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Living wage 2015: what it means for UK SMEs

The new national living wage (NLW) has come into sharp focus for many with the PM’s announcement of fines of up to £20,000 for non-compliant businesses.


What is the living wage?

From April 2016, UK businesses will have to pay all workers over the age of 25 at least £7.20 an hour (compared with the current £6.50). This will increase to £9 per hour by 2020 and is part of PM David Cameron’s ‘One Nation’ campaign.

Living wage vs minimum wage

All though enforcement may be six months away, Jeni Morris, consultant at NMW Direct, says SMEs should be conducting a full review to ensure they are fully NMW (National Minimum Wage) complaint.

“NMW legislation is complex and confusing and many accountants, payroll providers and HR departments are unaware of the numerous complexities surrounding the obligations which employers have,” she notes. “Unfortunately the burden of complying with all this legislation is solely on the shoulders of the employer.”

Morris says the new NLW scheme will most likely mirror the NMW provisions. “Currently the National Minimum Wage Act 1998 provides the skeleton for NMW law supplemented by the NMW Regulations 2015,” she explains. “But from April 2016 the penalties will increase to 200% of the arrears. Businesses will be named and shamed in the media, causing their company immense reputational damage. Additionally, any director who breaches NMW or NLW legislation will be considered for disqualification for up to 15 years.”

So what should employers be doing to help prepare?

The living wage

Jayne Dunn, senior HR consultant at Your HR Lawyer, says SME’s should carry out a payroll review to try and get a rough idea of potential costs of the NLW. “The first thing to do is carry out a payroll audit to assess how many people within their organsiation the NLW will apply to,” says Dunn. “Once they have done this, they will be able to see what the total cost of the wage increase will be. This will allow them to accurately forecast and budget and make cuts in expenditure elsewhere in the business. They will also need to consider any consequential increase in pension costs, employer NICs etc.”

Minimum living wage

Those worried by the change can try to take comfort from the bigger picture benefits: many part-time workers and women will benefit, especially those in the hospitality and care sectors, and also those in the North of England. “NLW will have the greatest effect in the North, as this is where, traditionally, lower wages are paid,” says Morris. “Supporters of increasing the minimum wage also contend that such a move would act as economic stimulus. When low-income households earn more money, they are likely to spend it, pouring more money into the economy.”

But even this optimism may not help businesses with lots of young workers, which could be hit hard. There could be an increase in the hire of self-employed contractors to lessen the burden of paying NMW or NLW.

“The new enforcement penalties will have a real impact on the businesses who breach the rules and we suggest all companies invest a little time in fully understanding all the areas associated with the NMW and NLW obligations which they have to comply with,” says Morris.

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