The introduction of the National Living Wage represents the biggest increase to minimum pay rates since the bandings were introduced in 1999. Workers aged 25 and over who earn the current minimum wage rate of £6.70 will earn an extra 50p per hour from April 2016 – never have any of the original rates seen such a large jump at one time.
Although the new rate is not in place until April, employers should act now to ensure they are ready to comply when the law changes. Considering the points below will make compliance easier in April:
Understand the terminology
Although the National Living Wage has been given its own name, it effectively just represents an additional layer in the current National Minimum Wage (NMW) structure. The current highest NMW rate is paid to those aged 21 and over; this rate will only be applicable to those aged 21 – 24 from April 2016, and the National Living Wage rate will take over for those who are 25+. Confusingly, there is already an existing pay concept called the ‘Living Wage’ which is a voluntary pay rate set considerably higher than the NMW and is advocated by some large employers. This is not a legal requirement; the National Living Wage is.
Do a payroll audit now
Conduct a review of your current rates of pay to determine if any fall below £7.20 per hour. If they do, consider the age of the worker and if they are aged 25+, then earmark these for a pay rise from April. Don’t forget about those who will have their 25th birthday between now and April.
Consider your overheads
If the increase means that funds will be uncomfortably tight, you may need to consider looking to reduce overheads in other way. The increase will mean almost a £900 rise in annual pay for someone working 37 hours per week, and this will need to be covered somehow. You may need to place tighter restrictions on employees doing ad hoc overtime or expenses, for example.
Pay reference period
You do not necessarily have to begin paying the National Living Wage from 1st April. Look at your pay reference periods – the intervals over which you calculate and pay wages – because this will dictate your exact start date for paying the higher rate. You only need to start paying it from the first new pay reference period on or after 1st April so if your pay month runs from the 20th of each month, then the new rate will not kick in until 20th April 2016.
Communicate with your employees
Let all affected employees know that they will be receiving a pay rise and the reason behind it. This will make clear the position so that, if you have had to knock back other requests for pay increases, there are no questions over why some people are getting it and some are not.
The National Living Wage will be enforced in the same way as the National Minimum Wage and therefore, as penalties for non-compliance continue to increase, it is vital that employers get it right.