National Living Wage for Ireland: What employers need to know

The new National Living Wage, recently announced by former Tánaiste and Minister for Enterprise, Trade and Employment, Leo Varadkar, is the latest in a series of initiatives to improve terms and conditions for workers across the country.

This article will explain the new living wage and how it will impact on employers at small and medium businesses.

It will cover the background of the new living wage, what it means for the National Minimum Wage and what employers need to do to prepare for the new legislation coming into effect.

It covers the following:

• What is the National Living Wage?
• Why is the National Living Wage being introduced?
• What it means for the National Minimum Wage
• National Living Wage timeline
• What employers can do to prepare
• Final thoughts on the National Living Wage

What is the National Living Wage?

A living wage is defined as the hourly wage rate that should provide employees with sufficient income to achieve an agreed acceptable minimum standard of living.

The Low Pay Commission – an independent body made up of employer and employee representative groups and independent experts – has recommended that a living wage be based on a percentage of the median wage rather than the Minimum Essential Standard of Living Approach (MESL) or ‘basket of goods’ approach.

The fixed threshold approach uses a benchmark figure to determine the National Living Wage and is typically a set proportion of the median wage.

The LPC has recommended that 60% of the hourly median wage should be the proportion to be achieved within a five-year timeframe through gradual adjustments to the minimum wage.

Why is the National Living Wage being introduced?

It’s being introduced as one of a range of measures aimed at improving pay, and terms and conditions for low-wage workers.

The measures, described by Mr Varadkar as “one ot the legacies of the pandemic” and recognising the contribution of low-wage workers to the economy, are targeted towards sectors that provide essential services and typically have a significant proportion of workers on minimum hourly rates, such as hospitality, retail, manufacturing and transport.

The new legislation follows progress on the introduction of a statutory sick pay scheme and an auto-enrolment pension scheme, which take effect in 2023 and 2024 respectively (the latter is still to be confirmed).

It follows extensive research by Maynooth University on behalf of the Low Pay Commission and a consultation process with representatives from employer and worker groups, as well as independent experts, trade unions and the public.

What it means for the National Minimum Wage

The National Minimum Wage will be gradually increased over the next four years and eventually replaced by the new living wage by 2026.

Currently, there are over 164,000 workers on the minimum wage in Ireland. All of these workers can expect increases in their pay starting in January 2023.

From 2026, the National Living Wage will be in effect the lowest hourly rate that employers can pay their workers.

From 1 January 2023, the increased National Minimum Wage rates will be as follows:

• Aged 20 and over: €11.30
• Aged 19: €10.17
• Aged 18: €9.04
• Aged under 18: €7.91

National Living Wage timeline

Following the recommendation from the LPC that the adjustment to a living wage of 60% of the median wage is made within a period of no more than five years, the new living wage will be phased in over four years starting in 2023.

The first step towards reaching a living wage will be the 80cent increase to the National Minimum Wage from 1 January 2023 to €11.30 per hour.

Incremental increases will follow until 2026 by which time the minimum wage is estimated to reach 60% of hourly median earnings.

At that point, the National Minimum Wage will be replaced by the National Living Wage and will be ‘floor’ pay rate and mandatory for all employers.

Once the Living Wage has come into effect, the Low Pay Commission will conduct a review and advise the government on the next steps to reach a targeted threshold of 66% of the hourly median wage.

What employers can do to prepare

As an employer, you have time to prepare for the National Living Wage coming into effect as the increases are being implemented over four years to allow employers to manage the additional costs.

It’s advisable to carry out a review of your business and calculate the additional costs for the current year and the years ahead.

For businesses that operate in a sector which typically has a significant number of employees earning the minimum wage, such as retail or hospitality, the LPC report considers a support mechanism to be introduced for employers.

Additionally, the LPC’s report recommends that a provision exempting an employer who is experiencing financial hardship from the obligation to pay the minimum wage should be maintained in any new legislation related to a living wage.

Final thoughts on the National Living Wage

The new living wage is aimed at improving pay and terms and conditions for workers.

The LPC recommendations take into consideration that the increases to wages should be manageable – particularly for small and medium enterprises.

Additionally, the LPC has included in its recommendations that it can adjust the timeline by speeding up or slowing down progress in response to economic conditions.

While the new measures are being introduced gradually, it’s advisable to review the short-to-medium-term financial plan for your business to factor in the increased costs so you can plan ahead to ensure your business can meet its obligations under the new living wage legislation.