Welcome to this HR Blast. This week we focus on the important issues of money and staff. We’ve been looking at The Living Wage and potential NI cost savings if you use self-employed workers. Why not scan through what interests you and skip over what doesn’t!
The Living Wage
Have you assumed this won’t affect you? Be careful to make sure your assumption is not wrong! Why not take a look at some of the impact suggestions below? If you already know this affects you, take some time to work through our thoughts and ideas. Planning is the key and as we all know if we fail to plan, we plan to fail…
What is it?
- A living wage is a wage which is high enough to maintain a normal standard of living.
- Livingwage.org.uk calculates the rate based on the cost of living, whereas the government defines it as 60% of the median wage.
- In his summer budget, Chancellor outlined plans to boost current minimum wage of £6.50/hour to £9 by 2020 (over 25s).
- To be achieved by way of a compulsory minimum wage premium.
- Min wage will rise initially to £7.20 in April 2016 and then will incrementally rise each year at a rate set by the Low Pay Commission until it reaches £9/hour.
- It will only be paid to the over 25s. Younger workers will continue to be paid at the current lower rate.
- Livingwage.org.uk calculate that the current living wage based on cost of living is £7.85 an hour (London £9.15).
The likely impact…
A helicopter view
- To minimise the impact there are planned cuts in the rate of corporation tax from 20% to 18% by 2020.
- A government report suggests about 60,000 jobs will be lost, as a result, but by 2020 there will be an increase of approximately one million jobs.
- Sectors such as retail where wages are generally low are likely to be the hardest hit.
- A report by KPMG concluded that bringing in the Living Wage will cost 1.3% of the national wage bill and will lift six million people out of poverty.
A practical view from Jaluch
- Controlling salary costs: to control costs younger workers are going to be increasingly sought after in retail/min wage jobs, whilst those hitting 25 may well find themselves back out looking for work.
- Cash flow and budgeting: coming so close to the introduction of pensions in many firms, those with many workers on or near the minimum wage will have to manage cash flow carefully. We are likely to see a number of redundancies as a result. If you will need to make redundancies, we recommend you plan ahead and where possible, achieve cost reduction through natural wastage.
- Development/retraining: likely to see a knock on effect to L&D/further education with those aged 25 on minimum wage levels having to take a step up the career ladder/retrain in order to remain attractive to employers. What else might the 25+ be doing to ensure they are not discriminated against or forced out?
- Line manager skills to avoid tribunal claims: the temptation on line managers to discriminate on grounds of age may be significant. Line managers may need to be better informed about/trained on how to keep the organisation out of court as they seek to control/minimise their staffing costs.
- Tribunal claims: likely to see an increase in discrimination claims from those losing jobs or missing out on job opportunities due to being the wrong side of 25. (And how often will sex discrimination on the basis of being a part-time worker/carer etc. be thrown into the mix along with age discrimination?)
- Fixed term/zero-hour contracts: Possible increase in a number of fixed term and/or zero-hour contracts being issued to avoid issues of unfair dismissal when someone reaches 25.
- Future changes: when developing strategy, employers might need to think about possible future increases for those aged under 25. With the salary differential changing significantly based on age, this may well put pressure on future adjustments in favour of younger workers.
- Succession Planning: if those over 25 do return to education to up their skill set, this in turn might put pressure on those organisations with very flat structures as a result of increasing numbers looking for the next step up. Will a flat structure continue to work for you over the next decade?
- Youth employment: on the upside this is all good for young workers who have had a tough few years but who will now be more sought after than ever. Not so good though for those heading towards retirement who already feel vulnerable when it comes to gaining employment.
And finally… moral dilemmas/business ethics:
The introduction of new legislation often challenges leaders and their organisations in respect of their morals and code of ethics. At Jaluch, we have no doubt that organisations with their constant focus on the bottom line will be wondering how to lessen the impact of the Living Wage.
If you want to achieve wages bill cost control through using fixed-term contracts so you can more easily lose those over 25 on lower wages, then consider carefully whether this aligns with your organisational values and business ethics. If you think more carefully, might there be a different route to absorbing these extra costs over the coming years without losing your integrity? If integrity isn’t an issue for you, then consider whether your organisation could sustain the press hounding suffered by those organisations that were seen to have abused the zero hours contracts system.
Planning ahead – a starter for ten…
- Check your hourly rates currently paid as split by age to assess who/how many staff might be affected.
- Review whether the changes will result in staff of differing ages being paid differing rates (i.e. those over 25 and those under 25).
- It will do no harm to analyse your minimum wage staff over 25 to assess if they tend to fall into any of the protected groups (sex, race, nationality, marital status, disability etc.)
- Consider what impact this might have on employee relations/business operation/L&D demands etc. if the profile of who you employ changes over time as a result of the new Living Wage. What steps might you need to take as a result?
A brief look at NI – will avoiding NI payments land you in a hole?
What is the difference between paying employers NI and using someone who is self-employed (or runs their own business as a sole trader) to avoid employers NI?
Almost all our Jaluch clients use at least some self-employed workers – consultants, associates and contractors (cleaners, gardeners, IT etc.) Often this arrangement is not set up with a view to avoiding NI, but because the arrangement is simply practical on many levels.
However, it is sometimes set up with a view to keeping costs and liability down, including NI costs. It is also sometimes set up in an entirely proper way but, over time, the relationship morphs into one that is more akin to employer/employee. And that is when problems often begin.
Here is an overview of what the NI costs are and what the consequence might be should you decide to use workers who are self-employed but who in reality, are acting and treated the same, as your other employees. Using contractors/self-employed is fine, but be careful and have sufficient knowledge to ensure you and your managers are staying on the right side of the legal line.
National Insurance for employers:
- How much? For workers aged 21 and over and for most tax categories 13.8% on earnings in over £156 per week. For employees under 21, employers NICs are only payable on earnings above £815.
National Insurance for employees:
How much for employees? Employees pay 12% on earnings between £155 and £815 per week and 2% on any earnings above £815.
How much for the self-employed? There are two rates depending on business size:
- Class 2 if profit is £5,965 or more per year at a rate of £2.80 per week.
- Class 4 if profit is £8,060 or more per year at a rate of 9% on profits between £8,060 and £42,385 and 2% on profits above £42,385.
If it all goes wrong…
Even if you have agreed to take someone on as an independent contractor if there is a dispute with the individual, which results in that worker seeking to bring a tribunal claim against you, a tribunal will assess the nature of the relationship rather than the title you have given it.
If the relationship is found to be one of employment you could find yourself liable for providing all the rights associated with employment such as holiday pay, pensions, sick pay and so on. Often backdated too!
In addition, if HMRC determines that the individual is an employee rather than a self-employed contractor it will pursue the business to recover historic PAYE deductions and may impose a fine. Whatever the worker has themselves paid in NI is not usually taken into consideration when calculating what you, the employer should have paid in both employee and employer contributions.
And once you’ve fallen foul of the HMRC, your affairs are more likely to be under scrutiny in future.
Whilst this is a complex area of law and you really ought to get good legal advice rather than making assumptions, just to begin building your knowledge, here is what might be considered when assessing if someone is really self-employed:
- Does the individual have to accept any work offered to them?
- Do they have to work at your premises or where you specify?
- Does their work with you exclude them taking work with others?
- Do they have to complete the work personally or can they nominate someone else?
- Do you give them specific instructions about when, where and how to do their work?
- Do they work a set number of hours per month?
- Are they paid weekly or monthly rather than for a specific project?
If they answer is ‘Yes’ to some or all of these questions, you may have a problem.
And finally…. at Jaluch we have also seen the following:
- Managers asking for doctors’ notes to be produced after a period of absence.
- Managers inviting contractors/associates into a disciplinary hearing.
- Managers not differentiating in how they communicate with, treat and manage those who are self-employed and those who are employed.
- Workers asking (and employers agreeing) for pay to be processed through company payroll to decrease their own admin load.
Don’t let the boundaries get cloudy. Consider whether you need to review the use of the self-employed in your organisation.
Have any questions about issues raised in this HR Blast? Interested in what we do? Call the Jaluch team on 01425 479888.
Jaluch can support with day to day advice on all HR issues including contracts for self-employed workers. We provide employment law training for line managers and we also support with grievances, disciplinaries, redundancy projects and on the positive side, employee engagement surveys too! No contract required for many of our services. We would love to hear from you.
The information contained within this article is for general guidance only and represents our understanding of employment and associated law and employee relations issues as at the date of publication. Jaluch Limited, or any of its directors or employees, cannot be held responsible for any action or inaction taken in reliance upon the contents. Specific advice should be sought on all individual matters.