The National Living Wage and employee benefits

George Osborne announced in his July Budget speech that the UK will introduce a new National Living Wage in April 2016.

The first thing to note is that the National Living Wage (NLW) does not always replace the existing National Minimum Wage (NMW).

NLW is only intended to apply to those aged 25 and above. This grouping will be entitled to an income per hour of £7.20 from next April, with the ambition of this increasing throughout the term of this parliament to £9.00 per hour by 2020.  The actual increments between these two dates are not yet available.

However, the minimum income for those under age 25 will still be governed by the existing National Minimum Wage structure. NMW is paid dependent on employee age, and will be the following rates from October 2015:

Over age 21:  £6.70 per hour
Aged 18-20:  £5.30 per hour
Under age 18:  £3.87 per hour

This too will continue to increase during the current parliamentary term. So what – if anything – does this mean for employee benefits?

The first point is a little glib, but not unimportant.  Many employee benefits are directly linked to salary (pension contributions, life cover, income protection and so on), so it follows that the cost of such benefits may increase for the employer (and sometimes employee) from next April. Employers in business sectors with relatively low pay (for instance hospitality) may therefore need to factor in not only a higher minimum income level, but also a bigger spend on connected employee benefits as well.

There is also possibly a more disguised interaction between legislation-led minimum wage levels and employee benefits – and that is our old friend Salary Sacrifice. Many employers now utilise Salary Sacrifice to support their employee benefits offerings, with pensions, childcare vouchers and cycle schemes being amongst the most popular usage of same.  This is now such a common occurrence that the summer Budget document did warn that the Treasury are monitoring this situation to ensure the loss to the exchequer does not get out of hand. Details of that announcement can be seen here.

Employers who utilise Salary Sacrifice need to be aware that the “sacrifice” has the potential to reduce an employee’s income below the appropriate minimum level for that individual. And as the HMRC website clearly states: “A salary sacrifice arrangement can’t reduce an employee’s cash earnings below the National Minimum Wage rates.”

Most organisations are aware that this minimum cannot be breached, but fewer companies contemplate the combined impact of several sacrifices together.  For instance a sacrifice for childcare vouchers may leave the employee seemingly well above the NMW minimum line, but another additional sacrifice for other benefits (for instance pensions) might cumulatively drop the employee (and employer) into the red zone.

As yet it is a little unclear whether this same dynamic will also apply to the new National Living Wage, but it would be surprising if it didn’t.  So employers may have to be more vigilant to avoid any inadvertent breach occurring. The government has announced the measures it will take to ensure that both NMW and NLW are actually paid by employers, and this announcement also includes details of some of the penalties that have been handed out for past breaches of this law. The full announcement can be seen here. The bottom line is that employers must ensure that they comply with the new minimum wage landscape, and an early review of the employee benefits offering may be prudent as part of this exercise.