Earlier this month (April 2017) the government named and shamed the most recent round of employers who have underpaid their workers. The list contained 350 employers and all together they underpaid their employees just under a million pounds. This is the biggest list published to date since the national living wage came into force. One of the particularly striking things about the list is just how many of the employers on it have underpaid by relatively small amounts.
The National Living Wage (NLW) was brought in on 1 April 2016 and guarantees individuals over 25 a pay rate of £7.20 per hour. The hourly rate will rise year on year until it reaches £9 per hour in 2020 and it has recently been announced that the next increase on 1 April 2017 will take the rate up to £7.50 per hour.
At the time of writing the NLW is approaching its first birthday. After initial concerns by employers that the NLW would seriously damage their businesses we take a look at what the impact has really been, and what the long term outlook is now.
Financial impact
The introduction of the NLW over an average working week of 35 hours meant employees were set to receive a pay rise of £17.50 per week, or £910 per year. For employers employing 100 people this equates to an additional annual wage bill of £91,000.
The NLW is also payable to casual and seasonal workers and an employer needs to make sure that their pay is equal to or more than the relevant NLW hourly rate of pay. The method of calculating a worker’s hourly rate of pay varies depending on the type of worker the individual is. For example, if the employee is paid with reference to hours worked then it is likeyl to be a calculation of pay divided by hours worked. This is a very simplistic view and the calculation can be complicated as other elements of pay and deductions need to be considered, for example accommodation offset rates (maximum offset of £6 per day against the relevant NLW rate).
Infringement
With nearly 750 employers being “named and shamed” for not paying the National Living/Minimum Wage (NMW) 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 NLW is inadvisable. The Business Department has also announced that HMRC is currently investigating a further 1 ,500 cases of potential underpayment of the NMW/NLW.
The employers on this year’s “list of shame” have commonly been caught out by practices such as using tips to make up wages, making staff pay for their own wages, and technical errors when running their payroll. From our own experience advising businesses on the NLW we also know that issues such as accurately factoring in travel time while working, and whether employees should be paid the NLW for “sleeping in” or being “on call” can cause confusion.
Minimising the impact
The increase in hourly rates has an immediate and direct impact on a business’ bottom line, particularly at a time when many smaller businesses are now at their pension auto-enrollment staging date. However, early research on the impact on the NLW suggests that job losses have not been the primary response to the increased costs. We have seen some employers who might otherwise have struggled to absorb the impact of the NLW take the following actions to try and avoid having to dismiss employees:
- decrease hours
- increase the demands placed on employees in terms of their flexibility in hours and duties; and
- remove or reduce paid lunch breaks
We have supported both small and large businesses in considering and implementing these actions to ensure that they have done so without exposing themselves to the risk of a claim.
Anecdotally, we believe that many businesses have also opted to increase prices and pass on the impact in that way. The Low Pay Commission Report on the NLW issued in Spring 2016 suggested that many employers have strategies
in place to deal with increases in pay in 2016 and 2017 but not beyond and that there is still considerable concern about the rising trajectory through to 2020.
At the time of announcing the introduction of the NLW, the government also announced that it intended to offset the impact on employers by introducing the following measures:
- corporation tax reduced to 19% in 2017
- corporation tax reduced to 18% in 2018
- increased employment allowance meaning employers of four full time workers on NLW would make no National Insurance Contributions
This theoretically should mean that employers should get some cushioning to further rises in the NLW (to some extent). Whether this is the case in reality remains to be seen.
Could the referendum result have an impact?
In the aftermath of the result of the referendum and the UK’s decision to leave the European Union, the government announced that that decision would not, in itself, give rise to a policy change.
However, future increases of the NLW will take into account “the state of the economy, employment levels and relevant policy changes”. Although the economy seems more buoyant now than some had expected it might by this point, there is still a prospect that a downturn in the UK’s financial position could lead to a watering down of the anticipated NLW rate increases.
Claire Lawry is a Paralegal in the HRExpress team, advising organisations on HR and employment law issues. To discuss this or any other HR query, please call 01392 210700 or email parks@stephens-scown.co.uk