United Kingdom: National living wage comes into force

A statutory ‘national living wage’ comes into force in the United Kingdom on 1 April 2016 and will be phased in over four years, with the aim of reaching 60% of median UK earnings by 2020. Trade unions have welcomed the move while employer groups have expressed concern about some businesses’ ability to meet higher wage bills.

In July 2015, in its post-election budget, the UK’s Conservative government announced the introduction of a ‘national living wage’ (NLW) that will be brought into force on 1 April 2016. The NLW will be phased in between 2016 and 2020, with the aim of reaching 60% of median UK earnings by 2020, when the NLW is projected to rise to at least GBP 9.00 per hour (€11.48 as at 29 March 2016).

Key features of the NLW

The legislative basis of the new NLW is the National Minimum Wage (Amendment) Regulations 2016 (36 KB PDF) adopted on 26 January 2016.

From April 2016, workers aged 25 or over who are not in the first year of an apprenticeship will be legally entitled to at least GBP 7.20 (€9.18) per hour. This represents an extra GBP 0.50 (€0.64) per hour compared with the current ‘adult’ rate of the national minimum wage (NMW).

The new NLW is an additional tier in the existing NMW framework that has applied in the UK since 1998. Workers not covered by the NLW must still be paid at least the hourly NMW rates. Since 1 October 2015 these are:

  • GBP 6.70 (€8.55) for workers aged 21 and over;
  • GBP 5.30 (€6.76) for workers aged 18–20;
  • GBP 3.87 (€4.95) for under 18s;
  • GBP 3.30 (€4.20) for apprentices aged 16–18, and those aged 19 or over who are in the first year of their apprenticeship. All other apprentices are entitled to the NLW or NMW rate appropriate to their age.

Regulation of increases

The Low Pay Commission (LPC) will recommend appropriate annual increases to the NLW, as well as continuing to exercise its responsibility to advise the government on the NMW.

The government has given the LPC a new remit, requiring it to set the NLW in a way that reflects the growth in median earnings. This is to ensure that the rate of the NLW is set at a sustainable level and continues to take account of broader economic conditions. The government will ask the LPC to set out how the NLW will reach 60% of median earnings by 2020.

NMW rates for those aged under 25 change on 1 October every year, while the NLW rate for those aged 25 and over will change every year on 1 April.

Tougher financial penalties

The financial penalty for employers who do not comply with the regulations has been doubled. The penalty rises from 100% to 200% of the amount by which a worker has been underpaid.

Expected impact

According to the government’s impact assessment of the NLW, an estimated 1.7 million workers will see their wages rise to the new NLW in 2016, and 4.2 million others further up the earnings distribution will benefit from the indirect knock-on effect of the NLW rate (2 MB PDF).

A survey conducted in November 2015 by the Resolution Foundation and the Chartered Institute of Personnel and Development indicated that the NLW is expected to have its greatest impact in the retail, hospitality and healthcare sectors.

The government has urged employers to take four key steps to prepare for the introduction of the NLW:

  • check which employees are eligible for the NLW;
  • take the appropriate payroll action;
  • let staff know about their new pay rate;
  • check staff under 25 are earning at least the appropriate NMW.

Social partner reaction

The Trades Union Congress (TUC) cautiously welcomed the announcement of the NLW but saw it as ‘effectively a higher NMW rate for people over 25’, introduced partly in response to TUC pressure for the highest sustainable NMW rate and its Britain Needs a Pay Rise campaign. TUC General Secretary Frances O’Grady commented, ‘The Chancellor [of the Exchequer] has finally woken up to the fact that Britain needs a pay rise. The TUC has long campaigned for the minimum wage to rise faster and the Chancellor has listened to us at last.’

The Confederation of British Industry (CBI) was more critical of the government’s announcement. While indicating it supports a ‘higher skilled, higher wage economy’, the CBI commented that ‘legislating for a living wage does not reflect businesses’ ability to pay. This is taking a big gamble that the labour market can absorb year-on-year increases of an average of 6%.’ The CBI's then Director-General John Cridland added, ‘Delivering higher wages can only be done sustainably by boosting productivity. Bringing politics into the Low Pay Commission is a bad idea.’

Commentary

Although branded as the ‘national living wage’, the government’s move essentially creates an additional tier of the statutory NMW for those aged 25 and over. It should not be confused with the ‘living wage’ set over recent years by the Living Wage Foundation and promoted by community-organising group Citizens UK. This reflects the basic cost of living in the UK, whereas the LPC calculates the NMW according to market conditions and sets the NLW rates taking into account the government’s target of 60% of median earnings.

According to the Living Wage Foundation, more than 2,000 employers choose to pay its suggested rate of a living wage on a voluntary basis. The campaign to promote a living wage appears to have influenced the government’s decision to introduce its own national living wage. However, the Foundation’s current level for a UK living wage is GBP 8.25 (€10.52), with a higher rate for London of GBP 9.40 (€11.99). Both are higher than the introductory rate of the NLW (GBP 7.20/€9.18), which suggests that debate in the UK about the appropriate definition and level of a living wage is far from over.

 

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