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The National Living Wage: the details

In July 2015 the Chancellor announced the introduction of a new statutory minimum pay requirement, described as a ‘National Living Wage’.

As part of the Financial Statement (or ‘Summer Budget’) in July 2015 the Chancellor announced the introduction of a new statutory minimum pay requirement, described as a ‘National Living Wage’ (NLW). The NLW will be: 

  • Introduced in April 2016
  • Available to workers aged 25 and over
  • Paid at an initial rate of £7.20 per hour 

It is anticipated that the NLW rate will rise to £9 per hour by the year 2020. 

When introduced, the NLW will be a compulsory payment. It should be distinguished from the existing ‘Living Wage’ (currently set at £7.85 per hour outside London and £9.15 per hour in London) which is paid voluntarily by employers. 

The current voluntary ‘Living Wage’ is set according to the projected cost of achieving an adequate standard of living. Campaigners have queried whether the new compulsory payment should be referred to as a ‘National Living Wage’ as it will be calculated with reference to median earnings rather than the cost of living. 

How will the NLW relate to the existing National Minimum Wage thresholds?

The National Minimum Wage is currently set at the following rates: 

  • Apprentices (if under 19 or in the first year of apprenticeship): £2.73 per hour (which will rise to £3.30 from 1 October 2015);
  • Under 18: £3.79 per hour (£3.87 from October);
  • 18-20: £5.13 per hour (£5.30 from October); and
  • 21 and over: £6.50 per hour (£6.70 from October). 

The NLW will sit alongside the existing National Minimum Wage. It currently appears as though, once the NLW is introduced the ’21 and over’ £6.70 National Minimum Wage rate will become a 21-24 rate, with the NLW applying to those aged 25 and over. 

This has led many commentators to describe the NLW as a new minimum wage rate rather than a true ‘living wage’. 

How will the NLW be implemented? 

It is not yet entirely clear how the NLW will be implemented. It may be that new primary legislation is required to introduce the scheme and, certainly, further details of the mechanics of the scheme are awaited. The Government have suggested that Regulations will be introduced. 

However it is likely that the operation of the NLW scheme will to some extent mirror existing National Minimum Wage provisions. 

Currently the National Minimum Wage Act 1998 provides the skeleton for National Minimum Wage law supplemented by the National Minimum Wage Regulations 2015. The rates are set annually by additional Regulations which come into force each October. The National Minimum Wage is set by Government with the advice of the Low Pay Commission. 

The Chancellor has indicated that the NLW will form a new aspect of the remit of the Low Pay Commission, which has been asked to set out how the new NLW will reach the Government’s target of 60% of median earnings (or a forecasted £9 per hour) by 2020. 

Who will receive the NLW? 

It currently appears that the new NLW will apply to all categories of individual who are currently eligible to receive the National Minimum Wage (provided they are aged over 25). However, this is subject to confirmation when further details of the scheme are available and/or legislation is published to bring the new compulsory payments into effect. The National Minimum Wage is currently payable to: 

  • Employees;
  • Most ‘workers’ (defined as an individual working under a contract ‘to personally do or perform work or services for another, provided that the other is not a customer or client of a profession or business undertaking carried on by the individual’); and
  • Agency Workers (It is the responsibility of the person who actually pays the agency worker to ensure that statutory minimum pay is received). 

Individuals who are genuinely self-employed, and charge an hourly or daily rate to the service user, are not entitled to receive the National Minimum Wage as they are able to self-determine an appropriate rate for their services. 

Where individuals are described as self employed but paid a gross monthly or annual salary it is unlikely that the NLW will apply (as is currently the case with the National Minimum Wage). However, the ‘self-employed’ descriptor may not be determinative and it will occasionally be necessary to carry out a case-by case assessment of whether an individual will be entitled to receive the NLW. 

Volunteers, work experience or placement students and some apprentices will be excluded from the NLW.  

What impact will the NLW have on the economy? 

  • In terms of the direct effect on earnings, the OBR estimates that three quarters of a million people aged 25 and over will move from receiving the National Minimum Wage to the new higher rate NLW. Just under an additional two million will move from earning above the existing National Minimum Wage to the higher NLW rate.  
  • There has been much debate in the press regarding the potential adverse impacts the introduction of a mandatory NLW will have on UK business as a whole with speculation that businesses may respond to increased wage costs by reducing hours or reducing jobs. As the new increased rate will apply to the over 25s only it has been suggested that businesses may increasingly move towards hiring younger workers (although history suggests this may be unlikely as the ‘phased’ nature of the existing national minimum wage does not appear to have had that effect). 
  • It is important to remember that the Government intends to introduce measures to ‘balance’ the increased wage costs of the NLW through reductions in corporation tax (which will fall from 20% to 18%) and reductions in the national insurance contributions paid by employers. The Government hopes that smaller enterprises will find that these reductions serve to offset higher wage bills. However it is questionable to what extent these changes will ‘soften the blow’, particularly for medium and larger businesses. 
  • It is possible that the introduction of the NLW will have a disparate impact on businesses operating solely or predominantly in the North of England where pay is traditionally lower. Treasury analysis suggests that 8 out of 10 of those likely to benefit from the NLW are based outside London and the South East, with the North West expected to see the largest number of wage increases. 

What impact might the NLW have on different business models? 

Until all of the details of the proposed NLW scheme are available (and until it becomes clear whether additional primary or secondary legislation will be needed) it is difficult to predict with precision how different business models will be impacted. However, in broad terms: 

  • Businesses that operate a straightforward ‘employment’ model are on the face of it likely to be most impacted by an increase in the rate of minimum statutory pay. All individuals working under an employment contract or a contract to personally perform services will be entitled to receive the NLW. Obviously, the impact will be felt most heavily in organisations or sectors where basic pay is low; 
  • Some of these employers may face challenges in relation to pay scale where an increase in pay for an employee currently receiving the National Minimum Wage will bring them up to or close to the pay received by their supervisors. In some cases a job evaluation study might be appropriate to make sure that pay adequately reflects the value of different roles; 
  • However, the cost of taking on agency workers is likely to rise in parallel to the costs of taking employees on to the payroll. An employment agency will of course be obliged to ensure that they pay eligible over 25s the NLW and presumably agency fees will be increased in line with the higher rate of pay. This may also pose challenges for organisations that use a heavy preponderance of agency staff; and 
  • The introduction of the new compulsory living wage may potentially make it more economic to use genuinely self employed service providers who are not captured by the statutory thresholds. However, it remains to be seen whether there will be a comparable rise in the market rates charged by self employed service providers once minimum statutory pay is increased.