Wages in the spotlight – what do employers need to know and do?

Written on 13 Oct 2015

The publicity surrounding wage rates shows no signs of abating with reports today that the Office for National Statistics has indicated that six million workers in Britain are paid under the living wage rate – a rate calculated by the Living Wage Foundation as being necessary to cover the basic cost of living (see here). This publicity is only set to intensify as the proposed introduction of the National Living Wage in April 2016 draws closer.

What is the difference between the “National Living Wage” to be introduced next April and the “Living Wage”?

The Government announced in its Summer Budget that from next April, employers will be required to pay all workers aged 25 and over a minimum of £7.20 an hour. This will rise to £9 an hour by 2020.

In announcing this new minimum rate, the Government has re-branded it the “National Living Wage”. To all intents and purposes, the Government is simply adding a new higher tier to the existing national minimum wage structure. Workers under 25 will still be subject to the existing national minimum wage rates (see here for the current national minimum wage rates which came into force on 1 October).

It is important to note that this new National Living Wage is entirely distinct from the existing and much publicised “Living Wage” promoted by the Living Wage Foundation (see here). The Living Wage Foundation’s Living Wage is an amount it has calculated an average worker needs to earn to cover the basic cost of living. The current Living Wage rates are £9.15 per hour in London and £7.85 outside, but a rise is expected to be announced this November. The Living Wage Foundation encourages employers to voluntarily sign up to the Living Wage and now has over 1,800 organisations subscribed. There is no statutory obligation to pay the Living Wage rate – whether or not an employer chooses to do so is a matter entirely for its discretion. That having been said, larger companies, particularly those operating in certain sectors such as retail, may well feel a reputational pressure to offer the living wage to their employees. Employers who opt to pay the higher Living Wage should bear in mind the impact on the wider workforce – Lidl, who became the first UK supermarket to implement the Living Wage (see here), found that attention it received quickly turned sour when it transpired that employees in Northern Ireland were excluded from its commitment. It has since announced that it is extending its Living Wage commitment to that region (see here).

What should employers be doing?

The House of Commons briefing paper on the National Living Wage comments “the economic impacts of the NLW are highly uncertain and largely depend on how employers choose to deal with the extra costs imposed by having to pay staff a higher wage” (see here). What is clear is that employers who will be impacted directly or indirectly by the National Living Wage will need to start planning now.

  • Employers must identify whether they have any workers who will be impacted by the new National Living Wage rate. Particular care must be taken where salary sacrifice and other arrangements are in place which, in practice, will bring a worker’s salary below the specified statutory rate.
  • Will there be any “spillover” effects where employees currently earning just above the level of the National Living Wage, and some younger workers aged under 25, may see their pay increase to the extent that employers try and maintain pay differentials between staff – a potential issue identified in the House of Commons briefing paper (see above).
  • Consider whether the new rate will impact on any liabilities in service provision agreements?
  • Can the business financially afford the new rates? Remember that the increased rate of pay may also impact on holiday pay, sick pay, pension contributions etc. Where affordability is an issue, will staffing changes be required, such as reducing working hours, re-arranging shift patterns etc.? Or can the cost be passed onto consumers or other third parties?
  •  It will be important to manage any staff changes carefully; to minimise legal risks, employee relations issues, and potential reputational damage.Consultation may need to take place with recognised unions and employee representatives.
  • Keep a watch on what your competitors are doing. Are they increasing rates in line with the “Living Wage”? How does this impact on your staff retention and recruitment?

Given the current publicity surrounding pay – both the Living Wage and the new National Living Wage – it is critical that employers start to give serious consideration as to what changes are needed and how they will manage the change process. Getting it wrong has serious financial consequences, (penalties for non-payment of the national minimum wage are currently £20,000 per underpaid employee and will no doubt be reflected in obligations regarding the National Living Wage), as well as leading to reputational damage and negatively impacting employee relations. On a positive note, 80% of employers who have voluntarily adopted the Living Wage believe it has enhanced the quality of the work of their staff, while absenteeism has fallen by approximately 25%.