Is your business ready for the National Living Wage?

Is your business ready for the National Living Wage?

It was announced in the Budget last year that the Government planned to introduce a compulsory National Living Wage (NLW) of £9.00 per hour for over 25’s, in stages, by 2020. This will be done by adding a premium on top of the National Minimum Wage which will gradually increase over time.

The current National Minimum Wage (NMW) standard adult rate (for those workers aged 21 or over) is £6.70 per hour and this rate is expected to continue to increase periodically, usually every October.

On top of the standard adult rate, the Government will now add a premium for workers who are over 25, effectively creating a separate rate for that age group. They are expected to add a premium of 50p onto the standard adult rate in April 2016, taking the rate for workers aged 25 or over to £7.20 per hour. A significant increase when compared with historical increases to the NMW rate.

The NLW 50p premium is expected to increase over time, alongside the NMW standard adult rate, to achieve the government pay target.

This will have an obvious effect across a wide-range of employers and, with the expectation that small business will be hit hardest; the Government has introduced measures such as a cut to Corporation Tax and an increase to Employment Allowance to cushion the impact.

We would recommend that now is a good time to review the pay structures you have in place in your business in order to plan ahead for the substantial increases to the NMW through the introduction of the NLW. We have compiled some top tips below, based on the current NMW regulations, we which don’t expect to change fundamentally, to focus on during the review:

  1. It is worth remembering that the NMW is payable to all employees and Workers are a wide class of individual that cover those engaged via agency contracts or as casual staff. Self-employed individuals are not entitled to be paid the NMW.
  1. When checking whether an individual is receiving the NMW, their average hourly rate is to be taken into account which is the total pay earned divided by the total number of hours worked over the period in which they are paid (up to a maximum of one month).
  1. Certain additional payments beyond basic salary count towards the calculation of the National Minimum Wage such as bonus, commission and other incentive payments based on performance, piecework payments and accommodation allowances.
  1. Some payments don’t count towards the calculation of the hourly rate however such as benefits in kind, expenses, tips/gratuities, pension payments, any premium paid for overtime or shift work, and allowances not attributable to performance such as on-call allowances. So care should be taken when calculating whether your business is complying with the National Minimum Wage.
  1. Certain deductions from pay made by the employer for their own use and benefit reduce the employees’ average hourly rate for the purpose of the National Minimum Wage calculation.

Great care should therefore be taken to ensure your staff are paid what they entitled to. Failure to do so brings with it many potential ramifications, including claims from staff who are underpaid, financial penalties, criminal proceedings against repeat offenders and a public naming and shaming scheme.

As a result of the forthcoming significant increases to the NMW via the NLW premium, you may need to re-consider the pay structures that exist within your business. This may require changes to the terms and conditions your staff currently enjoy. We would highly recommend you take advice on any such changes and the way they are implemented to avoid constructive dismissal claims from staff.

Please call our expert team of employment lawyers for any advice required arising from the above issues.

Ben McFeely

Ben McFeely