesses. The Government has provided some solutions which it hopes will offset the impact on employers. These include:

  • Reducing corporation tax to 19% in 2017
  • Reducing corporation tax to 18% in 2018
  • Increasing the National Insurance contributions employment allowance which would mean that employers of four full time workers on NLW would continue to make no National Insurance Contributions

The increase in wages is likely to see many employers forced to seek savings through increased productivity. Other cost cutting options available for employers who genuinely cannot afford the increase in wages include:

  • Decreasing hours for employees
  • Reducing overtime and bonuses
  • Reducing the number of employees
  • Removing paid lunch breaks
  • Increasing the price of goods or services

Any changes made to the employees' terms and conditions of employment will require the employer to consult with employees and follow a fair and legally compliant procedure prior to implementing the changes. Employers will need to seek advice as to how best to implement these changes without breaching employment law regulations.

Many opponents to the idea that raising minimum wages is an effective solution to tackling poverty suggest that a lower limit on wages imposed by governments will restrict the freedom of workers and employers to negotiate a deal that is mutually suitable to all. If the hourly minimum wage is raised then employers may struggle to employ a full complement of employees on this wage level, and, as a result, some of those employed on minimum wage may lose their jobs. 

Benefits of NLW

Employers who already pay the non-compulsory Living Wage have seen improved staff performance, retention and reduced absenteeism.  Evidence from the Living Wage Foundation shows that staff are more motivated due to the feeling that they are valued by their employer. They are also less likely to move to a new role with a new organisation due to the attraction of higher wages.

Higher wages also has the effect of ensuring that the working poor are better off and therefore some of the burden of relieving poverty is assumed by the corporate sector. This relieves our over-stretched public purse.

Conclusion

It is undisputable that the intentions behind the NLW are to create a fairer and better off society, as well as a more motivated work force. However, the implementation of the scheme will have more knock-on effects than perhaps originally anticipated by those behind the NLW. Employers will need to look carefully at their pay roll structure in order to ensure that they have budgeted for the increased pay. This will be particularly true of those that employ a higher proportion of low paid workers, for example in the retail, hospitality and healthcare sectors.