The National Living Wage vs the Real Living Wage - what's the difference?

6 minute read
13 November 2020

On 9 November the Living Wage Foundation announced the new 2020/2021 Real Living Wage rates. Over 250,000 people who work for an employer who has voluntarily signed up to the Real Living Wage are set for a pay boost of 20p to £9.50 an hour (in London 10p to £10.85). Employers signed up to the voluntary scheme are urged to implement the rise as soon as possible though they do have until 6 May 2021 to do so under the scheme's rules.

The Real Living Wage must not be confused with the compulsory National Living Wage, which is currently £8.72 an hour for anyone over the age of 25.

But just what is the Real Living Wage and how does it differ to the National Living Wage?

What are the various minimum rates?

Real Living Wage

The Real Living Wage ("RLW") is a recommendation of the Living Wage Foundation which is voluntary on the part of employers and only relates to those aged 18 and over. There are two recommended rates which differ on geography rather than age "in recognition that young people face the same living costs as everyone else". The recommended rates are revised in November each year. The recent increase now sets the rate at £10.85 in London (increased from £10.75) and £9.50 for the remainder of the UK (increased from £9.30). The latest increase is stated to be designed to help workers and families through the pandemic.

The voluntary RLW scheme has been adopted by more than 6,900 employers, with over 800 more employers having accredited with the Living Wage Foundation since the start of lockdown in March.

National Living Wage

By contrast, the National Living Wage ("NLW") is part of the mandatory National Minimum Wage ("NMW") regime. The NMW regime is a statutory requirement introduced in 1999. By 2015 the NMW contained four rates:

  • Adult rate (aged 21+);
  • Development rate (aged 18-20);
  • Youth rate (16-17 year olds); and
  • Apprentices (aged under 19 or those in the first year of an apprenticeship aged over 19).

In April 2016 a fifth NMW rate was introduced: the NLW. The NLW applies to workers aged 25 years or over, who are not in the first year of an apprenticeship. As part of the NMW legal regime, importantly, the existing provisions for determining whether the NMW has been paid and the enforcement measures also apply to the NLW.

Since 1 April 2020 the NMW rates are:

  • Aged 25+ (NLW) - £8.72;
  • Aged 21 to 24 - £8.20
  • Aged 18-20 - £6.45
  • Aged 16-17 - £4.55
  • Apprentices (aged under 19 or those in the first year of an apprenticeship aged over 19) - £4.15

All NMW - so including NLW - rates are revised annually in April.

Differing basis for calculation

The NLW is based on a target 60% of median earnings. By contrast, the RLW is a cost of living calculation by reference to a basket of household goods and services.

What happens if you don't pay?

If you don't pay the "Real Living Wage"…

…well in terms of legal liability, nothing really. Unless an employee has a contractual right to have their pay based on the Living Wage Foundation's RLW as amended from time to time (unusual), then whether an employer pays the RLW is an employee relations and public relations issue rather than a legal one. The employer would though lose the right to say they were Living Wage Foundation accredited.

If you don't pay the "National Living Wage"…

…well you risk significant legal enforcement action and penalties.

In addition to potential tribunal claims from individual workers, HMRC is responsible for enforcing the NMW. Where HMRC concludes that the NMW has not been paid, a notice of underpayment will be issued setting out the arrears of NMW to be repaid by the employer to the worker together with a requirement for the employer to pay a financial penalty to the Secretary of State within 28 days of service.

As regards a financial penalty, if the level of arrears for a worker is less than £100 a minimum penalty of £100 will apply. Above that level and a penalty equivalent to 200% of the arrears up to a maximum of £20,000 per worker will apply. For arrears of pay, these are calculated on the relevant NMW rate in force at the date of determination. This means that the worker will be repaid any arrears at the higher rate if the NMW has increased since the underpayment. This is designed to compensate workers for the length of time that the arrears have been outstanding. However, where the employee has changed age band since the underpayment, the arrears should still be paid according to the age band that applied at the date of the underpayment (in addition to financial penalties and arrears, HMRC can publicly name and shame employers who fail to pay the NMW including the NLW). Reasons for non-payment can be many and vary from inadvertent reporting errors to cases of deliberate decisions not to comply with the legislation.

For employers who are persistently non-compliant and refuse to co-operate with compliance officers, criminal sanctions can also be imposed.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.