From 1 April 2016, workers over the age of 25 became entitled to be paid the National Living Wage (“NLW”) of £7.20 per hour.

This article looks at how you might be able to restructure the way you pay staff to ensure that you meet your obligations to pay the NLW.

What is a living wage?

A living wage is defined as a “wage that is high enough to maintain a normal standard of living”.  The Living Wage, calculated according to the basic cost of living in the UK, is set to increase to £9.00 per hour by 2020.

On the upside

Many operators have embraced the introduction of the national living wage – already many employers in the hospitality industry pay more than £7.20 per hour and report the benefits in terms of attracting and retaining staff.  Higher pay means that staff are better engaged, morale is better and recruitment and training costs are significantly reduced.  As Peter Borg -Neal was quoted as saying motivated and engaged staff “must be able to pay the rent”.

The current chef shortage shows that in an industry where hours are long and people are required to work hard it is important to make jobs attractive.

On the downside

Of course the introduction of the NLW has undoubtedly meant an increase in payroll costs. Added to that, it is more difficult for employers to differentiate pay to reflect those with more experience or responsibility.  You may have a very able and experienced 23 year old who deserves to be paid as much as a new employee who is 25.

What pay and benefits could count towards the NLW?

The rules about which pay and benefits count towards the NLW are the same as for the previous national living wage, namely:

Pay and benefits that count towards NLW:

  • basic salary;
  • bonus commission and other incentive payments based on performance (but not any premium paid for overtime or shift work);
  • piecework payments;
  • accommodation allowance;
  • allowances paid by way of HMRC dispensation agreements.

Pay and benefits that do not count towards the NLW:

  • Benefits in kind whether or not they have a monetary value (e.g. staff meals, drinks, uniforms, cars);
  • Any premium paid for overtime or shift work.
  • Any allowances or payments which are not attributable to the employee’s performance, London weighting or on-call allowance. If these payments are consolidated into standard pay then they will count towards NLW.
  • Advances of wages;
  • Loans;
  • Pension payments;
  • Tips and gratuities paid through payroll.

Alternatives to a payrise

It may be that you are currently meeting the £7.20 rate because you are paying a bonus or an accommodation allowance which could count towards the NLW but you do not currently take this into account.

Alternatively you may decide that rather than giving staff the benefits that you currently give, such as free meals or gym membership (which don’t count towards the NLW), you could replace these with a pay rise to ensure that their hourly rate meets the NLW.

Accommodation Offset

If you are providing staff accommodation and not charging rent to the employee then you may be able to add the offset allowance of (£5.35 per day) to the worker’s pay to count towards the NLW.  NB If you are charging rent of more than £5.35 per day then the extra charge is taken off the worker’ pay for NLW purposes. For further detail see our article – “Staff Accommodation – Get the NMW calculcations right”.

Tips and gratuities

An unfair tip system is likely to de-motivate staff, however, it is currently legal for an employer to deduct an amount from non-cash tips to cover administrative costs such as payroll costs.  This may be an option open to employers who do not currently make a deduction in order to reduce the additional wage burden caused by the introduction of the NLW.  This option is not without its challenges and the BIS Code of Practice on Tips recommends that operators give customers and workers information on how tips are distributed.

NB It is not an option to require staff to hand over cash tips they are given as these belong to staff and cannot be used to count towards the NMW or NLW. Our article – “Tips – A fair distribution?” covers these issues in more detail.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.