Tuesday, 5 January 2016

£7.20 an hour: planning how to pay the National Living Wage

If you don’t employ people age 25 and older who are paid below £7.20 an hour, you can stop reading now. But for everyone else, read on!

“The government’s new National Living Wage will provide a direct boost to over two-and-a-half million workers in the UK – rewarding and providing security for working people. I am urging businesses to get ready now to pay the new £7.20 rate from 1 April 2016. With just under 4 months left, there are some easy steps employers can take to make sure they are ready. By taking these measures, companies will be able to properly reward their staff and avoid falling foul of the law when it takes effect.” Business Minister Nick Boles, December 2015.

Here are our recommendations for the easy steps you can take as an employer to make sure you’re ready:

Find out who in your business will need to receive an hourly rate increase to bring their pay to £7.20 an hour. This will involve analysing the age profile as well as current hourly rates - the legal requirement to pay £7.20 an hour only applies to people age 25 and older.

Identify whether the increase to £7.20 an hour will give enough of a wage gap between the lowest paid and the more skilled people. It could prove problematic where, for example, there is a 21-year-old supervisor in a team earning less than their more junior colleagues. Look carefully at rates just above the lowest level, as well as the distribution of pay across the organisation as a whole.

Make a policy decision about whether your company will ignore the age banding and pay everyone at or above the National Living Wage. Perhaps you think it’s too complicated to have people doing the same job paid different rates just because of their age. Or you're reluctant to create a two-tier workforce. There's a possibility that the age banding will be challenged as a breach of European law on age discrimination further down the line– although so far this hasn't happened.

If you use agency temps whose take-home pay is the National Living Wage, the 25 year olds and over will have to be paid more too. Take this into account in your costings.

Quantify the increase in your total employment costs. Plan ahead for it rising to £9 an hour by 2020.  

Consider the different ways your company could offset the increased wage bill and plan ahead. Some decisions you take will need action starting well in advance to produce the necessary cost saving.

This is what other employers are considering to offset the extra costs, starting with the most popular plan:

·         improve efficiency and staff productivity 
·         cut overtime and bonuses, or reduce allowances or out-of-hours payments
·         reduce profits to absorb the outlay
·         raise prices 
·         reduce the number of employees via redundancies or slowing down recruitment 
·         plan to take on more workers under the age of 25 in future

This is an opportunity to step back, consider your strategy and take a long-term view. Do you need to reskill people, to switch roles around? Consolidate some roles so there will be fewer people on the bottom rate and more with higher skills and higher pay? Giving low-paid staff more responsibility will also be beneficial in the long term by improving retention and productivity. 

Communicate the upcoming changes to staff affected. Send terms of employment change letters to everyone receiving an increase by the end of March.

Ensure the company payroll is updated with pay changes in time for 1 April.

Ensure your record systems are able to track each employee’s age and pay the right legal minimum after 1st April.

If you would like help and advice with calculating your additional costs, with planning to offset them and with the policy implications, plus communicating the change to your employees, contact The Human Resource on 07884 475303 or enquiries@thehr.co.uk

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