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National Living Wage - A recap

Back in the July 2015 Budget, one of the main talking points affecting UK businesses was the introduction of the new “National Living Wage”. Running alongside the existing “Minimum Wage”, the government states it is part of their plan to move to a “higher wage, lower tax and lower welfare society”. Now that it is actually in force, affecting more than 100,000 workers in our region alone, what will be the impact the new compulsory legislation has on UK’s businesses?

A recap

Over the last few years we have become very familiar with the National Minimum Wage introduced in 1999, most recently set at £6.50 per hour for those workers over 21, £5.13 for those aged 18 to 20 and £3.79 for under 18’s (separate levels are set for Apprentices). The new National Living Wage is, in effect, a premium on top of the existing National Minimum Wage for workers aged 25 and over. The new pay level will initially be set at £7.20 per hour, rising to around £9 per hour by 2020. In its simplest terms, it creates a 5th tier of National Minimum Wage.

This new National Living Wage is of course not to be confused with the “Living Wage” which many businesses have subscribed to voluntarily over the last decade through the Living Wage Foundation and currently pay a minimum of £9.15 per hour in London and £7.85 per hour outside of London. Whilst that is voluntary, the new legislation is compulsory for all employers in the UK.

What is the reaction to it?

Last November, a survey by the Department for Business, Innovation and Skills (BIS) revealed that 93% of bosses agreed that the new wage was a good idea, with 88% believing it will lead to higher productivity. It also showed that 83% of the 1000 respondents believe it will make staff more loyal, 86% think it will boost staff morale and 82% said they thought customers were likely to return if they recognised the business paid the right rates of pay. It will be interesting to see the responses to the same questions this November, once the Living Wage has actually been in effect for six months or so.

Effect on employees

It is estimated that around 2.5 million workers will have received a direct boost to their pay, assuming their employers have been compliant of course. For those that were previously being paid the National Minimum Wage, this means they are receiving a pay rise of almost 11% - that’s about four times the national average! And then there’s the knock on effect to consider: how does the increase in minimum wage affect the pay differential between general roles and supervisory or management roles? It is likely that millions of employees further up the ladder will enjoy salary increases as an indirect benefit.

Effect on businesses

It is likely that smaller businesses with a high proportion of employees on minimum wage are the ones that will feel the financial and operational impact the most. These typically include employers in the Wholesale & Retail, Health & Social Work and Leisure & Hospitality sectors which in fact account for more than half of those affected across all industries. There is likely to be little or no impact in service industries such as Insurance, Finance and Science & Technology where it is rare for those over the age of 25 to have been earning just the Minimum Wage.

(Source: The Resolution Foundation)

One of the biggest issues that employers need to face up to is looking in detail at their staff composition and ensuring that they are compliant with the new legislation as there is no doubt that the authorities will come down hard on anyone found to be non-compliant. As well as taking into account age and contracted hours worked, employers need to ensure that other elements don’t take a worker under their statutory pay level, such as overtime and salary sacrifice.

Many employers have concerns about the effect on their businesses – increasing the annual wage bill by tens of thousands of pounds for some. Others say they may have to decrease the size of their workforce to compensate for the increase in salaries. There is speculation that in some industries, such as hospitality, leisure and catering, there will be a drive to recruit younger workers as the Living Wage does not currently apply to those under 25, leaving more mature employees on the sidelines (age discriminatory issues aside).  Not everyone is quite so cynical: some have in fact introduced the £7.20 per hour minimum across their workforce for those aged 18 or over. Undoubtedly we will see many businesses increase their prices or service charges to mitigate against higher operating costs.

The introduction of the National Living Wage is obviously good news for those employees who will see their pay increased and it is hoped there will be a positive impact on employee performance and reduced absenteeism as workers feel better financially rewarded for their efforts. It will undoubtedly continue to be a headache for employers for some time and it will be interesting to see the impact on employment levels and costs of services over the coming months and years.

 

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