What will be the cost of the living wage for utilities?

In April the minimum wage will be replaced by the higher living wage, which could have a far-reaching impact on company pay structures, says Michael Ryley.

Employers have been subject to the national minimum wage (NMW) for 16 years, but from April 2016 it will be replaced for all workers over the age of 25 by the (higher) national living wage (NLW). That will mean an increase from the current minimum rate of £6.50 an hour to a new minimum rate of £7.20, and the NLW is expected to rise exponentially to more than £9 an hour by 2020.

For some, this will mean a significant increase in payroll costs, although many others already pay above the minimum rates. Confusingly, many already pay a “living wage” as recommended by the Living Wage Foundation, a voluntary scheme which currently sets the minimum at £7.85 outside London and £9.15 within. More than 1,000 employers across the UK have been accredited with “living wage employer” status.

The two regimes are quite different: the voluntary rate is set by the foundation rather than the government and it is set at a higher rate than the NLW, but just how clear and meaningful the distinction between the two schemes will be after April remains to be seen. Undoubtedly, some utility companies have sought to use living wage accreditation to boost their profile as responsible employers, distinguishing them within the consumer arena. Once all businesses are subject to the NLW, it may be difficult for such businesses to maintain the distinction.

Many employers in the sector – such as National Grid, Centrica, British Gas and Yorkshire Water – are accredited living wage employers. Not only do they pay their employees at or above the recommended minimum, they are also signed up to a commitment in respect of rates of pay within their supply chain, which is an important omission from the statutory scheme. Given the vast supply chains that exist around some of the big utility companies, the commitment of these employers to the voluntary scheme has had a widespread effect.

While there is significant uncertainty about the impact the NLW will have, it is anticipated it will rise by much more than inflation and employers will lose a significant element of control over what they pay some of their staff. They may have to make difficult organisational decisions such as reducing or stopping bonus payments and cutting back on other employee benefits.

There will be a decision to make about whether to retain existing pay scales or implement new ones. Differentials may be eroded – for example if an employee’s pay is inflated to a level where they are being paid as much as their supervisor. Inevitably, this might mean the employer’s whole pay structure needs to be overhauled.

 Some key considerations to bear in mind are:

•    It is likely that there will be unpredictability around payroll costs for some while, causing problems with budgeting, forecasting and pricing.

•    Employers will have to assess the day-to-day administration and payroll implications in the context of the shape of their workforce.

•    Employers should consider the employee relations issues that are likely to arise. Different levels of pay increase across a workforce are an inevitable source of tension.

•    Employers should ensure there are pay structures in place that reflect the value of jobs within the organisation and that minimum rates of pay do not create distortions. They should consider whether a job evaluation study might be appropriate.

•    Any contractual changes to employee terms and conditions will need to be handled carefully and any consultation requirements will need to be adhered to and dealt with in good time to avoid expensive tribunal claims. Therefore, employers need to be sure they are carrying out modelling exercises at an early stage so that they are clear on how they will implement the change in a way that minimises the risk of employee relations issues and any associated claims.

Given that unions across the sector have campaigned for the introduction of a living wage, it is a reasonable assumption that there will be continued pressure in this area. Whether this will result in action against employers paying the NLW but not the higher, voluntary level remains to be seen.

Strike action has also been threatened in the past where the concept of a living wage has been refused. It is very likely that the anticipated union stance will be to use the mandatory living wage level as a mechanism to seek to drive up the levels of pay for all employees. This will inevitably figure heavily in future pay talks across the sector. Certainly, employers across the utilities sector must evaluate and review existing business and financial models and start thinking about how to implement the NLW.

Michael Ryley, employment partner at Weightmans