The National Living Wage – the bigger picture for recruitment companies

Posted on: March 1st, 2016

As we reported back in October 2015, individuals aged 25 and over will be entitled to receive the National Living Wage (NLW) from April 2016. Starting at £7.20 an hour and rising to £9 by 2020, it will replace the current National Minimum Wage of £6.70 for workers over 25.

It is mandatory for all employers to pay the NLW and penalties of 200% of unpaid wages will apply, up to a maximum of £20,000 per underpaid worker. A new HMRC team is in place to enforce criminal prosecutions for deliberate non-compliance and a director found guilty will face disqualification for up to 15 years. HMRC will also retain the ability to ‘name and shame’ non-compliant companies, which will no doubt impact upon the reputation of businesses.

It is likely that the sectors which will be most affected by the change are hospitality, care, cleaning and food and drink, where typically pay rates are low and margins small. The Mears Group, which provides care services, has warned that it is facing a choice of passing on the higher costs to local authorities or facing a significant fall in profit.

So what does the NLW mean for recruitment companies supplying temporary workers? Importantly the primary obligation to pay the NLW falls upon the recruitment company that has the contract with the worker, rather than the client who receives the worker’s services. This means that, to cover the cost, the NLW will need to be included in the charge rate to your clients. Your current terms of business may permit increases to the charge rate in line with statutory requirements, such as the NLW; however, this should be confirmed and communicated to the client in advance of the April changes. In particular, if your terms of business currently refer to the National Minimum Wage, you should update them.
What else will a recruitment company need to consider?

Pay package

Other elements of a worker’s pay package will need to be adjusted to reflect the new NLW. Any percentage for holiday pay and pension contributions in the charge rate will need to be calculated on the NLW, further increasing the charge rate to the client. This will also apply to overtime where overtime hours are paid at an inflated rate (at ‘time and a half’, for example).

If your recruiters or other staff receive commission and/or bonuses as a percentage of their basic pay, the NLW is likely to cause an increase to these amounts.

Margin

The NLW will cause an increase to recruitment companies’ margins where the margin is a percentage of workers’ pay. If this margin percentage is already agreed and outlined in the terms of business, your clients will have no choice but to accept the likely increase; however, clients may negotiate to reduce the margin or may look for recruitment companies with more competitive margins.

Pay scales

Businesses will need to consider whether the NLW will have an impact on pay scales, as there is likely to be a desire to maintain pay differentials. For example, employee relations issues might arise where workers’ wages have been inflated to be level with or higher than their supervisors’. It is estimated that this ripple effect on pay differentials will cost UK employers £59.5m.

Administration

Keep a record of the date of birth of each worker being supplied. Payroll systems should be updated so that you are notified when a worker reaches the age of 25 and will qualify for the NLW.

Age discrimination

Recruiters will need to be aware of any discriminatory requests by their clients, who may wish to recruit under 25 year olds to avoid paying the higher NLW. A report by Manpower anticipates that employers will mitigate extra costs by taking on more young workers. Recruitment companies can be liable for age discrimination under the Equality Act 2010 if they act on clients’ requests to only supply younger workers.

Employment status

The Manpower report also anticipates that employers may take on more ‘self-employed’ workers, as they are not entitled to receive the NLW; however, this brings the risk of employment status issues. If an individual is under the supervision, direction and control of the client and therefore not genuinely self-employed, the worker should be receiving the NLW as well as other worker rights (such as holiday pay, rest breaks etc). This could leave recruiters with a penalty from HMRC and potential allegations of deliberate non-compliance.

Ultimately, the concept of the NLW is relatively straightforward: employees will be entitled to more money per hour and employers will have higher costs; however, the impact is bound to be more complicated. The full effect on businesses will become clearer once the NLW comes into force in April and rises over subsequent years. Before then, speak to your clients about how this will realistically affect your charge rates and ensure that you budget for the increase in wages.

If you wish to discuss how the National Living Wage will affect your business in more detail, please contact the Employment Team on 023 9236 6049.