Changes to the National Minimum Wage and the National Living Wage in the context of the Covid-19 Pandemic and a Shrinking Economy

Changes to the National Minimum Wage and the National Living Wage in the context of the Covid-19 Pandemic and a Shrinking Economy

On 6 April 2021, we will see an increase in the National Minimum Wage (NMW) and, for the first time, the National Living Wage (NLW) (currently applicable to workers aged 25 and over) will be extended to those aged 23 and 24. The Low Pay Commission had originally recommended a lowering of the age threshold for the NLW in 2019. They based their recommendation on several factors, including the following:

1. Most workers aged 23 and 24 are already receiving the NLW in practice. Therefore, it is important to apply this universally to all workers in this age bracket;

2. 23-24 year-olds have faced the same obstacles as 25 year-olds in the job market. For example, the same proportion of workers have been furloughed or become unemployed in both age groups during the pandemic;

3. Lowering the NLW age threshold will have no significant negative impact on employment. The last time the NMW threshold was lowered in 2010, econometric analysis found no significant impact even though, as today, this took place after a financial crisis; and

4. A majority of the stakeholders consulted, including both businesses and unions, supported the change in the NLW age threshold

For low-paid workers, the pandemic has exacerbated income insecurity, and issues of in-work poverty are on the increase. Young people are more likely to have been employed in sectors that were impacted the hardest during the pandemic. They are more likely to have been furloughed. The Low Pay Commission reports that workers under 25 made up 18% of all furloughed workers during the last year, most of whom experienced a decrease in income as a result.

Businesses have also struggled in the past year, with many forced to close their doors due to various lockdown restrictions, or, if they have been able to operate, to navigate ever-changing social distancing rules, and, as a result, have seen a drastic drop in revenue.

Whilst the increase in the National Minimum Wage, and extension of the National Living Wage, will not solve these issues, it is a step in the right direction, and a powerful signal of support for younger workers. Both employers and workers appreciate the importance of recognising the contribution of low-paid key workers, many of whom are under the age of 25. It is hoped that the modest increase of 2.2 percent to the National Minimum Wage will give a boost to these workers and remain affordable for struggling business in these difficult times. The 2.2 percent increase will not apply to workers who are currently on furlough unless they are required by their employers to complete training whilst on furlough.

Ensuring Employer Compliance

For employers, changes and increases in National Minimum Wage and NLW rates and bandings also require careful consideration to ensure ongoing compliance. Whilst most employers have no intention of paying workers below the applicable rates, the highly technical nature of the minimum wage legislation has resulted in some high profile cases of employers inadvertently falling foul of the rules and receiving fines.

Where National Minimum Wage increases bring workers closer to minimum levels, employers need to be mindful that there are various elements of a worker's pay that do not count towards a minimum wage pay, including shift premiums, overtime pay, payments by an employer to reimburse a worker's expenses, and benefits in kind. However, there is one aspect of the minimum wage legislation which is the most common cause of breaches and can be extremely costly for employers. This is the effect of payments by employees or deductions from wages which reduce pay for National Minimum Wage and NLW purposes. This includes payments paid by workers to third parties in respect of "expenditure in connection with employment". For example, if a worker is required to wear a certain type of clothing or provide their own tools and they are not repaid for the expenses incurred, then the costs incurred by the worker – even if these are payments made to a third party – will reduce their pay for the purposes of minimum wage calculation and can lead to underpayments, public naming an penalties imposed by HMRC.

Therefore, whilst a simple look at workers' basic hourly rates of pay may seem to indicate that they are being paid the requisite minimum wage, in actuality, they may have fallen below the threshold. It is essential for employers to review their pay policies every time there is an increase in the National Minimum Wage/National Living Wage in order to ensure that that they remain compliant.  

If you would like to discuss any concerns you may have with the National Minimum Wage or the National Living Wage, or to explore ways of auditing and reviewing your pay structures please contact our specialist National Minimum Wage team, Alex Watson or Richard Branson, or a member of the Fieldfisher EPIC team.

This Article was co-written by Shafagh Daneshfar.