The pay minefield: National Minimum Wage, Living Wage or Fair Pay?

The pay minefield: National Minimum Wage, Living Wage or Fair Pay?

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Author: Michael Briggs

Applies to: England and Wales

The National Minimum Wage Regulations 2015 come into force on 6 April 2015 and will consolidate and replace the National Minimum Wage Regulations 1999. The rate of NMW will not change as a result, but what other options for pay do employers have?

Background

The National Minimum Wage ('NMW') is a specified minimum hourly rate of pay which all employers are obliged to pay to all workers who are working in the UK and are over compulsory school age. NMW was introduced by the Labour government in 1998, with the aim of tackling some of the worst examples of poverty pay by providing a statutory floor.

Since July 2014, the government has been consulting on the introduction of a new set of consolidating regulations in respect of NMW.

Given the various pieces of amending legislation that have been put in place regarding changes to the National Minimum Wage Regulations 1999 over the years, the new regulations will set out the full position in respect of NMW by consolidating the existing 28 statutory instruments currently in force! It is hoped this will result in the legislation being considerably more user-friendly.

The existing rates of NMW will not change as a result and, by way of reminder, for the period 1 October 2014 to 30 September 2015 these are as follows:

Standard (adult) rate 

Workers aged 21 or over  £6.50 per hour 
Development rates Workers aged between 18 and 20 inclusive £5.13 per hour
Young workers rate Workers under 18 but above the compulsory school age that are not apprentices £3.79 per hour
Apprentice rate Apprentices under 19 years of age or those aged 19 and over but in their first year of their apprenticeship £2.73 per hour

The government has just confirmed the new rates for the NMW which will apply from October 2015.

A recent report on the level of NMW from Resolution Foundation suggested that the Low Pay Commission should take a broader role in trying to address the problem of low pay within the UK. The Low Pay Commission itself suggested a 3% rise for 2015, while Labour leader Ed Miliband has pledged that NMW would rise to £8 per hour over the course of the next parliament if Labour won the general election.

Failure to pay NMW results in enforcement proceedings by HM Revenue and Customs, who have the ability not only to enforce payment of the NMW but to impose financial penalties and to name and shame those employers who breach the legislation.

Living Wage

The 'Living Wage', promoted by the Living Wage Foundation, is an hourly rate of pay set independently and updated annually, and is calculated according to the basic cost of living in the UK. Different rates of the Living Wage apply in London and the rest of the country.

The Living Wage is not a legally enforceable minimum level of pay, like the NMW, as employers can choose to pay the Living Wage on a voluntary basis only. However, failure to pay the Living Wage can create adverse publicity for employers, particularly those in London and the public sector.

In November 2014, the rate of the UK Living Wage was increased to £7.85 per hour (with the London Living Wage increasing to £9.15 per hour). The voluntary UK Living Wage is 21% higher than the compulsory NMW and, as a result, commentators have stated that some business groups may struggle to pay it. Nonetheless, the UK Living Wage has been adopted by more than 1,000 employers across the UK, benefitting some 35,000 workers. An independent study also found that more than 80% of employers believe that the Living Wage had enhanced the quality of work of their staff, with absenteeism falling by approximately 25%. Two thirds of employers also reported a significant impact on recruitment and retention within their organisation.

Fair Pay

An employer's primary aims when setting pay levels are likely to be to retain and motivate staff. Rates of pay may depend upon the employer's business performance, the sector in which it operates and the state of the employment market. For example, when there is a shortage of candidates with particular skills an employer is likely to be required to offer higher pay.

Traditionally, hourly rates and salaries were used to attract employees to an organisation; benefits kept them there; and bonus and incentive schemes motivated them in their work. Nowadays, research indicates that individuals are attracted, retained and engaged by a whole range of financial and, importantly, non-financial rewards such as the ability to work flexibly.

Although there is a legal obligation on employers to ensure that there is equal pay between men and women doing equal work within their organisation, there is no legal obligation to ensure 'fair pay', either between the sexes or generally. It would be a defence to any equal pay claim that differences in pay within an organisation had arisen due to a 'material factor' which is likely to encompass differing market conditions at the time employees were recruited.

However, all the political parties are currently sensitive to the concept of 'fair pay' in light of the recession which has seen real wage rates drop in the face of inflation. The TUC campaigns vigorously on this issue. Therefore, whoever gets into Downing Street in May is likely to have this on their radar and employers are likely to feel the pressure on wages in the coming years.

Practical tips for employers

  • to find out what attracts, retains and motivates staff undertake an annual workplace survey
  • undertake annual benchmark exercises in respect of levels of pay within other local employers or other employers in the same sector. This information can be fed into pay structures to ensure that staff are attracted, retained and kept motivated
  • consider opportunities for incentives, whether those be through performance or other cash bonus arrangements, opportunities for career progression, flexible working arrangements or other arrangements that recognise good performance
  • make sure there are pay structures in place which reflect the value of jobs within your organisation and consider if a job evaluation study is appropriate? Job evaluation studies have been an important tool for setting pay rates among public sector employers, particularly to ensure equality between male and female employees. Market pricing has tended to be more influential in the private sector
  • review pay structures regularly, ideally annually.

Disclaimer

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.

About the Author

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Michael Briggs

Senior Associate

0370 086 5066

Michael is an experienced employment lawyer who provides practical, commercial and results-driven advice to a wide range of clients in respect of disciplinary matters, redundancy & reorganisation, absence and performance issues, employment contracts & handbooks and executive appointment & exits. Michael also defends employment tribunal claims.

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