Legal expert Jawaid Rehman explains how to ensure you meet the requirements of the National Living Wage
Following the eagerly anticipated announcement of the Budget, one of the big talking points was the new National Living Wage, which will replace the existing national minimum wage for all workers aged over 25 with effect from next April. The current minimum wage of £6.50 an hour will be replaced with a new rate of £7.20, which is expected to rise further to more than £9 an hour by 2020. This could fuel a significant jump in costs for employers across the country and many are anticipating a cut in employment levels in labour-intensive industries such as retailing, pubs and restaurants.
The concept of a living wage already exists (as recommended by the Living Wage Foundation), and has been voluntarily adopted by more than 1,000 employers across the UK who have been given Living Wage Employer status. It is set at a higher rate and is not to be confused with the new National Living Wage, which will be mandatory, and the respective rates of pay will be set by the government.
By enshrining such a living wage in law, this will compel businesses in certain industries to implement a potentially significant pay rise for many of their employees. Employers will therefore need to consider carefully how they implement this change within their organisation, including assessing the knock-on effect it is likely to have in terms of their existing pay scales, job evaluation schemes, pension costs and other employee benefit schemes.
There is significant uncertainty around the impact the new Living Wage will have. Employers are effectively losing a large element of control over what they pay some of their staff, therefore they may have to make difficult organisational decisions, which may result in contractual changes - for example, reducing or stopping bonus payments and cutting back on other employee benefits. Such changes could lead to complaints from disgruntled employees across the business. In order to avoid employee relations issues and potential claims arising, employers will need to carefully consider their approach and any proposed measures (and the legal requirements for implementing such measures), particularly given the phased increase in the rate of the National Living Wage.
Key considerations are likely to include:
- Unpredictability of payroll costs and subsequent issues with budgeting and forecasting
- Whether to retain existing pay scales and use a supplement, or implement new ones
- Practical administration and payroll implications
- Any employee relations issues that might arise, for example, where an employee's wages have been inflated to a level where they are being paid as much as their supervisor
Employers should also ensure that there are pay structures in place that reflect the value of jobs within the organisation. They should therefore consider whether a job evaluation study might be appropriate. Such studies have been an important tool for setting pay rates among public sector employers, particularly to ensure equality between male and female employees.
Any contractual changes to employee terms and conditions will need to be handled carefully and any consultation requirements will need to be adhered to and dealt with in good time to avoid expensive tribunal claims. Therefore, employers need to be sure that they are carrying out modelling exercises at an early stage so that they are clear on how they will implement the change in a way which minimises the risk of employee relations issues and any associated claims.
Jawaid Rehman is an employment partner at national law firm Weightmans LLP