A small business guide to the National Living Wage

The National Living Wage will come into force in April 2016 and many small businesses are concerned that their growth potential will be affected. Elaine Pritchard discusses how businesses can prepare for this huge legislation change.

From April 2016, employees over 25 will be entitled to a National Living Wage (NLW) of £7.20 an hour, which will rise to £9 by 2020.

Although many businesses already pay their staff members the National Living Wage, some are expecting many challenges.

More than two thirds (77 per cent) of small and medium-sized enterprises (SMEs) believe that the NLW will negatively impact their ability to grow and hire new people, according to a survey carried out by jobs site Indeed with Censuswide.

Increased overheads are likely to put pressure on some employers, squeezing cash flow and affecting growth.

So how should SMEs deal with these challenges? Hopefully, businesses have already looked at the impact this is going to have and how they will deal with the new wage rate. Whether you have or not, this new legislation isn’t going to go away and you can’t ignore it.

How should you prepare for the Living Wage?

With new rate of £7.20 applying to employees aged 25 and over, the first thing you will need to do is to check how many people in your workforce are already 25 or more and how many will soon be celebrating their 25th birthday.

The new rate is payable from April 1st and there are penalties for non-payment, so you need to make sure you have everyone on the correct rate.

One type of employee to look carefully at is your apprentices, if you have any. As with the National Minimum Wage, The National Living Wage won’t apply to 25-year-old apprentices in their first year of apprenticeship, but it will come into effect at the beginning of their second year.

Your payroll department, or your payroll provider if you outsource this, will need to have a system in place that flags up the employee’s 25th birthday in order to pay the correct rate.

You probably already have such a system in place for the other age milestones ie 18, 21 (and 19 for apprentices). If this is the case, you will just need to set up another one for 25.

Don’t forget about the following areas…

1. Do you have casual workers who come in to help out when needed?

These casual workers will also be entitled to be paid the National Living Wage if they are 25 or over.

2. Do your employees/workers get tips or gratuities?

Don’t forget that tips, gratuities and service charges don’t count towards the National Minimum Wage or the National Living Wage, whether they are mandatory and paid through the payroll or whether they are given at the discretion of the service user.

How are you going to deal with the increase in your wage bill?

There are several ways in which you may decide to deal with the increase. You could…

  • Stop bonus payments and cut down on overtime
  • Increase productivity by streamlining your processes to increase efficiency; have clear job descriptions, set targets, implement training etc
  • Reduce the number of hours employees work; this will save money but is likely to reduce productivity
  • Reduce the number of employees by not replacing people who leave or by redundancies; your remaining employees will absorb the work
  • Employ younger workers; cheaper wage bill but less experience
  • Pass the additional costs on to your customers
  • Absorb the increased costs and cut your profit.

What are others doing?

It might be wise to do a little research in your industry or local area. Here are some areas to consider:

  • Are your pay rates competitive at the minute? If so, will the new rates take this away?
  • Consider the impact of the new rates against the vast cost of recruitment and training especially if your employees are used to being paid ‘above the minimum’
  • Look closely at your costs and budgets and see if you can manage the increase in the crucial areas if you can cut down elsewhere
  • If your pay differentials compared to other companies are eroded and you want to retain your experienced employees and recruit good people, as an alternative, you could look at other benefits which wouldn’t cost you anything such as flexible working
  • Could you negotiate discounts for your employees at other local companies such as travel agents, café/restaurants, leisure centres/gym, hair salons or nurseries to give you your competitive edge back?

Be aware of the penalties

As with the National Minimum Wage, penalties will be imposed for not paying the National Living Wage:

  • 200 per cent of the amount owed (reduced to 100 per cent) if paid within 14 days
  • Maximum of £20,000 fine per employee who has been underpaid
  • Those responsible for non-payment banned for being a company director for up to 15 years.

In addition, it will be automatically unfair to dismiss someone aged 25 or over to avoid paying the National Living Wage or to dismiss or select for redundancy because they qualify for the new rate.

What will your future strategy be?

The National Living Wage is planned to be set at least £9.00 per hour by the year 2020, which means that you will need to budget for at least a 45p per hour increase each year for the next four years.

It’s important to get on board with these changes now and revisit your five year plan to see how you are going to cope with these increases in the long term. Therefore, you’ll need to either ensure your initial strategy sees you through to 2020 or plan to make further changes down the line.

Whatever direction you decide to take, make sure you keep on top of the rate changes; it’s too costly to ignore.

Elaine Pritchard is HR policy consultant at Moorepay.

Further reading on the National Living Wage

Ben Lobel

Ben Lobel

Ben Lobel was the editor of SmallBusiness.co.uk from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

Related Topics

Living wage

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