With the National Living Wage due to come into effect from 1st April 2016, there are questions arising around how and when to implement it for your employees. We’ve put together a list of Frequently Asked Questions to address some queries you may have. Don’t forget, out HR and Payroll experts are always on hand to offer advice and guidance on all things employment and pay.
These FAQs are designed to complement and expand on our article posted in July 2015 when the Government announced the National Living Wage which you can find here.
National Living Wage FAQs
- If 1st April 2016 falls part way through a payroll period, from which date does the employer have to start paying the National Living Wage?
The National Living Wage applies to pay reference periods beginning on or after 1st April 2016 for workers aged 25 and over. For example, if an employee’s monthly pay period begins on 10th April 2016, the National Living Wage rate will apply from that date. The employer does not have to pay the employee National Living Wage for the period 1st April – 9th April 2016.
- When a worker turns age 25, is he or she entitled to be paid the National Living Wage rate from the date of his or her birthday?
The rate at which a worker must be paid during a pay reference period is the rate that applies on the first day of that period. So, if the payroll period begins on the 10th of each month, a worker whose 25th birthday falls on the 25th May will be entitled to be paid at the National Living Wage rate from 10th June, the first pay reference period following his or her 25th birthday.
- Will the rate for the NLW increase each year at the same time as the other bands of the National Minimum Wage?
Initially, the National Minimum Wage hourly rate will be £7.20 when it comes into force on 1st April 2016 with the Government aiming for it to reach 60% of median earnings by 2020, around £9 per hour.
Traditionally, the other rates of the National Minimum Wage increase on 1st October. If the rates continue to increase annually, the National Living Wage will therefore increase each April on the anniversary of its introduction while the lower rates of the National Minimum Wage will increase each October. However, the Government are currently carrying out a review of these cycles which could see the two calendars come into alignment from April 2017.
- Is an employer at risk of an age discrimination claim if it has different pay rates for employees of different ages, in line with the National Minimum Wage bands?
The Equality Act 2010 includes an exception that states that it is not unlawful age discrimination to pay workers of different ages at different rates if the pay structure is based on the age bands set out in the National Minimum Wage legislation. This means that an employer can pay a younger worker at a lower rate than an older worker so long as the minimum wage rate for the younger worker is lower than that for the older worker and the younger worker is paid less than the highest rate of the minimum wage (ie £7.20, the National Living Wage). An employer could pay a 27-year-old £8.00 an hour while paying a 22-year-old £7.00 an hour as the 22-year-old is in a lower minimum wage age band and is paid less than £7.20 an hour. However, the exception would not cover payment of £7.50 for the 22-year-old as this does not fulfil the criterion of being lower than the highest rate of the National Minimum Wage.
The exception also does not cover different pay rates for workers within the same minimum wage age band, and an employer would be at risk of an age discrimination claim if it based recruitment or redundancy decisions on age, for example by rejecting applicants aged 25 and over with the aim of avoiding paying the National Living Wage.
- What are the consequences if an employer pays workers less than the National Minimum Wage?
Where HMRC identify an underpayment of the National Minimum Wage (or National Living Wage from 1st April), they may issue a notice that requires the employer to pay the arrears to the worker and a financial penalty to the Secretary of State which is set at 100% of the total underpayment. From 1st April 2016 this penalty will increase to 200%, a minimum of £100 and a maximum of £20,000 applies per underpaid worker.
Serious cases on non-compliance including false records or refusing to answer questions from a compliance offer may be criminally prosecuted and the potential penalty on conviction is an unlimited fine. The Government also operate a scheme to publicly name and shame employers who do not comply with the law on the National Minimum Wage.
An employee may bring a personal claim for unlawful deductions or breach of contract, though HMRC cannot also enforce a complaint on the employee’s behalf in this case.
- Are apprentices who are aged 25 or over entitled to the National Living Wage?
There is a separate National Minimum Wage rate for apprentices who are aged under 19 or in the first 12 months of their apprenticeship, therefore, is an apprentice is aged 25 or over and is not in the first 12 months of the apprenticeship, he or she will be entitled to the National Living Wage. Apprentices who are aged under 25 and not in the first 12 months of their apprenticeship will be entitled to the National Minimum Wage rate appropriate for their age.
- Which elements of pay count for the purposes of calculating whether or not the National Minimum Wage has been paid?
To determine whether a worker has been paid at least the National Minimum Wage, the employer must calculate the remuneration that the employee has received over the pay reference period (one month for monthly paid, one week for weekly paid, etc). Remuneration is gross pay including any bonus, commission or other incentive pay received.
An annual bonus will mostly be counted for the period in which it is paid though a portion of it may be allocated for the previous pay period (eg, 1/12th of an annual bonus paid in December monthly payroll may be allocated for the payroll period for November).
Pay given under a salary sacrifice scheme does not count towards the National Minimum Wage entitlement so a workers pay must still meet their relevant National Minimum Wage entitlement after salary sacrifice has been applied. Also, deductions for expenses in connection with the worker’s employment (eg, uniforms or tools) must not bring the worker’s pay below the minimum rate.
Elements of pay that cannot be included when calculating remuneration are:
- Benefits in kind (except limited costs of accommodation provided as part of the job)
- Overtime and shift premiums
- Allowances (other than those attributable to the performance of the worker arrying out his or her work)
- Tips, service charges, gratuities and cover charges
- Repayments of expenses
- Loans by the employer and advances of wages
- Employer pension payments