Report shows employers adapting to National Living Wage

The annual report by the independent Low Pay Commission (LPC) shows that employers have tended to adapt to NLW increases by raising prices or accepting lower profits, rather than by reducing staff count or increasing productivity. The report also confirms the LPC's recommended increases to the NLW and the National Minimum Wage (NMW) for younger workers for 2019, which have been accepted by the government.

The NLW, which is the statutory minimum wage for workers aged 25 and over, will increase to £8.21 from £7.83 in April 2019. The NLW was introduced in April 2016 and is due to increase so that it reaches 60% of median earnings by 2020, subject to sustained economic growth. Lower NMW rates apply to 21-24 year olds, 18-20 year olds, 16-17 year olds and apprentices aged under 19 or in the first year of an apprenticeship, as these groups are statistically at higher risk of unemployment if minimum pay rates are set too high.

Employment law expert Matt McDonald of Pinsent Masons, the law firm behind Out-Law.com, said that the NLW "is widely viewed as a success story".

"Concerns prior to its introduction that some businesses would be financially crippled by higher wage bills have, for the most part, not been realised," he said. "In fact, and as the LPC report notes, businesses have been forced to adapt, and have done so remarkably well."

"HMRC's NMW enforcement arm has been given a significant financial and headcount boost in recent months and is now systemically targeting large employers with random audits. The penalties of falling foul of such an audit are harsh - a fine equivalent to 200% of the underpayments as well as being publicly 'named and shamed' - so employers would be well-advised to review their pay arrangements proactively and ensure they are not in breach of the regulations," he said.

"To this end, it's worth noting that the regulations are very complex and at times counter-intuitive, so it's easy to fall foul of the law even for those employers whose base rate of pay for their lowest-paid workers is well above the NLW," he said.

Employers can be fined up to 200% of arrears for underpaying staff, and may face criminal prosecution in some circumstances. Employers in breach of the regulations will also be 'named and shamed' by HM Revenue and Customs (HMRC). Recent reports have seen employers named for deducting the cost of uniforms from wages, or for using incorrect time periods for calculating pay.

According to the LPC's report, fewer people benefitted from April 2018 increase to the NLW than from last year's increase, but this was still around five million workers or one fifth of workers aged 25 and over. The 4.4% increase in the NLW not only benefitted those on that rate, but also workers earning up to £9 per hour or the bottom 20% of UK workers. This was due to employers wanting to maintain a pay gap between job grades, or because they wanted to keep their pay rates above the NLW.

In total, 1.6 million people were paid at or below the NLW in the year to April 2018. This worked out as 6.5% of all workers aged 25 and above, roughly the same proportion as in 2016 and 2017. Almost two thirds of those paid the NLW were women. After the 2018 increase, more workers than ever before were paid at a rate of between 5p and 50p per hour more than the NLW: a total of 1.6 million people, almost half a million of whom were paid £8 or more per hour.