Will the new National Living Wage affect your business?

If you employ people at, or close to, the current National Minimum Wage levels, the new National Living Wage will affect your business. If not immediately, as the National Living Wage increases each year by 6%, you may find your hourly wage gets closer to the minimum and then you will need to act. This article includes some of the rules around the National Minimum Wage, as a reminder for you, and outlines what some businesses are doing in preparation for the change on 1 April 2016.

The National Living Wage is, in effect, a supplement on top of the National Minimum Wage for those who are aged 25 or over. If you employ people who are 25 or over and they are paid between £6.70 and £7.20 per hour, their hourly rate will increase to £7.20 per hour on 1 April 2016. You should begin to pay them the new rate at the start of the next pay reference period following 1 April 2016.

From 1 April 2016, when an employee reaches their 25th birthday they will need to receive the new National Living Wage rate at the start of the next pay reference period following their birthday.

A word of warning – if you employ apprentices, whatever their age, once the first year of their apprenticeship is over their hourly pay will revert to the normal hourly rate for their age. That means that if you have an apprentice who is 25 or over, or who reaches 25 during their apprenticeship, once the first year of their apprenticeship is completed they will need to be paid £7.20 per hour.

Remember though, the law does not require each and every hour of work to be paid at the National Living Wage. As with the National Minimum Wage, the hourly rate of pay can be averaged over the reference period. Beware though that there are certain things that cannot be included in that average. These include benefit in kind payments, such as car parking allowances, vouchers or stamps, tips and gratuities, allowances and overtime premia. Elements such as bonus payments can be included within the hourly rate, but if the average amount does not meet the minimum of £7.20 for those aged 25 or over, you will need to make up the difference in each pay period.

It is automatically unfair to dismiss anyone for reaching the top level of the National Living Wage (as with the National Minimum Wage), so be very careful if you are thinking of terminating the employment of those who are approaching 25. Also, if you are choosing younger workers because they are cheaper, or making redundancy decisions based on age, you will also fall foul of the age discrimination/equality legislation, which could cost you more than paying the National Living Wage. If you are not paying the correct amount, an Enforcement Officer can make a claim on behalf of the employee, thus circumventing the Tribunal fees that are required for individual claims.

What are companies doing to prepare for the National Living Wage?

We have been undertaking research around a number of businesses, some of them our clients and some not, and we have been really pleased to hear some of the business decisions that have been made. These decisions include:

  • One organisation is taking the opportunity to improve the quality (and therefore the price) of the product they offer to pitch at a different customer group than previously. They are confident that their product will be attractive to customers who can afford to pay more.

  • One of our clients is embracing the concept of the National Living Wage and is going to pay it to everyone who is 21 and over. They are currently experiencing recruitment difficulties and so they believe it will make them more attractive to new staff.

  • One of our clients is simply absorbing the increase, on the basis that if they cannot afford to pay it they should not be in business!

  • According to the newspaper, Tesco, Morrisons and B&Q are taking the opportunity to renegotiate overtime for Sundays and Bank Holidays, with the aim of only paying time and a half rather than double time. They pay slightly above the National Living Wage and believe this makes the case for them to cut their overtime bill.

  • One organisation we know is in the process of increasing automation to reduce the number of staff they employ. That does incur a high initial investment which is not always possible for businesses to achieve. It may not be good for the economy to put too many people out of work either!

  • One client is improving the skill levels of their staff to increase flexibility and enable better cover at peak times.

We have been modelling the impact of the National Living Wage for our clients that are affected, so if you would like any assistance with planning for the increase over the next four years, please do give us a call.

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