Clearing up the confusion around the National Living Wage

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The National Living Wage, the blockbuster announcement of the Summer Budget, is a hugely welcome move on low pay. But we’re now four months away from its introduction and, as a new government poll reveals, many businesses are not prepared for it. The awareness raising campaign launched today is a good start towards addressing that confusion.

The National Living Wage (NLW) is a game changing policy, delivering a pay boost for six million workers by 2020. But because of the scale of the change it brings, government has a challenging job in ensuring that employees get this new compulsory minimum, and that employers are able to adapt. There are four potential sources of confusion that stand in the way of a smooth introduction next April.

One in four employers don’t yet know how they are going to react to the National Living Wage

First is the difference between the government’s compulsory NLW and the independent, voluntary living wage. From April we will have a National Living Wage of £7.20 an hour, a voluntary UK Living Wage of £8.25 and a voluntary London Living Wage of £9.40 (to say nothing yet of the National Minimum Wage). All of these rates have an important role to play, with a legal minimum chosen with an eye to limiting job losses and a higher voluntary rate based on an average cost of living as something for employers to pay where possible. There will be confusion about what the legal minimum is and whether employers really are ‘Living Wage’ employers. This is a problem of the government’s own making. Having copied the name of the popular campaign it is now on them to minimise that confusion.

Second, while the National Minimum Wage (NMW) has for 16 years risen every October, the NLW will rise each April. Ultimately this may be a welcome move for employers, aligning it with the corporate tax year, but in the short-term some may be surprised to see a rise in the legal minimum only six months after the last and that – for now at least – the wage floor for over 25s (the NLW) will rise at a different time to that of under 25s (the NMW).

Third, these age bands have changed. Some employees aged 21-24, who are currently entitled to the adult NMW and might expect to benefit from the higher wage floor in April, will be disappointed, as the NLW only applies to those aged 25 and over (in order to minimise any impact on youth unemployment). However, as many employers do not discriminate by age, a large number of younger workers will get the higher pay rate, even if it isn’t a legal requirement. But with five bands of legal wage floor now – under 18, 18-20, 21-24, 25 plus, and apprentices – employers need to be guided and employees need to know what they’re entitled to.

A fourth source of potential confusion is the future trajectory of the NLW. It is a good thing that there is now a medium-term goal for the wage floor – 60 per cent of the 25 plus median wage. But prominent talk of a 2020 rate – currently forecast by the OBR to be £9.30 an hour – as well as a 2016 rate might confuse some. And it remains to be seen what the trajectory between 2016 and 2020 will be.

All those questions may help explain why our recent joint survey of employers with the CIPD found that one in four don’t yet know how they are going to react to the NLW. This lack of planning is worrying. Implementing the new NLW will be hugely challenging – particularly in low paying sectors such as hospitality, cleaning, retail and care – and future Resolution Foundation work will explore this in more detail.

Timely, prominent and targeted guidance is needed to help ensure employees are not underpaid, and to help such sectors develop ways to adapt and increase their productivity. Today’s campaign is a welcome start.