Tough punishments for avoiding National Living Wage

1 September 2015, 18:49   By Justin Schamotta

COMPANIES that try to avoid paying the National Living Wage when it is introduced next year face stiffer penalties and prosecution, the Government have warned.

living wage
Credit: AndriiKoval/

Fines will be doubled, and employers found guilty of not paying the new wage could face disqualification from acting as a company director for up to 15 years.

The measures were announced today by Business Secretary, Sajid Javid, who warned that employers who tried to cheat staff out of the National Living Wage would "feel the full force of the law".

More money for over-25s

The National Living Wage is being introduced in April 2016, and will require employers to pay all workers aged over 25 at least £7.20 an hour. This will be increased to £9 an hour by the end of the decade.

Prime Minister David Cameron has said that "the national living wage will only work if it is properly enforced."

The Government intend to do this by introducing a new team of compliance officers in HM Revenue & Customs.

These will have the power to use "all available sanctions, including penalties, prosecutions and naming and shaming the most exploitative employers".

Learning from the past

In the past, the Government has been criticised for not being harsh enough on employers who fail to pay their staff the minimum wage - currently £6.50 an hour for those aged 21 and over.

Under the last Government, employers who were caught out had to pay the amount they had underpaid workers, plus a penalty of 100% of the underpayment.

From next April however, the penalty element will increase to 200% of the underpayment - although the overall maximum penalty such companies face will remain unchanged at £20,000 per worker.

Is it enough?

While a National Living Wage is undoubtedly a good idea, the figures being used by the Government don't really add up.

Each year, the Joseph Rowntree Foundation (JRF) and Centre for Research in Social Policy (CSRP) at Loughborough University provide detailed estimates of the cost of living.

Last November those figures resulted in the Living Wage being set at £7.85 an hour outside of London, and £9.15 an hour for people working in the capital.

What's more, the Living Wage is an average calculated on the assumption that people will also be getting in-work support, such as tax credits and other benefits.

The Resolution Foundation point out [pdf] that without that extra support, the Living Wage in London would be £11.65 an hour, significantly higher than the current rate of £9.15.

The government's National Living Wage, by contrast, falls well short of these rates - and it will only apply to those aged over 25.

Younger people must continue to make do with the existing national minimum wage, which is £6.50 for those aged over 21, £5.13 for those aged 18-21, and just £3.79 for those under 18.

The good, the bad

An ever increasing number of companies have commendably pledged to honour the figures put forward by the JRF and CRSP as a workable living wage.

To date, there are more than 1,700 firms who've sought accreditation from the Living Wage Foundation.

Unfortunately, there are many other companies who complain that even the Government's National Living Wage, based on what the Low Pay Commission believes the market can bear, is too high.

Former Sainsbury's chief executive, Justin King, claims that the introduction of the National Living Wage is "ludicrous" and will "destroy jobs".

His argument is that rather than damage profits, employers will try to use fewer people to do more work in order to pay the increased wages.

Directors at Four Seasons Health Care, Britain's biggest care home operator, have also expressed concern over the possible effects of the National Living Wage.

They warn that the increased wage bill could lead to the collapse of the organisation within two years.

Four Seasons employ 30,000 staff to look after 20,000 residents and patients.

Nevertheless, independent fiscal watchdog, the Office for Budget Responsibility (OBR), estimates that the changes will have a "fractional" effect on employment.

They estimate that 60,000 jobs will be lost as a result of the higher rate - compared with the figure of six million or so people they say should benefit from higher earnings as a result.

The OBR do warn that companies might want to reduce the number of hours employees work to cover the cost of the increase - but even big business figures, including the Institute of Directors, have admitted it's time for pay to rise again.

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