What’s Happening

From April 2016, the Government will introduce a new National Living Wage (NLW) for workers aged 25 and over. It will be mandatory for employers to pay the NLW, whereas the Living Wage Foundation rates are voluntary.

The NLW will be £7.20 per hour from April 2016 increasing to, £9.00 per hour by April 2020.

The change appears simple; however, it does raise a number of issues that employers need to consider.

What do employers need to think about?

Accredited Living Wage Employers need do nothing at this time as the current rates for the Living Wage (£8.25 outside London and £9.40 in London) exceed the NLW rates.

However, there are a large number of organisations that need to take action and have a number of issues to consider.

  1. Cost

The costs will depend on the choices that business makes regarding implementation;

Will the minimum rate of pay be aligned with the NLW or higher?

Will people below the age of 25 also benefit from the new NLW?

The impact of the increased hourly rate on related payments such as enhanced overtime rates

Once an employer has decided its policy, determining the initial cost is straightforward enough, but projecting future costs is less certain.  The Low Pay Commission will advise the Government about changes to the NLW taking account of the ‘state of the economy’.  Subject to these conditions, the only basis for projecting costs at this time is the objective of creating a NLW of at least £9.00 by April 2020.  This represents an increase of 25% between 2016 and 2020, which is likely to be considerably higher than wage inflation over the same period.  The number of different factors may make it difficult for employers to budget for changes.

  1. Impact on pay structure

The implementation of the NLW may compromise the design of organisations’ pay structures.

The lower end of pay structures will be eroded and differentials reduced.  The erosion of differentials within the pay structure could lead to pay pressures emerging elsewhere and create employee relations issues, for example amongst employees with different levels ofresponsibility who would now be paid the same.

It is essential that prior to implementation organisations take the opportunity to consider how to deal with these issues, for example whether it might be necessary to amend the pay structure.

A number of organisations that have already introduced the Living Wage Foundation rates have done so on a non-contractual basis and are subject to annual review. In many organisations the additional payment is made by way of a supplement.  Clearly, the NLW is different as it will be a statutory requirement and will be part of basic pay.

Employers may also need to explore reviewing roles and increasing skills to improve productivity and efficiency thereby ensuring a return on their increased payroll costs.

  1. Potential equalities issues

A potential consequence of this change is that for many organisations the introduction of the NLW could result in equalities issues.

The addition of another age related rate of pay will create potential difficulties between employees who are equally experienced/skilled in a role, but who by virtue of age alone will be paid differently.

Where the grading structure has been based on the outcome of a job evaluation review it is clear that even though there may be differences in the size and nature of jobs, under the NLW it is feasible that role holders would be paid the same.  Whilst this in itself may not result in equal pay claims it could create additional employee relations issues.