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UK HR e-briefing: The National Living Wage – what it means for employers

  • United Kingdom
  • Employment law - HR E-Brief
  • Education

21-01-2016

On 1 April 2016, the national minimum wage rate will be increased significantly for workers aged 25 and over, with the introduction of what the Government is calling the ‘National Living Wage’. The new rate will initially be set at £7.20 per hour but further rises are on the cards over the next four years. In this briefing we look at what the changes mean for employers.
 
The living wage, the National Living Wage and the National Minimum Wage – what’s the difference?
 
The National Living Wage (NLW) is simply the name the Government has chosen to give to a new rate of the National Minimum Wage (NMW) for workers aged 25 and over.  So, from 1 April 2016 there will be five NMW rates:

New ‘NLW’ rate: applying to workers aged 25 or over, except where the apprenticeship rate applies: Initially £7.20
Younger adult rate: applying to workers aged 21 to 24, except where the apprenticeship rate applies: Currently £6.70
Development rate: applying to workers aged between 18 and 20 inclusive, except where the apprenticeship rate applies: Currently £5.30
Young workers rate: applying to workers aged under 18 but above the compulsory school age and who are not apprentices: Currently £3.87
Apprenticeship rate: applying to apprentices under 19 years of age or those aged 19 and over but in the first year of their apprenticeship: Currently £3.30

The NLW should not be confused with the voluntary ‘living wage’ rate calculated independently of the Government by the Living Wage Foundation to reflect the basic cost of living in the UK.  (currently £8.25 an hour, or £9.40 an hour in London).
 
Future increases
 
The NLW rate will start at £7.20 per hour. The Government’s plan is that this higher rate of the NMW will increase incrementally to what is expected to be over £9 an hour by 2020.  The other rates of the NMW may also be increased, with the Low Pay Commission being asked to advise in the usual way. 
 
The Government wants future NMW increases to take effect in April each year rather than October and is looking at how this can best be achieved. It is not yet clear whether this means there will be no increases to NMW rates below the NLW in October this year: for now it would be sensible to assume there could be increases to all but the new NLW rate in October.
 
Payments that count towards the NLW
 
The same rules will apply to the NLW as apply to the other rates of the NMW. This includes the complex provisions that determine which allowances or supplements can count towards the NMW and which can’t. Similarly, the regulations on calculating hours of work will continue to apply across the board, including the rules on travel time, on call time, daily average agreements and fair piecework.
 
Use of age related pay rates
 
Paying workers different rates of pay depending on their age is, on the face of it, direct discrimination. However, an existing exception in the Equality Act prevents payments connected with the NMW from being unlawful. That exception will continue to apply when the new NMW rate is introduced, permitting employers to pay under 25s less than the new NLW rate.
 
It is important to bear in mind that the exception does not permit all age based pay rates as it only applies when the following conditions are both met:
 
- firstly, the younger worker must qualify for the NMW at a lower rate than the better paid older worker; and
- secondly, the younger worker must, in any event, be paid less than the top rate of the NMW (ie the new NLW).
 
So the NMW exception can be relied on to justify paying 21 year olds less than 25 year olds, provided the 21 year olds are in fact paid less than the NLW, but it does not cover paying 21 year olds less than 23 year olds.  
 
Can an employer opt to employ only those who are entitled to lower NMW rates?
 
If an employer dismisses an older worker to avoid having the pay the NLW this will be automatically classed as an unfair dismissal (or, in the case of a worker who is not an employee, an unlawful detriment). It will also be unlawful age discrimination unless the employer can show their actions are justified (it is difficult to see a justification argument succeeding). The age discrimination provisions will also apply to employers who treat older job applicants less favourably than younger candidates because of a desire to avoid paying the NLW.
 
Changing existing employment terms to absorb wage increases
 
Some employers are looking to vary existing employment terms and conditions to absorb the cost of the NLW. In some cases, that might include consolidating certain allowances or supplements into basic pay, or replacing benefits that don’t count towards the NLW with cash – so the value of an individual’s remuneration package might remain the same but with more of it counting towards satisfying the NMW/NLW. Others may be looking more generally at reducing benefits across the board or perhaps higher up the pay scale.
 
There are a number of practical and legal challenges associated with changing employees’ existing terms. In the context of absorbing NMW costs, however, there is an additional obstacle that employers need to be aware of.  The issue is that it is unlawful to subject a worker to a detriment because he or she qualifies for (or will or might qualify for) the NMW, or for a particular rate of the NMW.  Making changes to the terms or benefits of those who stand to benefit from the NLW, in order to absorb the increased wage costs, could fall foul of this rule. This can be the case even when the change does not result in an immediate reduction in the overall value of a worker’s package of remuneration, such as where a non-cash benefit is replaced with an equivalent increase in basic pay. This is a complex area and one on which it would be sensible to take advice before taking action.

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