The national living wage (NLW) came into force on 1 April 2016 and introduced a mandatory, minimum hourly pay rate of £7.20 for workers aged 25 and over.
The NLW was a significant rise of 50p an hour from the national minimum wage rate of £6.70 that applied before 1 April (and which continues to apply for workers aged 21 to 24). This equates to an annual pay rise of £910 for a full-time worker on the minimum wage.
But basic pay is only part of the story, there is a knock on effect on pension contributions and national insurance contributions which are also increased as a result of the introduction of the NLW. In addition, more staff may need to be auto-enrolled into a pension scheme because of their higher rates of pay.
It is perhaps not surprising therefore that employers have been looking at creative ways to absorb this increase in costs. As we suggested in our previous article: National living wage - time to prepare, reviewing pay and benefit structures might seem like a reasonable response by employers.
Media reports suggest that some large, well-known retailers have recently taken measure to change employees' terms and conditions for example, by no longer paying Sunday and overtime rates to new workers, reducing pay premiums for bank holiday working, withdrawing catering perks and cutting hours.
However, following a debate in the House of Commons on 18 April 2016 companies have been criticised for allegedly trying to 'evade the spirit' of the NLW and MPs called for penalties for business that "deliberately circumvent" the NLW.
The chancellor also spoke out against employers not acting within the spirit of the law, in another example of the trend for 'soft' enforcement based on self-regulation, he said:
'I think that companies these days should be much more careful about their reputation and much more aware of their social responsibility to their workforce as well as to their community.'
We explore the issue of fear of reputational damage as a means of encouraging compliance in our article: business regulation and the power of the brand.
The legal position
Whatever the chancellor may say, the legal position is that employers are free to contract with their employees on whatever terms they agree, as long as these are within the letter of the law. There is no suggestion that any of the companies which have been name checked in the media have not complied with the new legal obligation to pay the NLW to older workers.
Politicians' concern about the 'spirit' of the law being evaded suggests that the drafting of the legislation may not be fit for purpose and perhaps needs to be further considered. It cannot be reasonable to expect employers to second guess what the 'spirit' of the law looks like!
Market forces are much more likely to influence benefit packages than political posturing: organisations will want to ensure that their offering remains competitive to retain and develop the best talent for their business.
The chancellor might reflect that the NLW appears to be a law of unintended consequences: while giving the lowest paid a pay rise was done with benign intentions, employers have predictably and understandably responded in ways which means workers may in fact be worse off overall.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.