Implications of the national living wage for local government

Jawaid Rehman, Weightmans, Leicester

Following the post-election budget, one of the big talking points was the new ‘national living wage’ that will replace the existing national minimum wage for all workers aged over 25 with effect from next April. The current minimum wage of £6.50 an hour will be replaced with a new rate of £7.20, which is expected to rise further to more than £9 an hour by 2020.

When introduced, the national living wage will be a compulsory payment. It should be distinguished from the existing living wage – currently set at £7.85 per hour outside London and £9.15 per hour in London, and set by the Living Wage Foundation – that is currently paid voluntarily by almost half of local authorities. The current living wage is an hourly rate set independently by the Living Wage Foundation and is updated annually. It will next be increased in November 2015. This voluntary living wage is calculated according to the projected cost of achieving an adequate standard of living. However, the new national living wage will be calculated with reference to median earnings rather than the cost of living.

How will the national living wage relate to the existing minimum wage thresholds?

The national minimum wage is currently set at the following rates:

  • apprentices: £2.73 per hour;
  • under 18: £3.79 per hour;
  • 18-20: £5.13 per hour; and
  • 21 and over: £6.50 per hour.

The national living wage will sit alongside this and it appears that, once it is introduced, the national minimum wage rate for 21 and over will effectively become a 21-24 rate with the national living wage applying to those aged 25 and over. This has led many commentators to describe the national living wage as a new minimum wage rate, rather than a true ‘living wage’.

Who will receive the national living wage?

It currently seems that the new national living wage will apply to all who are currently eligible to receive the national minimum wage provided they are aged over 25, for example employees, most workers and agency workers. However, this is subject to confirmation.

Individuals who are genuinely self-employed, and charge an hourly or daily rate, are not entitled to receive the national minimum wage. In addition, volunteers, work experience or placement students and some apprentices will be excluded from the national living wage.

What are the implications for local authorities?

There has been much debate in the press regarding the potential adverse impacts the introduction of a mandatory national living wage will have on UK business as a whole. However, the Local Government Association’s analysis revealed that the national living wage would cost councils a minimum of £340 million a year from 2016, rising to more than £1 billion by 2020. Only a fraction of this figure will actually come from pay rises for the relatively small percentage of full and part-time staff who are currently paid less than the national living wage; the bigger part is the anticipated increase in costs of provider contracts, for example, for home care and residential care providers. The cost of taking on agency workers is also likely to rise proportionately. While the employment agency will of course be responsible for ensuring that they pay eligible over 25s the national living wage, presumably agency fees will be increased in line with the higher rate of pay – the cost of which will naturally be passed on to the council. This may therefore pose challenges for departments that have a heavy reliance on agency and seasonal staff.

The question that naturally follows is: how will that be funded? Councils have already made significant savings in recent years and are likely to face further spending cuts going forward. Budgets are already likely to be strained. This has created speculation that local authorities may respond to increased costs through further cuts to services or reducing hours. As the new increased rate will apply to the over 25s only, it has been suggested that businesses generally may increasingly move towards hiring younger workers.

Local authorities are effectively losing a degree of control over what they pay some of their staff and may have to make difficult organisational decisions. If changes are required, employers will need to consider their approach and any proposed measures carefully. This includes the legal requirements for implementing such measures, particularly given the phased increase in the rate of the national living wage and the lack of control that the employer has in respect of what rate it is set at. Certain organisational changes will require collective consultation with unions and may need to be effected through a process of dismissal and re-engagement if a collective agreement cannot be reached. Any Part 2 changes will require a move away from Green Book terms and conditions.

What about those local authorities who already pay the existing living wage?

Local authorities may have contractually reserved their right to withdraw from being a living wage employer in order to respond to financial constraints where necessary. They will then have to decide whether to stick with the living wage, and face potentially unpredictable increases every November in order to maintain their living wage employer status, or whether to simply comply with the new national living wage. Where a local authority has contractually tied itself in to future living wage increases, thought will need to be given to the political sensitivities, employee relations issues and the legal process associated with switching from the living wage to the lower national living wage.

Impact on implemented pay structures

Although the main impact of the national living wage is likely to be an unpredictability of payroll costs, there is also the consideration about how to implement the national living wage in light of existing pay structures. Many authorities have put in significant efforts to implement analytical job evaluation schemes and will be keen that the structures in place are not undermined through implementing the national living wage. Authorities may decide to retain existing pay scales and use a supplement, or carry out a review of all the pay scales. With the former, there may be situations where an employee’s pay is inflated to a level where they are being paid as much as their supervisor and this could lead to employee relations issues arising.

Conclusion

At this stage, there remains uncertainty around the impact the national living wage will have for authorities that are not already committed to paying the living wage. While there is a certain level of speculation, much will depend on the outcomes of the wider debates on council funding. However, the money will need to be found from somewhere and it is probably unlikely that central government will fully fund this.

It is worth noting that the government does intend to introduce measures to balance the increased wage costs of the national living wage and ‘soften the blow’. However, these seem to be generally aimed at smaller private sector enterprises. It is clearly a positive thing that lower paid roles, such as street cleaners, school dinner staff and care workers, will receive a national living wage. What remains unclear is the steps councils will need to take in order to cope with the additional financial pressure and, in the absence of increased funding from central government, to what extent the associated costs of the national living wage will have a negative impact on the provision of key services.

Jawaid Rehman
Employment partner
0121 200 8123
jawaid.rehman@weightmans.com