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Glasgow
+44 (0)141 221 2984

Edinburgh
+44 (0)131 225 6366

Stirling
+44 (0)1786 451745

Dumbarton
+44 (0)1389 765238

Hamilton
+44 (0)1698 459444

French Duncan

The National Living Wage

08 September 2015

Below we take a look at the impact of the government’s announcement to increase wage costs for employers by 50 pence per hour for all over 25’s from April next year.

What’s Changing?

  1. 1.    The National Minimum Wage is set to increase from £6.50 to £6.70 per hour from 1st October 2015.  For some employers, a 20 pence per hour increase will be hard enough to swallow, but there is more to come next year.  
  1. 2.    The government announced in the July budget that there will be a new National Living Wage of £7.20 per hour from April 2016 for all employees aged over 25. 
  1. 3.    And it does not stop there - a 34% rise in the National Living Wage has been proposed between now and 2020 to £9 per hour.  
  1. 4.    Finally, there will be stricter penalties for non-compliance with the new National Living Wage from April next year.  


Rationale

This move has been positioned by the government as a means to driving economic growth, and is welcomed by the Living Wage Foundation and Low Pay Commission who have campaigned for a living wage on the basis that the current minimum wage is inconsistent with the cost of living.   

However, the change has been widely criticised given the financial impact on businesses across the UK –  it is anticipated 60,000 people could be made redundant as a result and the former Chief Executive of Sainsbury’s, Justin King has branded the announcement as “ludicrous”.   


Implications

It goes without saying that a 20p increase next month for all employees aged over 21, and a further 50p increase in April for all those over the age of 25 will undoubtedly hit the pockets of many employers across the country.   Whilst there are a number of high profile organisations who have signed up to the non-compulsory living wage of £7.85 per hour  (£9.15 per hour in London), many small to medium organisations cannot afford this. 

The profitability of many companies will be impacted by this change, and hospitality, retail and the care sector are being highlighted as the most likely to suffer.  Some organisations may need to look at reducing their headcount through redundancy, and this in itself has cost implications. 

Even employers who already pay over £7.20 per hour could be affected if they have outsourced contracts for cleaning or catering as such contracts tend to have provision for increasing costs based on government enforced changes.  

As the change only affects those aged over 25, many employers may be tempted to employ younger workers at the cheaper rate.  However, whilst this would save 50 pence per hour, recruitment decisions cannot be based on age, regardless of the business rationale, and to do so could lead to an employment tribunal claim for discrimination.  

Non-compliance is not an option, with Prime Minister David Cameron stating “The National Living Wage will only work if it is properly enforced…Businesses are responsible for making that happen”.   The HMRC will introduce a new enforcement team which will pursue criminal prosecutions with penalties of up to £20,000 per worker for failure to adhere to the changes.  


Benefits to the Change

It is not all doom and gloom though:

  • First and foremost, the current national minimum wage is a misnomer in that it is insufficient to meet the cost of living, and this change will go some way to bridging the gap. 
  • Alongside this, increasing salaries will improve the morale of staff, and so could positively impact on productivity. 
  • Finally, the government’s overarching aim is to increase consumer spending and in turn create jobs, and ultimately improve the UK economy.  

Steps Employers Should Take

Tougher penalties on non-compliance and potential employment tribunal claims for favouring younger workers mean employers cannot bury their heads in the sand, and organisations need to:

  1. Increase salaries to £6.70 per hour from 1st October 2015 for all over 21s
  2. Make financial provisions to increase salaries to £7.20 per hour from April 2016 for all over 25s
  3. If the above is not feasible, consider making headcount reductions through redundancy and seek proper advice on a suitable process. 

Further Information & Support

If you would like further information on this, French Duncan HR Services would be delighted to assist you.   Please contact Louise McCosh who leads the French Duncan HR Services team on 0141 221 2984 or email l.mccosh@fdhrservices.co.uk. Please also see French Duncan HR Services web page for an outline of how we can help your business.