The national living wage (NLW) is an additional rate of the national minimum wage (NMW) which applies to workers aged 25 or over from 1st April 2016.  Its introduction will affect almost all employers and create a number of potential pitfalls that they will wish to avoid. Here, to help avoid these issues, employment specialist James Edmonds takes us through the do’s and don’ts employers should consider immediately and into the future.

Do workout when the NLW will apply to your payroll

The NLW applies to pay reference periods beginning on or after 1 April 2016. The NLW therefore only applies from when the employer’s payroll period begins. This means that if an employer’s monthly payroll period begins on 25th April 2016, the employer does not have to pay workers the NLW for the period of 1st April to 24th April 2016.

Do ensure workers are paid correctly

The NLW sets a minimum wage rate of £7.20 that must be paid to workers aged 25 and over. It should also be noted that NLW payments will be subject to pension, tax and NI contributions and the NLW increase may take workers over a threshold for these deductions.

Do update payroll when a worker turns 25

When a worker turns age 25, they will be entitled to be paid the NLW rate during the next pay reference period after the date of their birthday. This means that if the payroll period begins on the 1st of each month and a worker’s 25th birthday falls on the 20th May then they will be entitled to be paid the NLW from 1st June.

Don’t confuse the national living wage with the Living Wage

The Living Wage is set by the Living Wage Foundation which is a campaigning organisation which promotes a voluntary minimum hourly rate of pay calculated according to the basic cost of living. The Living Wage rates are higher than then NLW but there is no legal requirement to implement the Living Wage.

Don’t dismiss an employee because he or she is eligible for the NLW

An employee will be able to claim unfair dismissal if they are dismissed because they qualify for the NLW, even if the worker lacks the two years’ length of service normally needed to qualify for unfair dismissal protection.

Don’t consider national living wage eligibility when making redundancies

The increased costs due to the NLW may create a need to save costs and reduce headcount.  Whilst needing to reduce headcount is a valid redundancy reason, employers must take care to ensure an employee’s eligibility for the NLW plays no part in their selection for redundancy. This is because:

  • a dismissal will be automatically unfair if the reason for selection is that the employee qualifies or might qualify for the NLW; and
  • an employee dismissed in such circumstances may claim that they have been selected for redundancy due to their age and that this is age discrimination. To minimise this risk the employer should operate a transparent selection process so that it can demonstrate the objective reasons for selection that are not related to age.

Do take care before reducing other employment benefits or discretionary payments

The increased costs due to the NLW may create a desire to reduce employment costs by reducing benefits or discretionary payments, such as bonuses. Any attempt to unilaterally change a worker’s benefits or reduce discretionary payments, may result in unlawful deduction from wages claim, breach of contract claim and/or constructive dismissal claim. This is because:

  • Benefits are likely to be considered a term of the employee’s employment contract and a worker’s express agreement will normally be required to make significant changes such as those to remuneration, even if their employment contract contains a flexibility clause reserving the employer’s right to change employment terms.
  • Discretionary payments may still need to be paid even if they are labelled discretionary. This is because such a label will not be definitive and the payment may be considered a contractual entitlement through custom and practice.

Don’t recruit workers based on national living wage eligibility

Whilst anti-discrimination Law does permit employers to pay workers of different ages at the different NMW/NLW rates, an employer risks an age discrimination claim if it bases its recruitment of new workers on age, for example by rejecting applicants aged 25 and over with the aim of avoiding paying the NLW. This is because a wish to save money may not, on its own, amount to a legitimate aim capable of justifying indirect discrimination.

Do consider future increases to the national living wage

The Government intends for the NLW to reach 60% of median earnings by 2020. This would mean the NLW increasing gradually to around £9 per hour, with annual increases happening each April for the NLW and October for the NMW. Employers should therefore budget for further increases in these rates in the future.

These do’s and don’ts should help employer’s ensure compliance with the NLW and avoid the penalties for non-compliance, which now include: naming and shaming; disqualification of employers from being directors and financial penalties of up to £20,000.

James Edmonds is a Solicitor specialising in all aspects of Employment, Commercial and Corporate Law.

If you require specific advice or assistance with implementing the national living wage, please contact us so James or one of our other skilled employment law specialists can assist you.