21 September 2015

Key things to consider ahead of national living wage enforcement

Prime Minister David Cameron has kicked off the autumn political season with a pledge to crack down on employers who fail to pay the national living wage (NLW).

One of the big talking points of the recent budget was the new NLW, which will replace the existing national minimum wage for all workers aged 25 and over with effect from next April. For this age group, the current minimum wage of £6.50 an hour will be replaced with a new rate of £7.20 which is expected to rise further to more than £9 an hour by 2020. This could fuel a significant jump in costs for employers across the country and many are anticipating a cut in employment levels in labor-intensive industries.

The concept of a 'living wage' (as recommended by the Living Wage Foundation) already exists, and has been voluntarily adopted by more than 1,000 employers across the UK that have been given the 'living wage employer' status. It is set at a higher rate and is not to be confused with the new NLW, which will be mandatory and where the respective rates of pay will be set by government.

By enshrining the NLW in law, businesses in certain industries will be compelled to implement a potentially significant pay rise for many of their employees. Employers will, therefore, need to consider carefully how they implement this change within their organisation, including assessing the knock-on effect it is likely to have in terms of their existing pay scales, job evaluations schemes, pension costs and other employee benefit schemes.

Many employers have expressed concern that the new NLW is too high and will cost jobs. The Prime Minister, however, has focused on enforcement by stating that the fines for non-payment will double, hitting employers with a penalty worth 200 per cent of unpaid wages, up to a maximum of £20,000 per underpaid worker. Employers that fail to pay face disqualification as company directors for up to 15 years. So it is imperative that companies get it right.

There is significant uncertainty around the impact the NLW will have. Employers are effectively losing a large element of control over what they pay some of their staff, so they may have to make difficult organisational decisions which could necessitate contractual changes, for example, reducing or stopping bonus payments and cutting back on other employee benefits. Such changes could lead to complaints from disgruntled employees across the business. In order to avoid employee relations issues and potential claims arising, employers will need to consider their approach and any proposed measures carefully (and the legal requirements for implementing such measures), particularly given the potential repercussions of getting it wrong.

Key considerations are likely to include:

• unpredictability of payroll costs and subsequent issues with budgeting and forecasting
• whether to retain existing pay scales and use a supplement to raise wages to the new minimum, or implement new ones
• the practical implications for administration and payroll
• any employee relations issues that might arise, for example, where employees' wages have been inflated to a level where they are being paid as much as their supervisors.

Employers should also ensure they have pay structures in place which reflect the value of jobs within the organisation. They should, therefore, consider whether a job evaluation study might be appropriate. Such studies have been an important tool for setting pay rates among public sector employers, particularly to ensure equality between male and female employees.