Legal

How effective is the national minimum wage?

10 Sep 2019 By Helena Rozman

Helena Rozman assesses the pay legislation’s success so far and looks at how it might develop in future

Introduced by the National Minimum Wage Act 1998, the national minimum wage (NMW) aimed to prescribe a minimum hourly rate of pay that an employer must legally pay its workers. The introduction of this requirement is seen as one of the most significant advances for workers in recent history.

There are five NMW rates, dependent upon a worker's age. This does not amount to unlawful age discrimination as there is a specific exemption. The rates are reviewed by the government in April of each year following recommendations from the Low Pay Commission. The current rates are: 

 
TypeAgeRate
National living wage (NLW)25+£8.21
Standard rate21-24£7.70
Development rate18-20£6.15
Young workers16-17£4.35
Apprentice rate£3.90

The NLW should not be confused with the living wage, which is a minimum hourly rate of pay calculated according to the basic cost of living and is purely voluntary. 

Compliance

The NMW rates are legally binding and must be paid to workers in the form of cash rather than benefits in kind. Employers must ensure their workers receive at least the NMW disregarding most non-cash benefits. The only non-cash benefit that may be considered is the value of any accommodation provided by the employer and even this is subject to an offset against an applicable allowance (currently set at £7.55). Failure to pay workers the NMW can result in civil and, in some circumstances, criminal penalties.

Relatively few employers deliberately underpay the NMW, but there are dangers even for those who intend to comply. The main risks for employers include not capturing or paying all working time (eg forgetting about informal overtime), prescriptive dress codes where uniforms are not provided by the employer for free, and not realising that salary sacrifices (eg benefits that are deducted at source, such as childcare vouchers) reduce pay for NMW purposes, so these arrangements can result in actual pay being less than the NMW. 

The last 20 years

The Low Pay Commission has reported that, since its inception, the substantial NMW increases appear to have had little detrimental effect on job opportunities in the UK. Instead, its introduction has coincided with a boom in employment rates, with the total number of jobs in the UK rising by 20 per cent since 1999 and the unemployment rate dropping to its lowest levels in 45 years. It concludes that the initiative has achieved its aim of raising pay for the lowest-paid workers while protecting their job prospects. In addition, according to the Office for National Statistics, wage growth in the UK has been outpacing inflation since March 2018.

However, it is not necessarily such good news for employers as increases in the NMW and NLW have not generally been supported by improved productivity. Instead, profits appear to have suffered from the adjustments, with many employers also sourcing the extra funds by tightening pay grade differentials, raising prices and reducing benefits, bonuses and overtime premiums. 

Looking forward

So what does the future hold? The Labour Party has already communicated its commitment to raising the NMW to £10 an hour by 2020. The Department for Business, Energy and Industrial Strategy wants to launch a new body that will have more rights to tackle employers' non-compliance, as set out in the government's Good Work Plan, which aims to enhance workers' rights. 

With this increased focus, coupled with record amounts of government spend on NMW enforcement, non-compliance remains a significant financial and reputational risk for many employers. Therefore, it is as important as ever that businesses analyse their working patterns to understand what their NMW obligations are and whether current pay and operational practices expose them to the risk of non-compliance. 

Helena Rozman is an associate at Dentons

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