National Living Wage – The Wider Business Impact

In the recent budget, Chancellor George Osborne announced that a new National Living Wage (NLW) will be introduced in April 2016, with any employee over the age of 25 being paid a minimum of £7.20 per hour. This rise is in addition to the previously announced increase to the National Minimum Wage in October 2015, which rises by 20p per hour to £6.70. Furthermore, the living wage is set to increase to £9.00 per hour by 2020.

The announcement means that under the new NLW, an employee over the age of 25 who works 40 hours per week will see their annual salary increase from £13,520 to £14,976, and reach £18,720 by 2020. Whilst this is welcome news for low paid workers, these rises exceed inflation forecasts for the next 5 years and despite the chancellor announcing measures that will allow businesses to effectively offset some of the impact (such as the reduction in the rate of corporation tax and for smaller businesses an increased Employment Allowance), the challenge for businesses will be how to go about dealing with such dramatic increases in their cost base.

Organisations will also need to plan for the indirect impact of the increase in NLW, one of which being the narrowing of the pay gap between low paid workers and their direct line managers. It is unlikely that supervisors and team leaders will remain satisfied if they are only paid slightly above their subordinates but have a much higher level of responsibility.

This new NLW is more than just an increase in wages for the lowest earning employees and everyone needs to be fully prepared if they are going to be able to cope with these changes. If management teams can see a potentially significant impact in terms of profitability on the horizon, then a typical reaction can often be to reduce labour costs accordingly, however managing the operational impact of any staff cuts is always a challenge and any reductions in headcount need to be carefully considered to avoid a downward spiral in terms of service levels and customer satisfaction.

The good news is that businesses do have time to plan and adapt before the changes come into effect. This provides managers with a window of opportunity to review methods of working or perhaps even new machinery or equipment. In the cleaning industry for example, there have been some very innovative developments in technology recently which can assist in driving forward substantial productivity savings.

In summary, the new NLW has a much wider impact for organisations than simply the increase in wage costs for their lowest earning employees, and thorough planning and consultation will be required by business owners and managers to ensure that they are fully prepared to meet the challenges ahead.

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