Reducing the impact of the National Living Wage | Applied

Reducing the impact of the National Living Wage

Alan Price discusses the topic of the mandatory Living Wage for employees over 25, which has forced many businesses to look at how the extra cost can be absorbed.

Wage increases are normally configured by employers to stay within the realms of what is realistically viable taking into consideration economic trends, current and predicted outgoings, and the employee’s value to the organisation.

However, some wage increases are dictated by the government meaning that employers are not able to decide for themselves whether it is an achievable extra cost. This has happened most recently with the introduction of the National Living Wage (NLW); an hourly rate of £7.20 which must now be paid to workers who are aged 25 and over. This represents an hourly increase of 50p to workers who are paid in line with the minimum wage, who were, before implementation of the NLW, eligible to receive £6.70 per hour. Where workers work 37 hours a week and are paid weekly, the new rate amounts to a yearly pay rise of almost £1,000.

Some employers may find this legally imposed increase difficult to cope with. There are various ways that the extra cost could be absorbed; changing to a cheaper supplier, increasing pricing, tightening stock control. However, it may be that the employer decides that the cost of the overheads must be absorbed by the employees themselves. Because of the NLW, some employers are already looking to make changes to employees’ terms and conditions to keep the pay package the same overall despite the increase in physical wages. Overtime rates is one area where cuts are being made; attendance bonuses and profit share percentages may be others in the firing line.

Contractual terms are legally binding when agreed by employer and employee. It is generally unlawful to change any term of employment without agreement by both parties. Employers who want to make changes to overtime rates or any other area of the benefits package that an employee receives should seek to gain employees’ agreement before doing so, otherwise they risk a breach of contract claim. In serious cases, employees could claim that they had no alternative but to resign from their employment due to a pay cut which fundamentally undermined the employment relationship. In this case, the employee can consider themselves to have been dismissed and make a claim to employment tribunal.

It is not impossible to change key terms of employment if the employer feels that they have a pressing business need to do so. In this case the agreement of the employee is not necessarily required, although it should always be sought in the first instance. A period of consultation should take place, the details of which are prescribed in law in some circumstances, where the employer keeps the employees up to date with their plans, the reason for them, any timeline involved and gives the employees the opportunity to have their say. This consultation period is essential because continued resistance to the changes from the employee could result in their dismissal on their current terms; however, the employer must then offer re-engagement on the new terms that they wanted to implement, eg a new contract which does not include the benefits of the previous one.

It would be open for the employee to challenge the validity of the employer’s pressing business need in an employment tribunal. The employment tribunal would consider the reason for the change, and the manner in which the process was carried out by the employer in determining whether their dismissal, whether or not re-engagement occurred, was fair. Even employees who are re-engaged retain the right for a limited amount of time to claim unfair dismissal, provided they ‘work in protest’ under the new terms.

Alan Price is employment law director of Peninsula.