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The National Minimum Wage: a hike too far?

21st Oct 2005
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It has been six years since the National Minimum Wage (NMW) Regulations were first introduced in the UK, since that time there have been successive rises each year for workers aged 22 and over; so have the inflation-busting rate rises gone too far and what is the cost to business?

The last two years have seen a particularly high increase in the national minimum rates, far outstripping the rates of inflation.

On 1 October 2005 there was a further increase. Workers aged over 22 will be entitled to an increase from an hourly rate of £4.85 to £5.05, breaking the £5 barrier for the first time. The Government has also confirmed that the October 2006 increase will take the NMW to £5.35.

Workers aged 18-21 will also be entitled to an increase from £4.10 to £4.25 (rising to £4.45 in October 2006).

There will be no change for 16 to 17 year olds whose rate remains at £3 per hour, and apprentices continue to be exempt from the regulations.

There appears to be differing opinions about the impact of these increases. The Government’s view is that one million people will be helped since they will receive a guaranteed national minimum wage while the Government believes that no increases of the rates for 16 to 17 year olds means that employers will be encouraged to recruit younger individuals who may be entering the labour market for the first time.

Tony Blair has stated that he “wanted the minimum wage to become a symbol of decency and fairness.”

The Government also believes that the national minimum wage increases will affect those people who need it most such as women mainly working in catering, cleaning and retail, part time workers, peripheral or atypical workers (for example seasonal or casual workers), workers employed by small employers (under 25 employees) and certain sectors of the private sector. The Government’s aim is to get rid of “poverty pay”.

The private sector has differing views. Many employers believe that the year on year increase in the national minimum wage has increased costs and damaged competitiveness.

There is also a fear that wage differentials are being squeezed since the low paid are having regular increases, that the increases have far outstripped inflation and the national minimum wage is now encroaching on sectors where it previously did not exist.

In addition, there is a feeling that it is becoming increasingly difficult to set up business in the UK and bearing in mind reduced consumer spending and competition from overseas, the latest increase may be the last straw which leads to redundancies or even small businesses closing.

The CBI have called for the Government to look at the interaction between the national minimum wage and benefits in kind (including salary sacrifices). At present when calculating whether employees earn the minimum wage, no deductions are made for any benefits including tax free childcare vouchers, computers, etc, or other benefits which form part of the remuneration package such as pensions or medical cover, bonus or commission.

Certainly in an age where flexible working is common and employers offer a sophisticated range of benefits to suit individual needs, it may be that a workers total remuneration package should be taken into account when calculating the national minimum wage as opposed to simply their pay.

Employers will certainly disagree with the Government that over the past six years the repeated rises in the national minimum wage have had no impact on the economy.

Whether the government continues to make increases is not yet known and certainly whilst the Trades Union Congress were calling for a £6 minimum wage next year, employers would welcome a “pause” year where there are no increases. In the private sector workers are not guaranteed pay increases, which are usually dependent on individual and company performance.

It may be necessary to review the government’s aims of reducing poverty pay by looking at other ways of supporting those workers on very low salaries. A more appropriate method might be to look at the way tax is deducted and the way that state benefits are provided.

One thing is certain, employers cannot afford to ignore the regulations and the increases. Under the National Minimum Wage Act 1998, as amended by the National Minimum Wage (Enforcements) Notices at 2003 enforcement notices may be issued to employers who are in breach.

These notices can require the employer to pay the correct national minimum wage and force them to make up the difference between any previous lower paid rate and the minimum prescribed rate up to a maximum of six years. The act also provides for criminal proceedings to be brought in the case of persistent or deliberate non-compliance attracting a maximum fine of £5,000.

In addition employees themselves can bring proceedings before the Employment Tribunal for breach of contract, and/or unlawful deduction of wages and/or constructive dismissal.

Ranjit Dhindsa is Head of Employment in the (Midlands) division of international law firm Reed Smith LLP.

HR Zone would like to hear your views, is the latest NMW rate rise, a hike too far?


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By Nkellingley
21st Oct 2005 15:13

I've said it before and I'm going to say it again.

Employers who cannot pay their staff a living wage (I'm not talking extravagance here) do not deserve to exist. It's simple really.

My heart bleeds for the business that can't manage to pay an employee just over £5 an hour. (Or a full time equivalent after tax of roughly £750)

When you consider that rent will cost a minimum of £200 a month (more if you have a mortgage), transport at least £50, heat, light, water, electricity, etc. again at least £50, food at roughly £100, personal pension contribution of £50, clothing and general expenses £50, leaving a low wage employee with a massive...

£250 a month. And that's assuming they live up here in the north - try renting somewhere for £200 in london and see how far you get.

So that's £60 a week for fun, and no money for fun at all if they smoke.

So by my calculation that's a whacking £1.25 an hour these folk make for themselves. Nice - not.

Quite simply this is not good enough, no wonder people find it easier and more profitable to sit at home and claim benefits.

So again I reiterate, businesses have no right to exist if they cannot pay a living wage. And no-one who has to live on the minimum wage can live with a reduction - particularly for benefits that they almost certainly won't have chosen, and that unscrupulous businesses will inflate the value of to pay less money.

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