The National Living Wage (NLW); a mandatory £7.20 wage for all employees aged 25 or over enforced on 1st April 2016. A simple concept to incentivise the public to take up employment, while raising the standard of living for those eligible. Nice and easy, right? Maybe not.
Like the National Minimum Wage, adherence is mandatory with fines of £20,000 per employee. HMRC also have a number of other punishments included in their arsenal for non-compliers. This said, we don’t yet have the rulebook on how to avoid these. But the NLW has a grown up cousin; the fabled goal of every adolescent paperboy in the UK, the National Minimum Wage. Its regulations can provide some understanding of what we can expect for NLW.
The current law on NMW dictates what can be counted as pay when working out whether a worker has earned at least the level of the minimum wage. Components to be included in this calculation are:
- Gross basic salary
- Bonus payments
- Commission payments
- Other incentive payments
- Limited Accommodation Costs
What’s not allowed to be in the calculation?
- Shift premiums
- Extra pay for overtime
- Tips
- Employee loans
- Wage advances
- Pension payments
- Retirement payments
- Redundancy payments
- Settlements
There is something to consider here though – especially for organisations that pay by the hour and use shift premiums.
The effects of a shift premium
Shift premiums are generally used to incentivise employees to work hours deemed more challenging to recruit for, or simply as recognition that eating your breakfast while waking up to the evening news isn’t everyone’s cup of tea. Dependant on the type of organisation, they can account for a sizable slice of the wage budget.
If you have employees with a contractual hourly rate of less than £7.20 per hour, your wage budget is only going to grow with the introduction of NLW. It has the potential to create a tricky financial situation for businesses with a large number of employees on shift premiums. But there’s a way to mitigate these increasing costs.
A move from hourly to salary pay
Let’s use a scenario; I get no bonus, commission, incentives or accommodation costs paid, and the base pay stipulated in my contract is £7.00 per hour. On the surface, I fall below the hourly threshold and need a bump up in pay. But my actual average hourly pay is above the NLW because 10 of my contractual hours are worked at night time, at a rate of time and half; let’s do some simple maths here:
Because of the way the shift premiums operate, in this situation, my real hourly pay is £7.92. But despite this, I’ll still need to be paid extra because shift premiums aren’t allowed to be included when calculating my average hourly pay.
Ready for the black magic?
The answer - if you were to change the way you structure your pay, you might be able to save some money. By adjusting to salaried pay and ‘rolling up’ the budget you allow for shift premiums. You might be somewhere close to ensuring everybody is paid above the NLW, without increasing your wage budget. It’s a simple redistribution; let’s play with some more numbers:
- Company Wage Budget - £1,000,000
- Company Wage Budget for Shift Premiums - £200,000
- Total - £1,200,000
So that’s 20% of my annual wage budget I reserve for paying shift premiums. If I were to include this in my wage budget, scrap the shift premiums, move to salary pay and distribute it across all of my employees, the calculated hourly rate for my employees would rise. I’m playing by the rules and spending no more money. Let’s have a look at the numbers again:
So there we have it. Your employee’s wage meets the average hourly threshold. You’ve spent no more money on wages and you meet the new NLW. If only it were that easy…
This approach can work, but it depends on how your organisation and shift patterns are structured. If the shift patterns worked by all of your employees are harmonised and strictly regimented, (i.e. everybody works 28 hours during the day and 10 at night at the enhanced rate), there would be no losers. However, if you have no set, structured shift pattern there would inevitably be some employees that lose out and some that unjustly gain. Let’s use our earlier scenario:
My colleague, like me, is getting no bonus, commission, incentives or accommodation costs paid. The base pay stipulated in their contract is also £7.00 per hour. On the surface, they also therefore fall below the hourly threshold and also require a bump up in pay.
But because they want to earn as much as possible, and our employer allows it, they work around three quarters of their contractual hours at night time, at a rate of time and half. Let’s look at the numbers for my colleague:
Their real hourly pay is a long way above the NLW and a long way above mine because they choose to work the shifts with premiums attached. So in this case if their contract is changed to the new proposal, they stand to lose pretty heavily with their real hourly rate falling from £9.58 to £8.40. This means their full time equivalent salary would fall from £18,981 to £16,643. You’ve curbed their earning potential, effectively reduced their pay, and they’re not happy. Conversely, if I have a colleague currently working nothing but shifts paid at a standard rate and they earned an extra 20% for doing nothing more, that’s similarly unjust.
So there’s the difference. Unless my colleague and I are working the same amount of hours at each level of pay, one of us will win, and one will lose. You can go ahead and make it a companywide policy that everyone must work the same amount and kind of shifts. But if this isn’t a system you already employ, would the cultural change be practical and worth the turbulence? I doubt it.
Unless you already have a structured and enforced shift pattern system in place, you risk mass disruption across your workforce. The only real way to implement this form of system is to proceed with baby steps; little by little harmonising the patterns of shifts worked by current employees and adjusting contracts for new joiners, stipulating a certain pattern to be worked and readily enforcing it.
Communicating a change like this with your employees is key. No employer wants a situation like the current NHS junior doctors dispute, due to smoke and mirrors around pay. You must proceed with your workforce’s best interests in mind. Clear communication around any changes like this will help to ensure a happy workforce, who are paid above the minimum wage at no extra cost with a strong ethos of fairness and equality. The added bonus is that employees will be able to see how great their employee deal is by looking at the full figure they earn, rather than compartmentalised figures.
