One of the most significant initiatives brought in since the election in May 2015 is the introduction of a National Living Wage (NLW) for individuals over 25. A recent online poll has suggested that food and drink manufacturers do not believe the increase in pay is going to be affordable and Moody’s, the credit rating agency, has also warned of the impact it could have on the sector.
The existing framework:
Apprentice* £3.30
Age 16-17 £3.87
Age 18-20 £5.30
Age 21+ £6.70
*If under 19 or in first year of apprenticeship
From April 2016 the NLW will guarantee individuals over 25 a pay rate of £7.20 per hour, rising year-on-year until it reaches £9 per hour in 2020.
Impact
For some time food and drink businesses have been operating with narrow margins in an attempt to counter rising costs and the effects of the global financial crisis, whilst at the same time trying to ensure the competitiveness of the sector. There is now a concern that a requirement to pay workers within the sector an increased rate of pay will have direct and significant consequences for food and drink manufacturers and for the UK’s grocery supply chain. The Food and Drink Federation has previously submitted papers to the Low Pay Commission (an independent body which advises the government on the National Minimum Wage) setting out its concerns about the impact of the existing National Minimum Wage on its members. It has sought to encourage the Low Pay Commission to minimise that effect and the implications it could have for business costs, competitiveness and employment levels, and to review how the minimum pay levels are set.
The Living Wage Foundation (an organisation which has long promoted the payment of a Living Wage in excess of the National Minimum Wage) estimates that the increase will affect 2.5 million workers. They are concerned that the NLW will not go far enough to help people out of poverty. Their main concerns are that:
- the increase will not help over two million workers who are too young to qualify
- the increase will do little for the 586,000 workers in London who face higher costs of living
When the NLW is introduced, an employee working an average week of 35 hours will receive an additional £17.50, effectively giving them a £910 pay rise. A business employing 100 people will therefore face an increase to its wage bill of £91,000.
The government intends to offset the impact on employers by:
- reducing corporation tax to 19% in 2017
- reducing corporation tax to 18% in 2018
- increasing the employment allowance meaning employers of four full-time workers on NLW would make no National Insurance Contributions
Options for employers
If an employer genuinely cannot afford the increase in wages than there are some options available:
- decrease hours
- reduce the number of employees
- remove paid lunch breaks
- increase the price of goods or services
The first three of these suggestions would generally require employers to consult with employees and follow a fair and legally compliant procedure in order to introduce the changes. We recommend that you seek legal advice if you considering taking such action. The last suggestion could, of course, have consequences for your relationship with your consumers and may not even be possible, depending on the terms of any pre-existing contractual arrangements.
Conclusion
It is clear that the simple addition of the National Living Wage for those over 25 will have a far reaching impact on employers within the food and drink sector.
How employers will react remains to be seen but with more than 200 employers being “named and shamed” for not paying the National Minimum Wage since October 2013, along with the increase of fines from £20,000 per employer regardless of the number of employees affected, to £20,000 per employee affected it is clear that not paying the National Living Wage will not be an advisable option.
Ellie Hibberd is an experienced employment solicitor and is part of our employment team in Exeter. To discuss this article or any other employment issue call 01392 210700 or employment@stephens-scown.co.uk.