From April next year the national minimum wage will be rebranded the “national living wage” and increase to £7.20 per hour for workers aged 25 and over. This will rise to £9.00 per hour in 2020.  Note, however, that the actual (independently set) “living wage” is already above this level (set at £7.85 per hour across the UK, save for London where the hourly rate is £9.15).

We look at the reality behind the headlines and consider how this change will impact businesses.

At the moment, employers are not required to pay the living wage, which is purely voluntary.  Employers are only required to pay the national minimum wage, which is currently some way below this.  The Living Wage Foundation has been campaigning for employers to adopt the living wage.  This has not been without success; IKEA, for example, recently became the first national retailer to adopt the living wage across its workforce.

The national minimum wage usually increases each year and from October 2015 the following rates will apply:

  • Adult rate: £6.70 per hour (from £6.50) – From April 2016 this will only apply to 21-24 year olds
  • 18-20 year olds: £5.30 per hour (from £5.13)
  • 16-17 year olds: £3.87 per hour (from £3.79)
  • Apprentices: £3.30 per hour (from £2.73)

From April 2016, the national minimum wage will be rebranded the “national living wage” and increase to £7.20 per hour for workers aged 25 and over. This will be compulsory and the Low Pay Commission will be asked to recommend future rises.  Workers aged 24 and under will only be entitled to the national minimum wage rate for their appropriate age.

Will your businesses be able to accommodate the increase in payroll costs?

According to the concerns expressed by businesses to the Office for Budget Responsibility, the increase in the cost of wages is predicted to result in 60,000 lost jobs.  However, numerous studies have shown that increasing minimum rates of pay boosts earnings, but does not result in job losses.  If we look back to the late 1990’s and the introduction of the National Minimum Wage Act, we know that businesses were predicting a huge increase in unemployment which did not materialise.

It is also important not to overlook the potential benefits of paying the living wage. There is evidence to suggest that paying the living wage improves staff retention, reduces absenteeism and increases productivity.  These indirect benefits may well outweigh the costs for businesses.

There is also the question of consumer perception and reputation.  The Living Wage Foundation is publicly accrediting businesses who adopt the actual living wage in order to see whether this affects consumer habits.  If consumers prefer to spend their money with employers that have adopted the living wage businesses that are slow to adopt the living wage risk losing out.

Will the changes in rate lead to age discrimination claims?

As set out above, the national minimum wage sets different rates of pay depending on a workers age. Equality laws provide a special exemption for the national minimum wage rules so that the pay bandings do not contravene age discrimination rules.  However, this is susceptible to challenge on the basis that it is in breach of European law. So far, this exception for the national minimum wage has not been challenged on the basis that it discriminates against or, depending on your view point, in favour of certain age groups.

That said, by adding another minimum wage band for those aged 25 or more, we believe that the Government increases the risk of a challenge under EU law.  The current age bands end at 21, when many young people will have completed higher education.  This has the effect of incentivising young people to remain in higher education and arguably justifies setting the wage bands at this level.  It is not clear to us, however, what justification arguments there would be for delaying payment of the maximum national living wage until the worker reaches 25.