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Key steps in preparing for the National Living Wage

Today (1 October) the annual increases to the National Minimum Wage come into force.

The new rates are as follows:

21 and over £6.70

18 to 20 £5.30

Under 18 £3.87

Apprentice £3.30

However, from 1 April 2016 the National Living Wage is set to replace the existing National Minimum Wage for all workers aged 25 and over.

What is it?

The current minimum wage for aged 21 and over is set at £6.70 an hour but with the planned changes it will rise to £7.20. The rate is expected to exceed £9 an hour by 2020. The Living Wage is not a new concept and whilst employers are not currently obliged to implement it, it has been adopted by around 1,000 employers in the UK. The Chancellor announced in the Summer Budget that the National Living Wage will become mandatory ahead of the Living Wage Foundation’s new rate announcement in November 2015.

Case example

Lidl is the first UK supermarket to announce that it will adopt and exceed the National Living Wage early from 1 October 2015, ahead of this becoming a legal requirement. This will mean that all Lidl UK employees will receive a minimum of £8.20 per hour across England, Scotland and Wales and £9.35 per hour in London. Lidl have confirmed that this will be an average basic wage increase of £1,200 per year, with 53% of Lidl UK’s 17,000 strong workforce benefitting from the rise. This implementation is estimated to cost Lidl £9 million per annum. This figure highlights the significant cost the National Living Wage represents for employers across the country. Some commentators anticipate a reduction in employment levels particularly in labour-intensive industries such as retail, hospitality and support services.

The potential impact of the National Living Wage

Employers will need to consider how they will accommodate significant increase in labour costs, particularly those in labour intensive sectors such as services. Employers will have to assess the impact across the whole remuneration spectrum as higher basic pay means higher holiday pay, sick pay, bonuses and pension contributions. The impact on costs goes way beyond the increase in basic pay. Employers may have to make trade-offs with other benefits in order to fund the change or they may simply put their prices up. Employers will have to be careful if they seek to make contractual changes so as to minimise the risk of any claims. Consultation may need to take place with recognised unions and employee representatives.

Employers should also be aware of the significant penalties for failure to comply. Fines for non-compliance are likely to be up to a maximum of £20,000 per underpaid employee and directors of employers who fail to pay could be disqualified from being a director for up to 15 years.

How to prepare

Employers should assess the impact of the National Living Wage on their businesses well advance of its implementation in April to ensure that clear plans are in place for how the change will be introduced and funded. Employers may also consider conducting a full pay audit to highlight wage discrepancies that may be created by the increase in wages.

Since writing this blog a new Living Wage rate has been announced with an increase to £8.25 per hour, rising from £7.85. In addition Boris Johnson has announced the increase to the London Living wage from £9.15 to £9.40 per hour, a rise of 2.7 per cent.

Our checklist contains the latest rates for the National Minimum Wage

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further