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The National Living Wage (NLW), starting at £7.20 an hour, will come in from April 2015 for employees over the age of 25. How will SMEs cope?
The minimum wage at present is set at just £6.70, making the new rate a significant increase. And it will continue to rise: announcing the new policy in his summer Budget, Chancellor of the Exchequer George Osborne said that the Government intends to see the rate rise to £9 by 2020.
While workers’ groups have welcomed the NLW, new analysis from the Resolution Foundation has found that its impact will be felt most strongly by the UK’s smallest firms.
A report published by the Foundation in September found that across companies with fewer than 10 employees, the NLW will add 1.5% to total wage bills by 2020. By way of comparison, firms which employ between 250 and 5,000 staff will see salary costs increase by just 0.6%.
Conor D’Arcy, Policy Analyst at the Resolution Foundation, said that sectors of the economy in which there are a higher proportion of low-paid workers – such as hospitality, retail and care – were likely to be hardest hit.
The Federation of Small Business has carried out a survey of its members to find out exactly what steps firms will be taking to limit the impact of the NLW. According to the FSB:
52% say they will delay new hires immediately after the NLW is introduced next year.
If you are considering such a move, you should be sure that the extra revenue and profit a new member of staff could bring does not outweigh their higher NLW costs.
50% say they will increase prices to mitigate the effects of higher wage costs.
The more competitive your marketplace, however, the more likely price rises are to result in a larger fall in sales.
41% plan to reduce staff hours.
Some businesses such as retailers and those in the hospitality sector may be able to cope with higher wage bills by reducing the hours they are open, for example.
31% say they will have no choice but to make redundancies.
Employees with two years’ service or more should be entitled to redundancy pay, however. And there are a number of legal obligations employers must meet when laying off staff.
29% will cancel or postpone planned investments.
Again, a cost-benefit analysis should be carried out to assess whether this is the right business move.
26% intend to freeze or cut the salaries of higher-paid staff.
But while raising the wages of the lowest-paid staff can boost their morale and may have productivity benefits, cutting pay among other employees could have the opposite effect and should not be done lightly.
Around a third of firms say they will simply have to absorb the impact of the NLW by accepting a reduction in profits.
Employers could use the introduction of the NLW to look at working patterns and see if productivity could be boosted to offset the higher costs.
Research suggests, for example, that firms can see financial benefits as a result of paying staff better. A report drawn up by academics at the University of Strathclyde earlier this year found that firms who paid a higher living wage tended to introduce more efficient working patterns and were more likely to help employees develop skills. They also reported lower staff turnover as well as better performance and job satisfaction among workers.
John Allan, FSB national chairman, said: “In highly competitive sectors with very tight margins, the only sustainable way to deliver real long-term wage growth is to improve productivity.”
Easier said than done, perhaps, but good advice all the same.
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