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  • Overview

    Introduction of the national living wage

    On 1 April 2016 the national living wage (NLW) will come into force. This requires all workers aged 25 or over to be paid at least £7.20 an hour. This will be a 50 pence increase on the current national minimum wage (NMW) rate of £6.70 for workers aged 21 and over. Although the NMW is generally increased every year, this is the largest increase since 2009. For those aged over 25, they will see their pay increase by more than 10% automatically, and will represent a significant wage increase by any standards.

    Businesses employing low paid workers (from care and welfare to hospitality, leisure and retail) need to ensure that they are prepared for the additional costs and that they are familiar with how the minimum wage rules will apply to those over the age of 25. The Government has announced that a new team of compliance officers in HMRC will be assigned to investigate the most serious cases of employers not paying the NLW. They will have the power to issue sanctions including penalties, prosecutions and naming and shaming. Employers in breach could face a penalty equal to 200% of the arrears up to a capped limit of £20,000 per worker, in addition to being compelled to pay the arrears.

    How will this impact businesses?

    The main impact of the NLW on businesses will of course be the cost of raising the pay of those employees currently earning less than £7.20 an hour. The Government estimates that approximately 1.7m employees in the private sector will be affected and that the direct costs of increasing their wages will be £804.4m across the UK. 

    There will also be indirect costs, including increasing the wages of those, perhaps more senior employees already earning £7.20 an hour, but whose pay will be the same as those benefiting from NLW. Pay may need to be increased in order to maintain necessary pay differentials, to ensure retention of those with higher skills and more to offer in terms of productivity contributions. 

    To prepare, you should check who is eligible in your organisation to receive the NLW, update your payroll, let staff know about the new pay rate and remember that under 25s are still entitled to at least the NMW (£6.70 for over 21s). 

    What steps could a business take to mitigate the cost of implementing the living wage?

    1) One method would be to increase prices. The rationale here is that if the Government is to be believed, we have more money in our pockets to spend and those sectors who benefit from our discretionary spending, e.g. leisure and tourism, may be able to put up prices to consumers. This may protect profits and jobs but may be difficult in an intensely price competitive market in which many organisations operate. For the care sector, the message is starting to get through to the Government that, further cuts to public sector services notwithstanding, in order to pay for care services including domiciliary care services employing mostly 25 year old plus workers, commissioners of those services (local authorities) will have to pay more, if the providers are to provide the level of care and welfare support that the aging and disabled people in the UK require.

    2) Consider the salaries and bonuses of the better paid in your organisation and whether those workers could fund the NLW costs, such as by removing or reducing expected future pay rises for the better paid workers. Perhaps, offering more productivity incentives to higher skilled employees may help pay for the NLW.  According to the CIPD (the professional body for HR and people management) and the Resolution Foundation, 32% of large employers are expecting to respond to NLW in this way by focussing more on staff  output. Some hotels may be thinking of reducing larger pools of casual workers and training permanent staff.

    3) Consider the age profile of the workforce and the skills offered by them. For all apprentices in year 1 of their apprenticeship and apprentices aged 16-18, the NMW will be £3.30 per hour. Could businesses make better use of the opportunity to offer training to those who need work but have not been able to secure places for higher education and are looking to train in the role from the bottom rung of the ladder upwards, so their trainer employers benefit from the lower wage rates? For non-apprentices under 18 years old, the rate will be £3.87 per hour and £5.30 for those aged 18-20. The NLW provides opportunities to target the lower aged workers for employment opportunities at the time when they most need it, after leaving school at 16, after A levels or vocational qualifications and before or instead of University, where the vocational route to their chosen career can provide more opportunities for those employers needing the developing skills.    

    4) Some employers have warned that the NLW is likely to lead to job losses, and some businesses may find that the only way to absorb the costs of the NLW is to reduce staff numbers, for example through efficiency savings. It is considered that only 10% of small firms may be considering this option as opposed to 17% of larger ones. Employers should be wary of targeting older workers (aged 25 years plus) for redundancies in preference to under 25 year olds, just because it costs more to employ those older workers. This could be seen as overtly age discriminatory.

    5) Alternatively, the costs may need to be absorbed into the business and lead to lower profits. This may mean reducing central cost overheads to pay for the NLW. The CIPD and the Resolution Foundation suggest that this is likely to be the preferred route, rather than pass on higher prices. For smaller businesses employing less than 250 staff, the proportion of employers expecting to absorb the impact of NLW through lower profits is higher than those expecting to offset higher costs with higher productivity (25%). In the not for profit sector, this absorption may not be possible without relying on the charitable reserves. 

    It is understandable for 54% of UK businesses to be nervous of the impact of the NLW on labour costs.  However, this is a re-balancing exercise in terms of reducing the cost of state benefits by making work pay or pay better. The Government in return are raising the level of the National Insurance Allowances and reducing corporation tax. So there is some quid pro quo thought that has gone into this exercise. It has been proved that having a NMW or wage floor since 1998 has been a good thing because it stops exploitation and reduces the numbers of those on the poverty line.

    The Government has pledged to be tough on employers that try to get around the NLW, rather than identify the benefits of the NLW. Paying the lowest paid employees more may help to increase morale and retention amongst those workers as well as reduce absenteeism, resulting in an increase in productivity. 

    For businesses that sell to those on lower incomes, they may see a boost in their sales as those low paid workers spend their additional income of something like £800 net per anum.

    What happens next?

    As for the future, the Government has declared an aspiration for the NLW to reach £9.00 an hour by 2020.  How this is to be achieved and in what increments will not be apparent until the Low Pay Commission publishes its annual review into the levels of the NMW and the NLW in October 2016. 

    If you would like to further discuss any of the information included within this article, please contact  Partner, Nick Hobden or Associate Ben Stepney from our Employment team.

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