The new national living wage could cost the care industry £1bn by 2020

In his summer Budget chancellor George Osborne announced that a new mandatory national living wage (NLW) of £7.20 per hour will be introduced in April 2016 for workers aged 25 and over.

The chancellor said that he will implement the NLW by introducing a new premium on top of the existing national minimum wage (NMW). This is an increase of 70p over the current NMW rate of £6.50 per hour. The NLW will eventually rise to over £9.00 an hour by 2020.    

Understandably, the care industry is very concerned about the introduction of the NLW - especially those employers providing residential or supported living services to people with learning disabilities and other mental health needs.

Five of the biggest care home providers in the UK (Four Seasons Health Care, Bupa, HC-One, Care UK and Barchester Healthcare) have written to the chancellor warning that the NLW will cost the care industry £1bn by 2020. The providers said they support the NLW but that, as staffing accounts for 60 per cent of care costs, there would need to be efforts to rescue the care system.

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Catastrophic collapse

Martin Green, chief executive of Care England (the UK Homecare Association), said that if the government did not act to address the funding gap, “continued supply of state funded home care will become unviable”.

“We want to work with the government to find a fair solution that will ensure the care sector can provide a safe and comfortable environment for older people who live in care homes,” he added. “Without adequate funding to pay for the NLW the care sector is at serious risk of catastrophic collapse.”

The working assumption appears to be that there is nothing the care industry can do to recover these additional costs.

‘The change must not have been anticipated by the parties when the contract was agreed’

However, many contracts in the care industry include “change in law” clauses that are designed to protect service providers from costs arising from unexpected legislative changes. 

They provide a mechanism that allows service providers to recoup some or all of their increased costs when the law changes unexpectedly. Thus, service providers might be able to use it to recover increased salary costs from local authorities when the NLW is introduced next year.

The key point in such clauses is that the change must not have been anticipated by the parties at the time the contract was agreed. In other words, the change must come out of the blue. 

Given the reaction inside and outside Parliament (see, for example, the pictures of Ian Duncan Smith that were all over the media after the Budget), the announcement of the NLW was a huge surprise to everyone, other than the chancellor and his inner circle. 

‘Change in law’ clause

All of this suggests that the introduction of the NLW might amount to a “change in law” under many contracts within the care industry. 

The effect of this little discussed lifeline depends on how the change in law clause works in practice. 

In certain cases the clause will provide that the service provider is automatically entitled to the increase. In other, greyer areas the provisions of the clause will suggest that the local authority (the usual customer in these cases) should meet the service provider to discuss the implications of the change. It might be an increase in contracted rates will occur only in exceptional circumstances.  

‘Customers will no doubt expect service providers to show that they have mitigated their costs’

Even where change in law clauses do not provide for mandatory increases in service provider rates, they may nevertheless represent an opportunity for providers to open negotiations with local authorities that are under budgetary constraints and reluctant to increase their spending. 

Where negotiations are opened, customers will no doubt expect service providers to show that they have mitigated their costs. In other words, service providers are unlikely to be able to recover any elements of the NLW increase that could be recoverable in other ways - for example, indexation provisions.

At the least, those operating in the care industry should be checking the clause in their contracts to see whether they create potential additional costs to customers or indeed opportunities to recoup unforeseen expenditure for care providers. 

Mark Walker is senior associate of the employment team at CMS Cameron McKenna LLP