HR · 5 April 2016

The National Living Wage: A comprehensive guide for micro business owners

NLW law
Make a mistake and you risk very significant financial penalties

It’s been talked about for months, but 1 April finally saw the policy become law. This guide tells you everything you need to know about the National Living Wage (NLW) and the risks to be keenly aware of.

If you have workers who are aged 25 or over, the minimum hourly rate you can pay them is now £7.20.  The only exception is a person who is within their first year of an apprenticeship. Get this wrong and you risk very significant financial penalties as well as loss of business reputation.

What about the National Minimum Wage (NMW)?

We saw no changes in the rates for those under 25-years-old this April, with the most recent increase being seen last October 2015.  The plan is that the NMW will next be increased in October 2016 with the NLW remaining unchanged at £7.20.  The next planned review for both will then be aligned to April 2017.

The current NMW rates for younger workers and apprentices are as follows:

Age                   21-24     18-20     16-17     Apprentice

Rate                 £6.70     £5.30     £3.87     £3.30

When looking at apprenticeships in relation to the NMW it is important to note that the apprentice rate is only for those who are 16-18, or who are older than this but in their first year of their apprenticeship.  Otherwise, the normal rate for their age applies – so if someone is 25 or  over and in the second year of an apprenticeship, they are entitled to the full NLW.

Getting it wrong

Quite simply, the government has legislated for very large fines for non-compliance. As well as requiring back payments to be made to affected workers for the whole period of underpayment, HMRC can also fine you for getting it wrong.  This penalty can be up to 200 per cent of the whole underpayment (capped at £20,000 per affected worker) – at this level it could quite easily put a small firm out of business.

The government has also pledged to step up its campaign to publicly name and shame employers who flout the NMW laws – and this is very likely to extend to the NLW too.

Action to take

Hopefully you have already arranged for all workers who are currently 25 and over and paid below the £7.20 minimum threshold to receive this rate from 1 April.  Here are some other considerations to include on your checklist:

  • You may have identified everyone who is currently over 25, but you now need to put in a system to automatically capture current younger workers for when they reach this threshold.
  • With new hires make sure your induction procedure captures the correct amount to be paid for their age – and be careful to include them within your system (if they are under 25 on hire) to capture when they become eligible.
  • Ensure this is communicated to your staff. This may not be as simple as it first looks. If you have two individuals with the same skills and experience doing the same job at the same level it may be hard for the person under 25 to accept their colleague is being paid more for doing the same job.  There is real potential for conflict and this needs careful management.
  • Evaluate the cost impact on your business. Obviously this may range from no impact for business that already pays above this rate, to significant cost increases for others.  If not already done you need to agree a strategy to mitigate the increase to your wages bill.
  • The government states that it plans to increase the NLW progressively to £9 per hour by 2020. At this point, there is no scale of these increases published – but it is clear that you will need to ensure that you have in place a proper strategy for managing this new regime and mitigating these progressively increasing employment costs.
  • Don’t forget discrimination and other employment law risks. This legislation makes it lawful to pay those aged 25 and more the higher National Living Wage rate. But you could face age discrimination and other employment law risks if you do not have an employee handbook with robust policies and procedures to manage this in your business.
  • Ensure your recruitment and selection procedure can prevent your managers from recruiting someone under 25 just because they are cheaper and it helps them to keep within a budget. This is likely to see a discrimination claim land firmly onto your desk quite swiftly.  Remember, a person does not need to be an employee to make such a claim against you – just a reasonable belief that it was the reason for your decision not to hire them.  And discrimination claims are uncapped.  Although the headline hitting six figures settlements are rare, it does highlight settlements for a lost discrimination claims can be at any level – and can have a serious impact on your business.
  • A good competency based recruitment and selection procedure will not only help you find the best person for the job, it will help ensure you do not discriminate – even if unintentionally.
  • Other key procedures to consider are your redundancy, discipline and capability procedures. Are they robust enough to ensure no person is dismissed with the fact that they are over 25, and so are entitled to the NLW, an underpinning reason?   Again this would be likely to result in an age discrimination claim landing on your desk – as well as an automatic unfair dismissal claim.

If you want to read about this in a little more detail, this government guide covers most of the basics.

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ABOUT THE EXPERT

Carole is as a freelance senior HR consultant with over 18 years experience in supporting small businesses. She founded HR Support for Business to provide an affordable, but still professional, outsourced HR Support service for micro and small businesses looking for guidance.

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