National Living Wage: an in-depth guide

What is the National Living Wage?

The National Living Wage (NLW) is an increased National Minimum Wage (NMW) rate which will apply to workers aged 25 and over.

The NLW rate from 1 April 2016 will be £7.20 per hour, an increase of 50p on the current NMW and the NLW is expected to rise to £9 per hour by 2020.

Although they share a name, it is important not to confuse this with the Living Wage Foundation’s recommended Living Wage, which is already £8.25 per hour outside London and £9.40 within London but is not legally binding.

The current NMW rates will continue to apply to workers aged under 25. The rates differ depending on the workers’ status and age. The current hourly rates are:

Both the NMW and NLW rates will be reviewed annually. Increases to the NLW will take effect in April each year, while NMW will continue to rise every October.

Who will be entitled to the National Living Wage?

Workers aged 25 and over who are currently entitled to the NMW will be entitled to the NLW. This includes:

· Employees

· Casual, temporary and agency workers

· Agricultural workers

· Apprentices who are not in the first year of their apprenticeship.

How is the NLW calculated?

Like the NMW, the NLW is a minimum hourly rate. Eligible workers must receive at least the NLW for each hour worked in the pay reference period (if the worker is paid monthly, the pay reference period is one month, but it can be a shorter period if the worker is paid at shorter intervals e.g. every week).

The calculation depends on whether the worker is paid by the hour, salaried (i.e. paid the same salary regardless of hours worked), paid according to output or has neither set hours nor a set salary.

Where workers are paid by the hour or receive a salary, a key question is what counts as working time for which the NLW must be paid.

What counts towards the National Living Wage and what deductions may be made?

There are detailed rules on which payments and benefits count towards the current NMW and these will apply equally to the NLW. A key principle is that, with very limited exceptions, workers should receive their applicable legal minimum hourly rate in cash rather than in the form of benefits in kind.

Some deductions from wages/payments by the worker reduce the amount of the total earnings for NLW purposes. The worker must receive at least the NLW after these deductions and payments have been taken into account. However, other deductions/payments by the worker do not reduce total pay for these purposes and the employer will comply with the law provided the worker's pay before these deductions or payments is at least the NLW.

Accomodation allowance

This is the only non-cash benefit which can be taken into account. Accommodation provided to the worker free of charge is treated as having a cash value prescribed by law. This value is treated as being added to the worker’s cash pay when calculating whether they receive the correct NLW rate.

Tips and service charges

Since 1 October 2009, employers have not been able to count tips or service charges when determining whether the worker has received the NMW. This is the case even if the money is paid by the employer or through a troncmaster rather than direct from the customer. This rule applies equally to the NLW.

What happens if a business does not comply?

Workers entitled to the NLW who do not receive the correct rate of pay, can bring Employment Tribunal claim against their employer for unlawful deduction from wages.

Separately, HMRC may take civil enforcement action, including imposing substantial fines. The fine for non-payment will be 200% of the amount owed, up to a maximum of £20,000 per worker (although this is reduced by half if the fines are paid within 14 days). HMRC also regularly “names and shames” non-compliant employers.

Company directors may face criminal prosecution if the company has failed to pay the NLW and may be disqualified from being a director for up to 15 years.

Legal protection of workers

Workers are protected currently against retaliatory action linked to the National Minimum Wage and will now be in respect of the National Living Wage. This protection limits the ability of businesses to take immediate targeted steps to reduce additional staff costs resulting from the introduction of the NLW.

Dismissal/detriment

Dismissing an employee or subjecting a worker or employee to a detriment because they become eligible for the NMW or a different NMW rate, they take action to ensure they receive the correct NMW rate or because the employer is prosecuted for an NMW-related offence is unlawful and entitles the employee/worker to bring an Employment Tribunal claim. Dismissal of an employee in these circumstances is automatically unfair and so the employee does not need 2 years’ service to bring an unfair dismissal claim on that basis. These protections all apply equally to the new NLW.

This means that the legal implications of cost-cutting strategies need to be carefully considered. If redundancies need to be made, the selection criteria must be designed so that the employer can show that employees were not selected for redundancy because they would receive the new NLW rate.

Age discrimination

Dismissing (or refusing to hire) workers aged 25 and over (or offering them fewer shifts because the NLW now applies to them) would amount to age discrimination. Although both direct and indirect age discrimination can be lawful if objectively justified, it is generally not possible to justify discrimination on cost grounds alone and so this strategy would likely be unlawful.

Cost-mitigation options

Options available to businesses looking to reduce wage costs as a result of the NLW include:

· Reducing working hours or use of overtime

· Removing or reducing non-contractual benefits

· Changing contractual terms after consultation with staff (and, if an agreement cannot be reached dismissing and re-engaging on the new terms)

· Making redundancies.

In each case, targeting these workforce changes only at workers now eligible for the NLW would place the business at risk of detriment and age discrimination claims. In addition, businesses would need to consider:

· Whether overtime is purely at the business’ discretion or whether employees have any contractual right (e.g. through custom and practice) to a certain number of overtime hours

· Likewise, whether benefits are genuinely non-contractual or whether removing them may give rise to breach of contract claims

· Whether staff are likely to agree to the revised contractual terms and, if not, whether any resulting dismissals would be unfair (bearing in mind that there would need to be a genuine business case to justify dismissal

· Whether redundancies or other dismissals would trigger collective consultation obligations.