The National Living Wage - What are the implications for public procurement professionals?

12 August 2015


Every Chancellor of the Exchequer likes to have a "rabbit" to pull out of his hat (red despatch box) on budget day; an announcement to grab the headlines and to spring a surprise on the unwitting opposition. On 8 July 2015, George Osborne's "rabbit" was the announcement of a new "National Living Wage" (NLW).

The impact of the announcement will be felt across the procurement and supply sector, so what are the five key questions arising out of the announcement for public procurement professionals?

1 Does NLW replace the minimum wage?

No, the NLW is not the same as the current National Minimum Wage. The NLW is a compulsory premium to be paid on top of the existing National Minimum Wage to all workers over the age of 25.

The first NLW premium will be set in April 2016 at 50p, establishing the new NLW at £7.20. This will rise to over £9 an hour by 2020.

2 How is NLW different to the existing "Living Wage" and the "London Living Wage"?

The Living Wage and the London Living Wage are based upon voluntary schemes administered by the Living Wage Foundation. Though adopted by the Greater London Authority and high-profile employers such as KPMG and Nestle, there is no obligation on employers to do so. On the other hand, employers will be required to pay the NLW from April 2016.

3 What do procurement practitioners need to be thinking about now?

Those involved in public procurement will need to be ready to comply with the relevant NLW legislation from April 2016.

The Government will inevitably release a large volume of guidance on the topic in the coming months so it will be worth regularly consulting the Cabinet Office website.

For public authorities, compliance is likely to require changes to template procurement documentation, to ensure that draft conditions of contract are amended to include the new requirements.

4 Could the NLW lead to a procurement-related legal challenge?

Living wage requirements have been much discussed in procurement circles, and is the subject of jurisprudence of the Court of Justice of the European Union (CJEU). The leading cases of Ruffert and Bundesdruckerei saw the CJEU restrict attempts by member states to enforce living wage legislation through public procurements.

The NLW is expected to be imposed through universally applicable legislation; this is likely to lead to a perception that authorities can require compliance through public procurements with greater confidence.

However, the likelihood of a legal challenge to NLW is rather less predictable in circumstances where a contract is awarded by a UK public authority, but would be performed in a different EU member state (e.g. a data processing contract performed in Poland). The CJEU judgment in Bundesdruckerei gave a clear indication that such a measure is likely to be construed as contrary to EU law on the basis that it would constitute an additional economic barrier to cross-border provision of services. Watch this space...

5 How has the market reacted to the NLW?

Councils in England and Wales have warned that the NLW could cost them an extra £1 billion a year by 2020. Both the CBI and The Federation of Small Business have expressed concerns about the cost implications of the NLW for employers too.

Considering the focus placed on increasing small medium enterprise (SME) involvement in public procurement in the Public Contracts Regulations 2015, which entered into force earlier this year, practitioners will be interested to see whether the consequent increased labour costs will have a disproportionately negative effect on the competitiveness of SME tender submissions.

This article was originally published in Supply Management.


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