The National Living Wage — implications for recruitment

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The idea of a set wage to give employees a guaranteed amount of money in return for their labours is by no means a new idea. The Trades Board Act 1909 aimed to set minimum wages for specific industries. It was not until the National Minimum Wage Act 1998 that this country saw a set over-arching minimum wage for everyone. Now, 17 years on, the current Government has taken this a step further with the introduction of the National Living Wage (NLW), which is already felt by some to be casting a shadow on the economics of the country.

The National Minimum Wage (NMW) is currently set at £6.70 an hour for adult workers who are aged 21 or older (the level is set at £5.30 for younger adults). Employers have a legal duty to comply with this minimum, although not a legal duty to offer a minimum number of hours. Additionally, some employers choose to pay their workers a level higher than this. The Living World Foundation, an independent charity, sets a recommended living wage level each year and accredits employers that elect to comply with this. Since 2011, more than 1300 employers have been accredited in this way.

The Living Wage Foundation recommended wage is set at £7.85 an hour, and £9.15 an hour for people working in London. The NLW, announced by the Chancellor of the Exchequer in July 2015, will be phased in gradually between 2016 and 2020, with the target of reaching 60% of median UK earnings by the end of the phasing in process, estimated to mean a living wage of around £9 an hour. Penalties will be put in place for employers not complying with the terms of the NLW, with up to 200% of the arrears to be paid in fines where the NLW has not been paid. The maximum penalty will be £20,000 for each employee.

While the complete impact of the introduction of the NLW will not be rolled out for a matter of years, the immediate impact will be when the NLW for adults aged over 25 is introduced in April 2016. This will be set at £7.20 an hour initially, 65p less than the Living Wage Foundation level and 50p more than the NMW for that age group.

The anticipated positive impacts of a minimum living wage are well documented. The Living Wage Foundation divides the benefits into three categories — business, families and societies. The benefits for business they report as being reduced absenteeism, enhanced quality of work from staff, and a significant impact on recruitment and retention and reduced turnover of contractors. Additionally, the Living Wage Foundation reports that employees are happier and thus more willing to accept change: they report that “50% of employees felt that the Living Wage had made them more willing to implement changes in their working practices; enabled them to require fewer concessions to effect change; and made them more likely to adopt changes more quickly.”

In terms of the benefits to families, the Living Wage Foundation finds that the NLW affords people the opportunity to provide for their families and, in terms of society, the Living Wage Foundation believes that the adoption of a living wage can help to tackle poverty in society more generally.

The Government view, at the time of the announcement, was similarly straightforwardly positive. The Department for Business, Innovation and Skills talked of the benefits of the NLW as follows: “Britain deserves a pay rise and the Government is making sure it gets one… the independent OBR expects the National Living Wage to give a direct boost in wages for 2.7 million low-wage workers, with up to 6 million seeing their pay rise as the knock-on effects are felt higher up the earnings scale.”

However, the voices that seem to be shouting loudest in the media at the moment are not those looking forward to reaping the benefits of the NLW, but those who are complaining of the negative effect on the economy and individual sections thereof. It is being reported that some of these negative impacts are already occurring, even though the actual introduction of the NLW will not even begin until next year.

Many employers and other stakeholders are already predicting doom and gloom as a result of the anticipated hike in their wage bills when they need to bring their hourly pay rates up to the new level.

One of the areas of concern is the impact a bigger wage bill might have on prices. Greggs, the chain of bakery stores, has said that price rises may result from the wage increases, although it already reportedly pays its workers a level above the NMW — £7.11. A spokesperson for the company said that wage rises will increase inflationary pressure. Similarly, Whitbread (which incorporates Costa Coffee and Premier Inn) has reportedly not ruled out price increases for its products as it seeks ways of offsetting the costs of funding the NLW within its company. As an arguably more positive approach to mitigating the extra costs, the company has also said it is looking at the possibility of investing in training and other resources in an effort to increase the productivity of its workforce. The Mears group, as another example, has reportedly warned that it is facing a choice of passing on the higher costs of its care workers to local authorities or facing a significant fall in profit. The wider impact of price hikes could be inflation.

The other significant area of concern is employment, with some commentators predicting job losses as employers attempt to make ends meet under the NLW. The Office for Budget Responsibility, an independent fiscal watchdog, has estimated that the introduction of the NLW could lead to 60,000 job losses. On a wider scale, they predict a reduction in GDP over the next few years.

Some of these impacts may already be here, it has been warned. A survey of 2101 employers by Manpower has found that fears of the impact of the NLW are already having a very real impact. Its report finds that optimism in terms of recruitment is at its lowest level for three years and that Christmas recruitment has not been as low since 2012. They put the blame for at least part of this firmly on the introduction of the NLW, as taking on new staff now means an increased wage bill come April and beyond.

The full effects of the NLW, both positive and negative, will not be known for some time. Paying people more money, on the face of it is largely straightforward — employees will have more money in their pockets, employers will have higher costs. However, the picture is going to be very much more complicated. For example, will the employee age structure be slanted as employers take on younger workers who are below the NLW threshold? Will employers turn to zero-hours and part-time contracts to reduce the number of hours paid for at the higher rate? It will be interesting to see how things unfold over the next few years.

Disclaimer: The information provided through Legislation Watch is for general guidance only and is not legal advice. Legislation Watch is not a substitute for Health and Safety consultancy. You should seek independent advice about any legal matter.

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