The National Living Wage and the National Minimum Wage: Is it time to review your rates of pay and become more efficient?

21 November 2016

The National Living Wage (NLW) is not to be confused with the ‘Living Wage’ (an advisory rate set by the Living Wage Foundation) or with the National Minimum Wage (NMW) (which has been in place for some time and now applies only to employees under the age of 25). One further source of confusion is that the NLW rates are increased annually in April whereas the NMW rates are increased in October.

The current rate of NLW (for employees who are 25 and over) is £7.20 per hour. For those younger than 25 the following rates of NMW apply:

  • 21 to 24-year olds – £6.95 an hour;
  • 18 to 20-year olds – £5.55 an hour;
  • 16 to 17-year olds £4.00 an hour; and
  • Apprentice rate – £3.40 an hour (the apprentice must be under 19 or in the first year of apprenticeship).

Most payroll software systems will deal with this – as long as they have been upgraded to handle the new age threshold, minimum hourly rate and effective date. For others, the process may involve a degree of intervention. All employers and their advisers need to have at least a basic level of knowledge on:

  • who is affected by the NLW;
  • how to calculate whether the minimum pay rate is being paid; and
  • how to identify when an individual’s pay rate must rise.

Who is affected?

The NLW rate applies to workers who are aged 25 years or over on the first day of the pay reference period. This is the period during which the pay is earned and is usually determined by how often the worker is paid (monthly, weekly, etc.). Various types of workers are excluded from the regulations including self-employed workers, company directors, volunteers and sometimes family members. A more complete list is available in our blog of 14 December 2015 here.

What is ‘average pay’?

Average hourly pay must equal or exceed the relevant minimum rate for each worker in each pay reference period.

Detailed guidance and a basic online calculator is available at www.gov.uk/minimum-wage-calculator-employers.

Enforcement

Cases will be referred to HMRC’s minimum wage enforcement unit who will then undertake an investigation into the employer’s business. Where NLW regulations are found to have been breached, the affected employees will be entitled to receive from their employer payment of all arrears. The employer will be subject to a fine of up to 200% of the wage arrears (to a maximum of £20,000 per worker).

The bigger picture

A survey of employers published by recruitment company Manpower in September last year found that employers were already scaling back recruitment, and suggested that some firms would try to bypass the legislation by taking on more, younger or self-employed workers.

There are wider implications for all employers. Workers currently earning just above the new minimum may also demand rises to maintain their pay differentials. Many businesses, especially those in retail or hospitality, will also need to consider changing working methods or introducing more technology to contain their costs and remain viable.

If you are concerned about any aspect of NLW, or need to discuss ways of maintaining the profitability of your business in the face of this additional cost burden, you should contact Martin Johnson (0191 567 8611) or your local UHY adviser.