NMW increase creates challenges for employers

From 1 April 2024, the highest rate of the NMW, the National Living Wage (NLW), increases from £10.42 to £11.44. This will apply to all workers aged 21 and over, representing a 21.2% pay increase for some.

Absorbing the costs

How can the increase costs be covered? If price increases aren’t an option, some employers may need to consider ways in which they can reduce their overall wage bill as a consequence. This might include reviewing commission and bonus schemes, benefits arrangements, reducing hours of work or even reorganising the workforce. Clearly, each of these will have consequences, the impact of which will need to be carefully thought through. If employers do proceed with any of these actions, they will need to consider their legal obligations to first consult with impacted employees and seeking agreement to the changes. 

Pay compression

The increases may also inadvertently create workforce tension when employers, unable to afford generous wage increases across the board, are providing less for those earning slightly above the National Minimum Wage (NMW). Some have coined the term ‘pay compression’ which is creating challenges for reward teams, HR business partners and line managers who will have to tackle these conversations at pay review time and when analysing their benchmarking processes. Reward teams may therefore need to get inventive with how they can continue to incentivise this group of workers where there is no further room for pay increases. 

Compliance risks

Finally, there is the increased exposure to the risks of non-compliance. The penalties for non-compliance are severe – repayment of all underpayments going back six years, a 200% fine and reputational harm from naming and shaming. The size of the increase may, for the first time, impact employers who had not considered themselves at risk of NMW breaches and they will need to understand the essential elements of NMW compliance outline below.

• Worker categorisation

The starting point for NMW compliance is to correctly categorise the worker based on the work they are doing as there are different rules which apply to each. An employer could inadvertently breach NMW by getting this wrong. There are four categories of work – salaried, time, unmeasured and piece rate. Employers commonly make a mistake by assuming that workers paid a salary are performing salaried work. However, there are certain contractual conditions which must be met for the worker to be performing salaried work. If any of those is not met, the worker will likely be performing unmeasured work.

• Salary sacrifice

For employers, salary sacrifice schemes still cause compliance headaches, as they must consider the post-salary sacrifice pay for NMW compliance purposes. If an employer operates a pension salary sacrifice scheme which meets the basic auto-enrolment requirements (total 8% employer pension contribution), the employee’s gross pay before salary sacrifice must be at least £25,500. The eligibility for the salary sacrifice scheme will need to be considered for NMW purposes before workers are enrolled. It’s important to note though that the worker must still be automatically enrolled into a qualifying pension scheme.

• Working time

Working time continues to be a challenge when complying with NMW. It is the time the worker actually spends working which must be considered. Employers need to understand what amounts to working time so that it can be captured accurately. For example, the time it takes to get changed into a uniform or time spent training could be considered as working time. Employers also need to implement a time and attendance system which records when the worker is working. 

This is not an exhaustive list but a starting point for those who have never considered NMW compliance before. There are many other NMW risks which employers need to be aware of. These significant rate rises mean a NMW audit should now become a priority to avoid the significant penalties which can arise.  

If you would like to speak to someone about the impact of the NMW rate rises or issues with compliance, please speak to Charlie Barnes or Julie Moore.