Geoff Pearce, Managing Consultant, NGA Human Resources explores the actions facing businesses in light of the new national living wage

What’s Happening

From April 2016, the Government will introduce a new National Living Wage (NLW) for workers aged 25, it is a cornerstone of the drive to make work pay and reduce reliance on the benefits system. It will be mandatory for employers to pay the NLW, which should not be confused with the similarly named Living Wage that is promoted by the Living Wage Foundation and is voluntary.

Initially the NLW will be set at £7.20 per hour, this is 50 pence above the Age 21 rate for the National Minimum Wage, which increased to £6.70 from 1st October 2015. The Government has asked the Low Pay Commission to recommend future increases to the NLW with the stated objective that by 2020 the NLW should be at least £9.00 per hour, which it is anticipated, will be equivalent to 60% of median earnings.

On the face of it the change appears fairly simple, after all it is in effect a new National Minimum Wage rate payable only to those aged 25 and over. However, it’s not quite as straightforward as it may sound and potentially raises a number of issues that employers need to consider.

What do employers need to think about?

Accredited Living Wage Employers across the public and private sectors need do nothing at this time as the current rates for the Living Wage (£7.85 outside London and £9.15 in London) exceed the proposed NLW rates. There are other organisations (most notably in the retail sector) that have already announced measures that will help them address the implementation of the NLW; these organisations will need to continue to monitor future changes in the NLW and adapt their pay policies accordingly.

However, there are a large number of other organisations that still need to take action between now and April 2016 and they have a number of potential issues to consider.

1. Cost

The costs will depend on the choices that business makes regarding implementation, for instance:

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?

When will the changes be implemented?

Once an employer has decided its policy, determining the initial cost should be straightforward enough, but projecting future costs is less certain.  The Low Pay Commission will be responsible for advising the Government about changes to the NLW and will take account of the ‘state of the economy, employment and unemployment levels and relevant policy changes’.  Subject to these conditions the only basis for projecting costs at this time is the Government’s objective of creating a National Living Wage of at least £9.00 by April 2020.  This represents a significant increase in earnings over the period as the increase from £7.20 to £9.00 an hour is 25% over the proposed period which is likely to be considerably higher than normal wage inflation over the same period.  Therefore by 2020 it is likely that greater numbers of employees will be captured by the NLW.

The number of different factors involved may make it difficult for employers to plan and budget for changes.

2. Impact on pay structure

The statutory implementation of the NLW will potentially compromise the design of many organisations’ pay structures. 

The introduction of the NLW will erode the lower end of current pay structures as it will remove the existing differentials between the lower grades of many pay structures, particularly in light of the projected rate of increase from £7.20 per hour to £9.00 per hour by 2020.  NGA Human Resources has already looked at the impact on a number of Council’s structures and in many instances  for all practical purposes it could in effect merge the first three grades of a typical  structure.  This erosion of differentials within the pay structure could lead to pay pressures emerging further up the structure and create employee relations issues, for example amongst employees with significantly different levels of role responsibility who would 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 or if it would be feasible to apply the new rates whilst maintaining the integrity of the pay structure. 

Looking at the experience of Councils that have adopted the Living Wage Foundation rates, these are typically not contractual and the continued commitment to paying these rates is often subject to annual review. In many organisations the additional payment is made by way of a supplement added to the basic salary.  Clearly the NLW is different as it will be a statutory requirement, but the options for payment need to be considered.

Other options that employers may wish to explore include reviewing roles and increasing skills to improve productivity and efficiency thereby ensuring a return on their increased payroll costs.

3. Potential equalities issues

A potentially unforeseen consequence of this change is that for many organisations, particularly in the public sector, the introduction of the NLW could result in equalities issues, which have yet to be tested.  

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 significant 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.

NGA Human Resources Reward Team provide support and advice on a range of issues including Equal Pay, Job Evaluation and Job Families, Pay Structure design and gender pay reporting.