It is now a criminal offence for employers not to pay the National Living Wage. Construction firms will have to examine their contractual arrangements

Stephanie Canham

It is now a criminal offence for an employer not to pay UK employees the National Living Wage, if they are entitled to it. All well and good for an estimated 1.3 million people (many of whom will be employed in the construction industry) aged over 25 and not in the first year of an apprenticeship, but not so much for employers.

So what happens if you have employees and you don’t comply with the new law?

HMRC will be checking up on you and employers will be obliged to make good any arrears in wages immediately. Penalties can include not only large fines (200% of the amount owed to workers up to £20,000 per worker) but also bans for company directors and public naming and shaming for offenders.

The issue for the construction industry is who, ultimately, will be funding these extra payments? Employers on construction projects will be looking to avoid picking up the extra costs from their contractors who are looking to pass the cost on, whilst contractors and suppliers will be looking to push the costs up the supply chain.

The simple answer is that employers will have to have a close look at their contractual arrangements.

This legislation is the right thing for underpaid and undervalued workers, but it may be commercially hard for some companies

If it is not a fixed price lump sum type of contract or the risk allocation for changes in legislation falls to the contractor as it does not catch this new piece of legislation, there may be scope for arguing that costs should be recovered from the employer.

With fixed price lump sum contracts, as many in the UK are, persuading the same employer that he should put his hand in his pocket to meet extra contractor/supplier costs will be an uphill struggle for contractors; the established principle that the courts will not step in to protect commercial parties to a negotiated contract from a bad bargain playing a part.

But, as is often the case, the devil is in the drafting. Employers should also take heed when drafting contracts in light of these statutory changes. There may be scope for arguing entitlement through variations, change provisions, payment clauses, change of law risk allocation and a wealth of other provisions, although as time goes by, they may not provide fertile ground as the element of the “unforeseen” risk will be diminished. Conditions precedent to claims such as strict notice or early warning obligations may also play a part in mitigating risk for the employers.

It will be interesting to see if the new JCT contracts will expressly deal with the question of increased labour costs in their new standard form contracts to be released later this year. After all, the JCT has stated that they are amending payment provisions to make them fairer. It is predicted that theNational Living Wage will be increased to over £9 by the year 2020, so how will construction contracts allocate ultimate responsibility, bearing in mind HMRC’s powers to advertise the identities of wrongdoers?

The emails have started arriving with contractors and the like alerting their client employers that they will be in touch to confirm how the new legislation will be changing how they charge them and/or what they intend to claim from them, whether that be for existing contracts, those currently being negotiated or those in the pipeline.

Companies are racing to review their contract terms so that they understand their position and are then able to assess their commercial view.

HMRC’s power to advertise the identities of wrongdoers will contribute to the problems now faced; a black mark against a company’s reputation being something that is to be avoided, either directly or by association.

The law is the law and this legislation is the right thing for underpaid and undervalued workers, but it may be commercially hard for some companies who have tied themselves up contractually, leaving them with little or no flexibility to pass the cost on.

So what do you really need to know about this legislation? If you have a directly employed labour force, pay properly, check your contracts and then, if you want or need to pass on some or all of the costs, you may need to negotiate or change what you agree to or provide for in your contracts.

Stephanie Canham is head of construction at law firm Trowers & Hamlins