National Minimum Wage and Living Wage – what’s the difference and why is it important?

19th May 2020

With the recent changes to both the National Minimum Wage and Living Wage rates, there is still much confusion amongst employers as to what this is, why it’s changed and what should employers be doing to avoid fines and even being named and shamed.

The History – National Minimum Wage (‘NMW’)

The National Minimum Wage Act 1998 (‘the 1998 Act’ as amended, including the Employment Act 2008 ‘the 2008 Act’) introduced a statutory right to be paid a certain amount of remuneration for work performed. Almost all workers in the UK are entitled to the National Minimum Wage. Workers are defined in Section 54 of the 1998 Act. A qualifying worker who is paid less than the minimum wage for any pay reference period is legally entitled to be paid the arrears by their employer.

The History – National Living Wage (‘NLW’)

From 1st April 2016, the Government introduced a new mandatory living wage (NLW) for workers aged 25 and above. It was introduced through an amendment to the National Minimum Wage Regulations 2015 to ensure that the rules that apply to the NMW rates for workers aged under 25 also apply to workers entitled to the NLW

Why was it introduced?

The aim of the NMW was simply to increase the income of the low paid. Before the union reforms of the early 1980s, wages in many areas of business were controlled by government income policies and wage councils. Under the Thatcher government, the power shifted towards employers and away from unions with the result being that by the 1990s when most of the last wage councils were abolished, pay for many workers in many sectors were well below what was considered a living wage.

Throughout their time in opposition, Labour was committed to introducing an NMW, and during the 1997 election, this formed part of their manifesto. In July 1997, the Government set up the Low Pay Commission and the NMW bill was introduced to parliament. The LPC submitted its first report in June 1998 with the Government accepting in part their recommendations.

Introduced from 1st April 2016 the NLW had the aim of moving from a low wage, high tax, high welfare society to a higher wage, lower tax, lower welfare society. The NLW was described as an essential part of ensuring lower-wage worker could take a more significant share of the gains from growth to what the government described (in 2016) as the highest GDP growth in the G7.

The NMW and NLW while broadly accepted as a political and an economic fact of life is still controversial and debated as to its effectiveness.

Who sets the NMW and NLW?

The Government set the rates and are advised by the independent body The Low Pay Commission. The LPC is an advisory non-departmental body, sponsored by the Department for Business, Energy & Industrial Strategy.

The rates are reviewed annually by the LPC with any changes currently being made on the 1st April.

Who is entitled to the NMW & NLW?

Nearly all workers aged 16 or over, which includes the following:

  • part-time workers;
  • fixed-term workers;
  • agency workers;
  • casuals;
  • those working on zero-hour contracts;
  • homeworkers.

Anyone who is obliged to do work for another person is entitled to the NMW or NLW.

There is an exception for a small number of excluded groups and amongst these are:

  • members of the armed forces;
  • family members working in a family business;
  • people working and living as part of a family;
  • genuine volunteers.

Some interns will qualify for the NMW/NLW, and this will depend on whether they are legally obliged to do some work during their internship.

Definition of worker:

A legal term that includes all working people, not just employees. A worker who is an employee either has, or is entitled to, a contract of employment. By contrast, a worker who is not an employee will typically work for an employer based on a contract to provide services. Strictly speaking, all employees are workers, but not all workers are employees. In practice, a worker is often used to describe those who are not employees.

So what happens if you don’t pay the NMW or NLW?

HM Revenue & Customs (HMRC) are responsible for enforcing payment of the wage, and anyone can report an employer to HMRC for non-payment of the statutory rate. This report can also be anonymous.

If HMRC finds that the statutory rate has not been paid they can send a notice of arrears and issue a penalty for not paying the correct rate of pay. HMRC can also take employers to civil court for not paying the statutory rates.

The maximum fine for non-payment is £20,000 per worker, and employers who fail to pay can be named publicly and banned from being Company Directors for up to 15 years.

In addition, employees can take their employer to the employment tribunal or civil court if they feel any of the following:

  • they have not been receiving the NMW or NLW;
  • they have been dismissed or experienced unfair treatment (known as a detriment) because of their right to the NMW or NLW;
  • they have been discriminated against because their age means they are entitled to a higher minimum wage rate.

So what are the 2020 rates?

25 and over (NLW)21 to 24 (NMW)18 to 20 (NMW)Under 18Apprentice

Apprentice Rates

There are certain rules around apprentices of which you need to be mindful. You can pay the apprentice rate if the individual is either:

  • aged under 19; or
  • aged 19 or over and in the first year of their apprenticeship

For example, an apprentice aged 22 and in the first year of their apprenticeship is entitled to a minimum hourly rate of £4.15

Apprentices are entitled to the either the NMW or NLW for their ages if they both:

  • are aged 19 or over; and
  • have completed their first year of apprenticeship.

What is the Living Wage and why is it different?

This is where people start to get confused. The Living Wage was introduced in 2001 and is an hourly rate, calculated according to the cost of living in the UK.

The UK Living Wage is currently £9.30 per hour, and the London Living Wage now at £10.75 per hour.

The calculation takes into account a basket of essential goods and services. It provides the amount a worker should earn to give their family a basic but acceptable standard of living.

This is a voluntary rate, and should not be confused with the Government set National Minimum or Living Wage. There is no legal obligation to pay this rate, although advocates of the scheme will argue that employers may have a moral duty to do so. Employers who wish to adopt the Living Wage can become accredited by the Living Wage Foundation.

Common pitfalls when calculating NMW/NLW

As with most things employment-related, there are a few pitfalls to be aware of when calculating these wages. Employers will often rely on their payroll provider or software to pick up any irregularities, but this isn’t always foolproof. Here are some of the common pitfalls to consider:

  • Taking deductions from wages for costs such as uniforms;
  • Underpaying apprentices;
  • Failing to pay travel time;
  • Misusing the accommodation offset;
  • Using the wrong periods for calculating pay.

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