Reducing the impact of the National Living Wage

Alan Price – CEO at BrightHR

April 25 2016

The recently introduced National Living Wage has brought with it some financial concerns for employers. We take a look at the impact the NWL has had, and offer some guidance on managing the changes in the best way possible... Wage increases are normally configured by employers, and designed to stay within the realms of what’s realistically viable to their business, taking into consideration factors such as:
  • Economic trends
  • Current and predicted outgoings
  • The employee’s value to the organisation
However, some wage increases are dictated by the Government, meaning that employers are not able to decide for themselves whether it’s an achievable extra cost. This has happened most recently with the introduction of the National Living Wage (NLW) – an hourly rate of £7.20 which must now be paid to all workers aged 25 and over. This represents an hourly increase of 50p to workers paid in line with the minimum wage, who prior to the implementation of the NLW were eligible to receive £6.70 per hour. Where workers work 37 hours a week and are paid weekly, the new rate amounts to a yearly pay rise of almost £1000. Absorbing the additional cost Some employers might find this legally imposed increase difficult to cope with, but there are various ways that the extra cost could be absorbed such as:
  • Changing to a cheaper supplier
  • Increasing product costs
  • Tightening stock control
However, it may be that the employer decides that the cost of the overheads must be absorbed by the employees. Because of the NLW, some employers are already looking to make changes to employees’ terms and conditions, in order to keep the pay package the same overall, despite the increase in physical wages. Cuts are already being made to overtime rates, and attendance bonuses and profit share percentages may also be in the firing line. Keeping an eye on contracts Contractual terms are legally binding when agreed by employer and employee, and it’s generally unlawful to change any term of employment without agreement by both parties. Employers who want to make changes to overtime rates or any other area of an employee’s benefits package should seek to gain their agreement before doing so, otherwise they risk a ‘breach of contract’ claim. In serious cases, employees could claim that they had no alternative but to resign from their employment due to a pay cut which fundamentally undermined the employment relationship. In this case, the employee can consider themselves to have been dismissed and make a claim to employment tribunal. Consultation for contractual changes With the above said, it’s not impossible to change key terms of employment if the employer feels they have a pressing business need to do so. In this case the agreement of the employee is not necessarily required, although it should always be sought in the first instance. A period of consultation should take place – the details of which are prescribed in law in some circumstances – where the employer:
  • Keeps the employees up-to-date with their plans
  • Keeps the employees informed of the reason for them
  • Discusses any timeline involved
  • Gives the employees the opportunity to have their say
This consultation period is essential because continued resistance to the changes from the employee could result in their dismissal on their current terms. However, the employer must then offer re-engagement on the new terms that they wanted to implement e.g. a new contract which does not include the benefits of the previous one. In the event of a tribunal... It would be open for the employee to challenge the validity of the employer’s pressing business need in an employment tribunal. The employment tribunal would consider the reason for the change, and the manner in which the process was carried out by the employer in determining whether their dismissal – regardless of whether re-engagement occurred – was fair. Even employees who are re-engaged retain the right, for a limited amount of time, to claim unfair dismissal, provided they ‘work in protest’ under the new terms.

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