The National Living Wage (NLW) is coming into force in April, are you already thinking of how to manage this?

Wednesday, December 9, 2015

George Osborne's new £7.20 National Living Wage will cost companies more than £1 billion in total when it comes into force in April next year, according to the independent regulator, The Regulatory Policy Committee.


The changes will affect around 1.7 million workers across Britain, and cost private employers a minimum of £672 million in wages, as well another £132 million in extras like national insurance. You can read their full report here.


Although there has been some criticism of the new National Living Wage. A newsurvey conducted for the Department for Business, Innovation and Skills (BIS) asked 1,000 employers across Britain about the NLW. When asked if they thought the new rate would be good for businesses, many respondents identified a range of positive impacts:


  • 93% of all bosses agreed the National Living Wage was a good idea
  • 88% said it would make staff more productive
  • 83% believed it would make staff more loyal towards their employer
  • 86% said it would boost staff morale
  • 82% believed customers were likely to return if the business paid the right rates of pay


How are businesses planning on managing the higher costs brought about by the National Living Wage?


A recent CIPD survey of more than 1000 employers across the private, public and voluntary sectors, found that employers are divided over how to manage the higher costs brought about by the national living wage:

  •  30% planning to deal with it by improving efficiency
  • 22% intend to absorb costs.
  •  9% reduce hours
  •  8% planning to take on more workers under the age of 25.


Mark Beatson, chief economist at the CIPD, said the chancellor’s NLW was a “bombshell” for most employers when it was announced in July. 

“For those that have started to think about the consequences, the emphasis on efficiency rather than cost-cutting is welcome,” he noted. 

“If the chancellor wants to provide any more support for businesses grappling with the national living wage in the autumn statement, it might be better delivered through enhanced business support or special help for the care sector rather than shaving small amounts off general business taxation.”

Conor D’Arcy, policy analyst at RF, said: “It’s encouraging that so many firms say that they’ll respond to the new higher wage floor by improving efficiency. But actually delivering this will prove challenging in many sectors, and it’s important that firms are given the necessary support to boost productivity.”


The new rate isn’t coming into force until April, but it may pay to start preparing now for a seamless introduction. 


The CIPD have recently published an article to get businesses thinking now about the NLW. They have suggested the following:


• “Start with the end in mind,” advises Deborah Rees, director of consulting at reward advisers Innecto. “It will be much easier to model this in one pass if you consider whether key pay elements such as overtime, out of hours payments, shift pay and allowances could be rolled in to help make the cost more affordable.”


• Consider the wage bill beyond immediate staff. How will contractors be affected? Arran McDowell, HR director of Elior, says: “We started talking to our clients straight after the announcement.”


• Look beyond the rise in April. How will you afford the incremental increases that will bring the minimum up to £9 by 2020? “We don’t know exactly how pay will change in the next five years, but the aim is to end with staff over the age of 25 earning a minimum of £19,000,” says Rees.


• How do demographics affect the wage bill? “The rise only applies to those aged 25 and over. It’s time for a conversation about whether people of different ages should be paid differently for doing the same job. If there are good reasons for it, employers need to avoid breaking the law by ensuring their systems track each employee’s age and make sure they are paid the right legal minimum,” says CIPD chief economist Mark Beatson.


• Delve into the differentials. Other, more senior staff may be concerned about their own pay rises or how pay differentials will be eroded over time. Or is the wage distribution too focused on paying more to managers and above? “Taking a step back to analyse the wage bill as a whole may unearth other pay gaps in the organisation, particularly between men and women,” says Beatson.


• Think about reward as a whole. “You should look at the elements of how you pay people,” says John Harding from PwC. “Identify which elements count towards the minimum and therefore affect your compliance. You could have a higher basic rate but change bonuses, for example.” Employers should also be mindful of other costs coming down the line, such as increased compulsory pension contributions and the proposed apprenticeship levy.


• Do you want to create a feel-good factor? Stepping up your bottom rate to the voluntary living wage (£8.25 an hour nationally and £9.40 in London) will mean staff can better manage the cost of living and feel happier about coming to work. And, as Duncan Brown of the Institute for Employment Studies points out: “If you stick with the national living wage, you’re allowing the government to set your rates.”


Further reading:

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