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The National Minimum Wage

21st April, 2015

The national minimum wage (NMW) is a specified minimum hourly rate of pay to which most workers are entitled.

All employers are obliged to pay the NMW, irrespective of the size of their business. The NMW was introduced in 1999 by the National Minimum Wage Act 1998 (NMWA 1998) by the Labour Party after they came into government in 1997. Prior to this there was no NMW.

Labour’s minimum wage policy was implemented due to a decline of trade union membership over recent decades, which had caused a weakening of employees’ bargaining power. In addition, the Government had recognised that the employees most vulnerable to low pay, especially in service industries, were rarely unionised.

The first NMW was set at £3.60, known as the standard rate, and £3.00 for people between the ages of 18 to 21, which is known as the development rate. Since then the rates have steadily increased and are presently set at £6.50 for the standard rate and £5.13 for people under 21.

Since the act became law there has been an introduction of two new bands.  In 2003, the NMW protected workers between the ages of 16 to 18 by setting the minimum wage of £3.00, known as the young workers rate.  In October 2010, the NMW was introduced for apprentice schemes, which were set at £2.50, called the apprentice rate.

The NMWA 1998 applies to most workers working or ordinarily working in the UK who are over the compulsory school age (www.practicallaw.com/9-386-0356).  Under section 54 of the NMWA 1998, a worker is an individual who works under the following:

  • a contract of employment whether implied, oral or in writing, to personally do work or perform work or services for another, as long as the other is not a customer or client of a profession or business undertaking carried out by the individual.  

 

The Chancellor announced in this year’s budget that in October the rate will rise by to £6.70 and £5.30 for younger workers. This is lower than George Osborne predicted in 2014 where his original aim was to offer a rate of £7.00 per hour.

With the NMW consistently being raised with the cost of inflation, this has put a further stretch on businesses during difficult economic times. Small businesses with minimal staff have previously been the hardest hit as they struggle to adjust to the increased NMW rates. As a result many have had to take advantage of either apprenticeship schemes or zero hour contracts to survive and as a final resort some have had to make redundancies.

The Director General at the British Chambers of Commerce suggested that an introduction of a “significantly higher” apprenticeship rate than that recommended by the Commission “could negatively impact demand for apprenticeships among those firms that are only just getting by”.

On 22 January 2015, the Government completed a consultation and confirmed its intention to adopt simplified rules, provide further clarification and improve guidance on issues raised. The main purpose was to seek views on whether the draft consolidation regulations were clear and workable. Respondents were asked to identify any provisions which they considered not to work or were unclear.

Following the consultation the Government has stated that it would like to provide further clarification and improve its guidance on issues raised during the consultation.  This includes entitlement to NMW during sleep-in shifts and ensuring the formula for calculating hourly rates addresses unlawful practices.

The Government may also undertake a further separate review of suggested improvements to the NMW regulations, with a view to amending the regulations at a later date. The proposals include increasing enforcement of the NMW and allowing employers to recoup training costs in the first twelve months of employment, without the deduction reducing pay for NMW purposes.

Following the consultation the Government has already consolidated all of the NMW regulations and has taken the opportunity to clarify and simplify the existing rules and update the current version to reflect current changes in society and make them more user friendly by including provisions which are gender-neutral.

It is trying to ensure that each regulation deals with a single issue rather than a number of issues and put connected issues in one regulation, rather than over a number of different regulations. For example, provisions relating to payments from the employer that does not count towards remuneration. It has also attempted to explain how the hourly rate is calculated by using a formula, rather than a written explanation.

(www.practicallaw.com/3-200-3458)With the General Election due in May there is little doubt that future NMW will be discussed. In a recent comment made by the Labour Party, they have stated that they would like to see the NMW raised to £10.00 per hour by 2020, which, given the recent inflation of the economy and trend of the NMW, does not seem too difficult to achieve. It will be interesting to see what further changes are made to the regulations or if another consultation will take place following the election.

For further information and advice regarding the National Minimum Wage, please contact Helen Watson, Partner and Head of Employment, Aaron & Partner Solicitors LLP, on 01244 405565 or email [email protected].

 

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