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The Cost of Employment in 2016 – Are You Prepared?

22nd January, 2016

National Minimum Wage

The retailer Monsoon Accessorize Ltd has recently topped the government’s list of companies who were named and shamed for failing to pay the National Minimum Wage. The retailer neglected to pay 1438 staff which is more than a quarter of its UK store staff a total of £104,507.83. It was forced to reimburse staff and pay a fine of £28,147.81.

It is understood that wages fell below the National Minimum Wage due to a policy imposed by the retailer which required staff to wear Monsoon clothes on duty, after purchasing them at a discounted rate. The cost of the clothing was deducted from the employee’s pay and the effect of this compulsory expense was that many staff were taking home less than the minimum wage.

Many payments and benefits cannot be counted towards National Minimum Wage calculations, for example; vouchers, reimbursements for work-related expenses and loan and wage advances. Employers that require employees to purchase uniforms, tools or other products need to be aware that the cost of these items will be considered a deduction for National Minimum Wage purposes.

Travelling time counts as working time
The recent case Federacion de Servicios Privados v Tyco Integrated Security found that time spent travelling from and to home by mobile employees, who do not have a fixed or usual place of work, should count towards time worked under the Working Time Directive.

The decision may have implications for employers who pay the National Minimum Wage, as they may need to increase their employees pay because they will now be considered to be working for more hours each day so their average hourly rate will be reduced. Employers should consider carrying out a pay audit as the penalty for failing to pay the national minimum wage is £20,000 per unpaid worker as well as being named and shamed by the government.

National Living Wage

The National Living Wage (NLW) is a compulsory higher wage for more experienced workers aged 25 and over, which will be £7.20 from 1 April 2016 and is expected to rise to £9 by 2020. The increase which will take effect from April 2016 is an 11 per cent increase on the current NMW rate. Many employers are not yet ready for the introduction of the NLW despite having less than four months until it becomes a legal requirement.

The Department for Business, Innovation & Skills has recommended that all businesses take the following steps as soon as possible:
• Find out which staff are eligible for the NLW;
• Update the payroll in time for 1 April 2016; and
• Communicate the changes to staff

Whilst critics claim that the increased costs on business could put up to 60,000 jobs at risk, there are a range of options availed to employers to offset the increased wage bill. Employers may be considering managing the higher costs as a result of the NLW by improving efficiency, reducing hours, employing more workers under the age of 25, passing the costs on to customers or simply absorbing the costs. However, employers may also consider offsetting the pay increase through changes to contracts or other aspects of reward.
Any employer who does not intend to pay the NLW to those under 25 will need to consider the impact of creating a two-tier workforce, which could be difficult operationally and potentially leave them susceptible to age discrimination claims. The law provides an exemption so that pay bandings do not contravene discrimination law, however, this could be challenged as a breach of European law.

Aside from the age issue, any changes to a Company’s ‘floor’ rate as a result of the NLW will have an effect on other wage differentials. This will be particularly significant for those rates just above the lowest level but will effect the distribution of pay across the whole organisation. As the NLW is set to reach £9 in 2020 this will mean a yearly increase of around 6 per cent, while average salary increases will only be around 2 per cent. This will mean employers will want to consider how to ensure those employees being paid just above the minimum wage remain satisfied.

Key things to consider:
1. Review key elements of pay such as overtime, out of hours payment, shift pay and allowances to see if they could count towards the minimum and affect your compliance. Alternatively you could have a higher basic rate and alter any bonuses.
2. Is the organisation prepared for the incremental increases which will see the NLW at £9 by 2020?
3. How will any significant change in pay for the most junior employees affect the view of more senior employees about their own pay rises?

An employer’s aims when setting pay levels will often be to retain and motivate staff. Traditionally hourly rates were used to attract employees to an organisation, benefits to keep them there and bonus and incentive schemes to motivate them in their work. However, research now suggests that individuals are attracted, retailed and engaged by a whole range of financial and importantly no-financial rewards such as the ability to work flexibly.

Apprenticeship levy

On top of the introduction of the NLW, large employers will be required to spend 0.5% of their wage bill on funding apprenticeships. The so-called “apprenticeship levy” will come into force in April 2017 and every employer will receive a £15,000 allowance to offset against the levy. The aim is to encourage employers to increase their apprenticeship programmes, with the hope that it will fund three million new, high-quality apprenticeships by 2020 . However, some employers are concerned that the combination of the NLW and increased compulsory investment in training could have a significant impact on the business’s budgets. The expectation is that organisations will pay their contribution through their PAYE return to HMRC, at a rate to be confirmed but which will be calculated on the basis of employee earnings.

Gender Gap Pay Reporting

Although there is a legal obligation on employers to ensure that there is equal pay between men and women doing equal work within their organisation, there is no legal obligation to ensure ‘fair pay’ between the sexes. In July the government launched it consultation on ‘Closing the gender pay gap’ and draft regulations are expected in early 2016. The aim of the new regulations will be to require businesses with 250 or more employees to carry out an equal pay review and publish information about their gender pay gap. To limit any reputational damage in respect of the publication employers should consider carry out internal pay audits to assess their current position and make any necessary changes.

Auto-enrolment pension delays

There is also the planned increase in auto-enrolment contributions to think about. The planned rises in minimum contributions for auto-enrolment will now be linked to tax years with the aim of making it easier for employers to administer. The date for minimum employer contributions to rise to 2 percent has been delayed until April 2018 and the further 3 per cent increase (planned for October 2018) will now take effect in April 2019. However, despite the changing deadlines auto-enrolment remains an obligation for employers which will requires preparation from between 3 – 6 months prior to the staging date.

If you have any queries regarding compliance with the National Living Wage or any other issue raised by this article, please do not hesitate to contact Helen Watson on 01244 405565 or send an email to [email protected]

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