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Insights into the national living wage

Posted on from Bond Dickinson LLP

How will the new national living wage impact on employers?

What is the update?

In July this year, the Government announced that it wanted to ensure higher wages for more experienced workers.  From 1 April 2016, it will look to achieve this through a premium added to the national minimum wage (NMW) for workers aged 25 and over, known as the national living wage (NLW). 

This will be over and above the NMW, which will remain in place. The Government will set the first premium in April 2016 at 50p, which will increase the total NLW to £7.20 per hour.  This could be seen as a response to criticism of a shift among some employers to zero hour contracts and lower wages to cut costs.

Not to be confused with…

The NLW should not be confused with the living wage set by the Living Wage Foundation, a campaigning organisation that promotes a voluntary minimum hourly rate of pay calculated according to the basic cost of living.  This is currently £9.40 per hour in London and £8.25 per hour elsewhere, for all workers aged 18 and over.

The rules are getting strict

The new rules are backed up by some fairly stringent compliance measures. They include:

•    Doubling the penalties for non-payment of the NMW and NLW. Penalties will increase from 100% of arrears to 200% of arrears but will be halved if employers pay within 14 days.  The overall maximum penalty of £20,000 per worker remains unchanged.

•    The establishment of a new HMRC team dedicated to pursuing the most serious cases of employers deliberately not paying the NMW and NLW.

•    The introduction of a new penalty of disqualification from being a company director for up to 15 years for the non-payment of the NMW and the NLW.

•    A consultation in autumn 2015 on the introduction of a new offence of aggravated breach of labour market legislation. 

The Government has also pledged to improve the guidance and support available to employers and to work with payroll providers to make sure that payroll software incorporates mechanisms to ensure compliance with the NMW and NLW.

Impact on employers

Based on earnings forecasts, it is likely that the NLW will reach over £9 per hour by 2020.  There have been positive reports in the press about employers welcoming the NLW, with one survey finding that six out of 10 employers are happy with the change.  However, some employers have serious concerns about the potential impact on the bottom line.  Research from the CIPD and the Resolution Foundation shows that more than half of UK employers believe that the NLW will have an effect on their wage bill.  These include in particular those employers with large numbers of employees at the lower end of the pay scale, in the retail, hospitality and healthcare sectors for example.  This additional cost could be passed to customers in the form of price increases and some employers are already talking about a need for “increased efficiencies”, which may include reorganisations and cuts to staff numbers.

Redundancies

Would it be possible to make redundancies to cover the cost associated with meeting the NLW?  If a business will continue to operate from the same location but a headcount reduction is proposed in light of an increased wage cost, which will arise once the NLW takes effect, redundancies would be possible. The reason for the headcount reduction is largely irrelevant and the question is simply whether the requirements of the business for employees to carry out work of a particular kind have ceased or diminished or are expected to cease or diminish.

If an employee is made redundant in this situation then they may attempt to pursue an unfair dismissal claim.  In order to minimise the risk of a successful claim, it would be important to follow a fair redundancy process, in the same way that you would for any other redundancy situation.

Age discrimination

An added potential risk in this situation is a claim of age discrimination.  An employee dismissed as redundant in these circumstances may claim that they have been selected for redundancy because they are aged 25 or over (on the basis that those under 25 do not qualify for the NLW and younger workers have therefore been favoured) and that this is age discrimination.  It is possible to justify direct and indirect age discrimination but the cost of employing those who qualify for the NLW is very unlikely to amount to justification.  

To minimise this risk, employers should operate a rigorous and transparent scoring process in selecting employees for redundancy so that they can demonstrate objectively that selection has not been made on grounds of age or as a mechanism for minimising payment of the NLW.

Authors

Sarah James, associate

Karen Plumbley-Jones, practice development lawyer. 

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