A national living wage: an important but complex shift in policy

Author: Darren Newman

Consultant editor Darren Newman examines the complexities arising from the Chancellor's announcement of a "national living wage" for workers aged 25 and over and highlights the potential for challenges on age discrimination grounds.

The national minimum wage is about to be transformed. Since it was introduced in 1999, the Government has shied away from setting the actual rate at which it is paid - leaving it to the independent Low Pay Commission to make its recommendations based on the need to avoid damaging the economy or prospects for employment. With the new Budget announcement of a "national living wage", however, the Chancellor has placed the issue firmly in the political domain. "Britain deserves a pay rise", he says, "and Britain is getting a pay rise."

The Low Pay Commission is being given a new remit. It will not advise on what the level of the new national living wage should be, but on how quickly it should reach the Government's aim of being 60% of median earnings. It will start at £7.20 per hour in April 2016 and is projected to reach £9 per hour by 2020. We should not underestimate the importance of this shift in policy.

One complication of the Chancellor's announcement is his use of the phrase "national living wage" rather than "national minimum wage". This is not mere window dressing. It appears that the national living wage will not simply be a new higher rate for the minimum wage, but will be achieved through a premium for workers aged 25 years and over. This seems needlessly complicated.

The national minimum wage must be a single hourly rate applicable to all workers regardless of their location or the sector in which they work. However, there has always been a power to make Regulations providing for different rates for those under the age of 26 - s.3 of the National Minimum Wage Act 1998.

So the National Minimum Wage Regulations 2015 (SI 2015/621) (which consolidated a wide range of earlier regulations) actually set out four national minimum wage rates. From 1 October 2015, these rates are: £6.70 for workers aged 21 years or over; £5.30 for workers aged 18 to 20 years; £3.87 for workers under the age of 18; and an apprentice rate of £3.30 for apprentices aged under 19 or in the first 12 months of their apprenticeship.

The new national living wage will apply to workers aged 25 or over, so it seems tailor-made for regulations specifying a new rate of the national minimum wage for that age group. However, the new remit for the Low Pay Commission is explicit that the new rate will be a premium that is added to the national minimum wage, which will stay in place. This is a puzzle. Why take a needlessly complicated approach to introducing the new rate - one which might even require time-consuming primary legislation?

The legislation uses the phrase "national minimum wage" time and time again. It would be no small feat of drafting to include the phrase "national living wage" where needed. Perhaps on reflection the Government will adopt the more straightforward approach of introducing a new rate of the national minimum wage for those aged 25 and over. I can think of only two reasons why it might not choose to do so. The first is that the Government has pledged to ensure that those on the minimum wage will not be subject to income tax. That will be harder to achieve if the minimum wage is set at 60% of median earnings. The other - more concerning - potential reason is that the "premium" element in the national living wage need not be subject to the same rules on calculation as the national minimum wage. Will there be more flexibility, for example, in calculating working time or allowing the rate to be offset against benefits in kind such as accommodation?

The Government must surely intend, however, that workers entitled to the national living wage should be subject to the same legal protections as those entitled to the national minimum wage. Workers have a right not to be subjected to any detriment as a result of qualifying for a particular rate of the national minimum wage. It is also automatically unfair to dismiss an employee for the same reason. We can assume that the same rights will be given in respect of the new national living wage - the new rate would be completely ineffective otherwise.

These rights may take on more importance with such a significant premium for the national living wage. Hitherto the "youth rates" have applied only to a small part of the workforce and have applied to any particular worker only for a couple of years at the most. But if workers can stay on the national minimum wage between the ages of 21 and 25, many employers may be tempted to weed out those who qualify for the higher rate in order to save money. If a 24-year-old on the national minimum wage is selected for redundancy, that will - surely - be automatically unfair if the employer was concerned that he or she would soon qualify for a higher rate of pay. It is not clear that an employer would be able to use the excuse that it "could not afford" to pay the premium of the national living wage. In any event, if an employer dismissed or failed to recruit a worker because he or she qualified for the national living wage that would be age discrimination.

There is of course an element of age discrimination inherent in the legislation creating and setting the national minimum wage. That has always been controversial, but is likely to be even more so now. Age discrimination can be justified under the Equal Treatment Framework Directive (2000/78/EC) if it is aimed at achieving certain social policy objectives - one of which is the vocational integration of young people. It is easy to see the argument that, with youth unemployment being a particular problem, setting a lower minimum wage gives young people a better chance finding that crucial first job. But does that justification still apply once someone has reached his or her mid-20s? Perhaps - but I would not be surprised to see a legal challenge on behalf of workers who just miss out on the national living wage.