National living wage: three practical scenarios for employers

Source: BIS

The national living wage comes into effect on 1 April 2016. How well prepared is your organisation for applying rate changes when a worker moves from one rate to a higher rate band of the national minimum wage? Ashok Kanani looks at three practical scenarios.

The national minimum wage is set as an hourly rate. The rate a worker is entitled to depends on age. There is also an apprentice minimum wage. Until 31 March 2016, the highest rate applies to workers aged 21 years or over, and is £6.70 per hour.

From 1 April 2016, the rate of £7.20 per hour – the national living wage – becomes effective for workers aged 25 and over. Workers under age 25 (but 21 or over) will continue to be entitled to a minimum of £6.70 per hour.

Here, we provide three national living wage examples to help employers implement the new rate correctly.

Scenario 1: salaried employee aged 25 or over

Employer A has a worker aged 30 who is paid an annual salary of £15,126.80 for a 37.5 hour working week. The pay reference period begins each week on a Monday, and the employee is paid every Friday in cash.

The employee additionally receives accommodation, meals and pension as part of his employment package.

Does the employer need to take any action in respect of the pay for the week ending 10 April 2016?

The employer must calculate the employee’s hourly rate and ensure that it equates to at least £7.20 per hour. Benefits in kind do not count towards the national minimum wage, but an offset is given for accommodation. In this example, the employee does receive at least £7.20 an hour, and so no action is needed.

Scenario 2: salaried employee has his 21st birthday

Employer B has a worker aged 20 who will reach his 21st birthday a few days after 1 April 2016.

The employee is paid an annual salary of £11,500 by equal instalments each calendar month on the 28th. What is the minimum rate the employer must pay the employee in April 2016?

In any pay reference period, the national minimum wage rate to which the worker is entitled is the rate which applied on the first day of that period.

In this example, as the employee will reach his 21st birthday in the middle of the pay reference period, his pay need not change in April 2016. For pay reference periods beginning from 1 May 2016, the employer will have to ensure that the employee pay equates to a minimum hourly rate of £6.70.

Similarly, any worker who reaches his or her 25th birthday a few days into a pay reference period will not be entitled to the national living wage rate until the following pay reference period.

Scenario 3: Fair piece rate worker

Employer C has a worker aged 59 who works as a homeworker packaging greeting cards. He is paid on the basis of a “fair piece rate”.

The employer has already determined that an average worker completes five envelopes in an hour. In April 2016, the worker completes packaging 750 envelopes.

From 1 April 2016, the employer must pay the employee an amount based on the national minimum wage for those of age 25 and over. Where employers pay workers based on a fair piece rate, a 20% premium is applied to the rate.

In this example, the employer must pay a minimum of £8.64 an hour and, given the output, he must be paid at least £1,296 in April.

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