National Living Wage increase – how will it affect your business?

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National Living Wage increase – how will it affect your business?

The national minimum wage has seen a fairly big transformation over the last couple of years – with some significant increases being introduced and it being rebranded as the “national living wage”.

As another increase has been issued and with more increases on the horizon, what does this mean for your business?

What is the National Living Wage?

To recap, the National Living Wage (NLW) is a premium added to the national minimum wage for UK workers aged 25 and over. This applies to all workers living in the UK, no matter where they might be living. On 1 April it is going up again by 4.9%, resulting in an increase of 38 pence an hour from £7.83 to £8.21.

The Government has confirmed that its ambition is to increase the wage up to £9 an hour by 2020. On commenting on this latest increase, the Treasury has said that a full time worker will now receive a further £690 per annum and their annual earnings would have increased by over £2,750 since the introduction of the NLW in April 2016.

What are the true costs of the increase?

One of the frequently debated problems with the NLW is although so many people will receive a pay rise, which is seen as a positive, it’s to be paid for by businesses with no guarantee that they will receive a better quality workforce.

While most organisations in the UK pay above the NLW, some sectors struggle more than others to meet such increases. On face value this increase might seem manageable, however, businesses will still need to be mindful of the effects this increase can have.

In our experience, we have seen how this might cause a “ripple” effect throughout an organisation. The cost of implementing the national wage will be a lot higher than the cost of simply raising minimum wage pay rates – particularly so if an organisation tries to maintain a difference between their junior employees and those in more senior positions. If for example, your organisation is in retail and you pay the starting shop employees the minimum wage, and the management team’s pay is based on £2 over the minimum wage, the retail shop might have to consider increasing the management wage as they start to come to the realisation that the gap between the two is closing.  To avoid this, it might be that organisations will look to implement pay rises for a number of employees, not just those on the minimum wage.

How to prepare

It is likely to be SMEs that suffer the most with this increase, as these businesses usually have a considerable number of staff that are on the minimum wage. We appreciate that for some, there is not much room to manoeuvre to absorb the increases and so the impact of this increase might mean that some organisations will start to feel the pressure.

If you are a business that recruits a large volume of employees on the minimum wage, it goes without saying that you are going to be spending more money. It is wise to reassess your outgoings to determine now how this increase, and the increase in 2020, is going to have an effect on your profit levels. Businesses might need to consider cuts in other areas to accommodate the increase, whether that be reviewing its recruitment plans and scaling back, increasing costs of its services/products or to the extreme, making redundancies.

However, it is not all doom and gloom, as the increase can have a positive effect and could possibly improve staff turnover and retention, productivity and lower absenteeism. Nevertheless, businesses will be advised to plan now to ensure these positives are maintained in the future and it may be time to speak to your accountant/solicitor to discuss the potential issues your business might face, and the opportunities the increase might bring.

For more information, please contact Claire or Rebecca in the employment team.

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