Dealing with the national living wage increase

From April, this year all businesses within the UK must conform to the increased national living wage rate. Any businesses found to be failing to comply with the new regulations regarding the national living wage could receive penalties of up to £20,000 per underpaid worker.

In April 2016, the government replaced their minimum wage with a new regulation called the national living wage. It applies to all employees aged 25 or over working within the UK. The minimum wage remains in place for those under the age of 25. This is a bid from the government to address the economic challenges of low wages for employees within the UK and encourage higher income for those who wish to work, along with increasing productivity for the employer.
From April 2016, the introductory rate that should be paid to employees was set at a rate of £7.20 per hour, and we will see the first planned increase this coming April. Employers by law must increase their hourly rate for employees to £7.50 per hour, an increase of nearly 5%. In addition, this is set to further increase over the next three years; with the governments, overall objective being for the national living wage for over 25’s to reach £9.00 per hour by 2020. It is expected that over 4.5 million employees will benefit from the compulsory national living wage increase.

You may have heard of something known as the recommended living wage, proposed by the Living Wage Foundation. The foundation was setup in 2001 with the purpose of promoting a living wage based on the actual cost of living. Key living costs such as accommodation, food, clothing, medical treatment, and even the cost of purchasing gifts are considered in this calculation. They suggest that the recommended living wage that employers pay their staff over the age of 18 should be at least £8.25 per hour, rising to £9.75 an hour for employees living in the London area. Many companies across the UK have voluntarily opted to offer the recommended living wage and are increasing their hourly rate to at least £8.25 for all employees. This is significantly different to the national living wage, which applies only to employees aged over 25. It must be remembered that the Living Wage Foundation only promotes and recommends this higher living wage, which is entirely at the discretion of the employer, and there is no legal requirement to abide by their recommendations.

The national living wage will affect businesses in many ways, with the main impact being the cost of wages increasing significantly. The cost of implementing this will mean many companies must cover ‘spill-over’ costs, in order to maintain the difference between entry level employee incomes and incomes of employees at a higher level, such as supervisors. In other words, the execution of this will have higher costs than simply raising the hourly rate to £7.50 per hour. Many companies are already playing catch up with regards to what they pay their employees, whether they are full or part-time, salaried or temp staff, and will need to review and adapt their wage structures accordingly.

For deliberate non-compliance, a business could face criminal prosecution and any individual found guilty could face disqualification from being a company director. It will also be deemed permissible for Compliance officers to name and shame the most exploitative companies within the UK, further damaging their business. Therefore, it is in the interest of all employers to take any and all steps necessary to ensure that they comply with the new laws and also plan for any future increases to the national living wage.

Overall, businesses are going have less control over what they can pay their employees. It is felt that employers traditionally paying lower level wages will be most affected, predominantly within the hospitality, retail and social care sectors. The biggest impact will be to small businesses with a relatively unskilled workforce, since they will face the largest overall increase in their wage costs, no doubt having already been affected when this was first introduced in 2016. Also, any businesses within the service sector that are bound by long-term contracts could also see a huge impact when the national living wage is further increased in April 2017.

Businesses will essentially have to look at different ways to recoup their increased wage bill which comes directly from the bottom line and potentially scale back on recruitment and strive for more cost-effective ways of ensuring productivity and efficiency. Whilst maintaining profitability within their organisation. It will push some businesses to consider solutions like reducing or stopping bonuses, raising prices of goods, recruitment freezes, reducing working hours, hiring of employees aged under the national living wage threshold, acceptance of lower profits, rethink plans for investing or reduce the head count within the organisation number of employees.

It is inevitable that all these changes will have a negative impact on any business. Not just a crippling financial impact. The workforce themselves will be affected have an influence on how a business’s workforce react to certain changes. It may leave staff members feeling demotivated and disgruntled depending on the type of changes that were made. There are many factors in which a company must consider before making any decisions that will have a profound affect.

With the national living wage set to increase year on year. There will be a great sense of pressure added to employers over the upcoming months. Tough decisions must be made as to which direction they should steer towards. It will be an impulsive instinct to be looking at ways to cut employment costs and look at different initiatives to ensure productivity is maintained throughout the business. Companies may start to look to the alternative methods within latest technologies in the market and other processes that will cut labour cost, without impacting on productivity. One thing for sure. This will be an unsettling time for any business over the next few years. Whether you’re a small business or a large corporation, the national living wage will continue to affect your business in some way.

Written by