What does the introduction of the National Living Wage mean for my business?

In the January edition of Napthens’ HR Hub, we briefly reported on the introduction of the National Living Wage, which comes into force on 1 April 2016, under the National Minimum Wage Regulations 2015 (“the Regulations”).

With the introduction of the National Living Wage just round the corner, here at Napthens, we have received a number of queries across our broad range of clients. It is clear that many employers are concerned about what the introduction of the NLW will mean to their business in practice and how they can address this going forward.

What the NLW means

The introduction of the NLW is essentially an increase to the current National Minimum Wage (NMW) rate of £6.70 per hour by 50p, totalling £7.20 per hour for all workers aged 25 or over.  This is a legal entitlement, therefore there is no getting around this increase, no sectors are exempt and employers need to ensure that they are paying their staff aged 25 and over in line with the NLW or risk a penalty of 200% of the total underpayment per worker if they are found to be in breach.

Impact

For those full time workers who are currently receiving the NMW of £6.70 per hour, the increase will amount to around an additional £900 in their salary per annum. This is a significant cost to any business, and many employers are questioning how, in reality, they are going to afford the increase.  Many businesses have expressed concern that this additional cost comes around the same time when employers are legally required to auto-enrol employees into a pension scheme and make contributions.

Getting prepared

Businesses should take the time to review their current business practices, overheads, benefits and rewards structures and identify any efficiency that can be made to help with the additional cost.

Our top tips to help prepare for the NLW:

• Identify those staff to whom the NLW increase will apply to (those who are aged 25 or over)
• Keep a close eye on any upcoming birthdays to ensure that you do not fall foul of complying with the NLW for those who are yet to reach the age of 25. The increase will be effective from the next pay date after their birthday
• Identify your pay reference period. Although the Regulations come into force on 1 April 2016, the NLW increase will only be effective from the first pay reference period after this. You do not need to alter your payment date.
• Work with your payroll provider to ensure the correct amount is reflected in salaries
• Review the current discretionary benefits that you provide, such as bonus schemes to identify any possible cost savings
• Issue a letter to the affected staff detailing the changes to their salary prior to the change *
• Keep staff informed and engaged throughout!

*To help assist employers with notifying staff who are eligible for the NLW, we have produced a template letter which can be issued to them detailing the changes. This is available to all of our HR3 clients on our HR3 i-Toolkit.

The Government have proposed that the NLW will increase to £9.00 per hour by 2020. Employers need to ensure that they are looking to the future, keeping up to date with any changes to legislation and informing their employees throughout.