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The combination of the national living wage and the skills shortage is pushing pay up at the fastest rate since 2008. The government has increased the national living wage effective from April 2020 and workers can expect the biggest pay rises since before the financial crisis in 2020 to force pay levels upwards after years of constrained growth.

We explore the impact of the national living wage on business’ financial planning and the delicate balance between achieving fair pay and keeping financial pressures on businesses at bay, particularly as Brexit approaches and caution amongst businesses persists.

A boost for the lowest paid roles

The Living Wage Foundation highlights that there is still a discrepancy between the legally enforceable national living wage (the government minimum for over 25s) and the real living wage (the wage rate based on what people need to live). Over five million workers reportedly earn less than the real living wage; however the rate of national living wage increases is still four times that of inflation and signals strong progress in ensuring low-paid workers are remunerated at a rate that is in step with inflation.

Complying with the National Living Wage

Pay stimulus through increases in the living wage sounds like a win-win situation – employees are paid more for the work they are doing and this in theory drives productivity. Prime minister Boris Johnson hailed the increase as the “biggest ever cash boost” and says that he is responding to the fact that people “haven’t seen the pay rise they deserve”. Workers aged 21 to 24 who receive the national minimum wage will get 50p an hour more with their hourly rate rising from £7.70 to £8.20 (a 6.5% rise) and the national living wage for those over 25 will rise from £8.21 to £8.72 (a 6.2% rise).

A complex pay picture: balancing costs and fairness

Whilst the move was welcomed by the Trades Union Congress, who responded that the rise was long overdue for those struggling to make ends meet, the British Chambers of Commerce warned that the extent of the increase risks creating problems for businesses in a “time of great economic uncertainty”. They warned of the additional pressures placed on business’ cash flow and training and investment budgets. The Institute of Fiscal Studies has warned of the prospect of a tipping point whereby a high minimum wage must reduce employment levels in terms of what a business can afford in terms of resource. The Institute advised caution to ensure that wage levels do not damage employment prospects and jeopardise a buoyant labour market that has kick started 2020.

A question of size and sector?

The Federation of Small Businesses is concerned that four in ten small employers are anticipating negative effects because of magnitude of the increases. One in five will cancel investment plans and one in ten will consider redundancies. Affordability is a key issue depending on the sector in which the business operates, according to our customers.

Ongoing recruitment and retention challenges

Operating against these pay increases is the ongoing recruitment struggles faced by organisations, as captured by our UK Reward Management Survey in autumn. These challenges are particularly acute in the residential care sector, with 100 per cent reporting recruitment and retention struggles. For respondents across all sectors, 66 per cent face recruitment difficulties and 60 per cent anticipate recruitment challenges. With resource challenges already operating, additional pressure created by pay expectations is an additional pressure on potentially stretched HR budgets.

The difficulty in differentiating

Those within the care sector point to the pressure living wage increases create within salary scales and differentiating roles. Re-evaluation is required across organisational designs because upward pay pressure either means an increase across all pay levels, which is highly expensive and logistically challenging, or the hovering up of jobs between different bands in salary scales, widening levels of responsibility.

Care employers in particular are struggling to differentiate roles because of this upward pay pressure, which often requires the reorganisation of work. Care Assistant roles are potentially becoming Team Leader positions in Care Homes, as more responsibilities are assigned to combine these two levels and overcome costly increases at all levels. In some cases, middle tiers in organisational charts are removed and employers expect more of lower level roles, with some being assigned larger teams. However, if the pay is not competitive with less pressurised roles in other sectors, this may lead to retention issues.

Zero hour contracts

A link between the national living wage increase and zero hour contracts is yet to be definitively established, but there is an argument that the impact of pay requirements may lead to more zero hour contracts being offered so that employers can ease their business costs. The Living Wage Foundation has noted how increases have not resulted in people losing their jobs but there may be a correlation with the rise in these types of contract as a result. This may overcome hidden hiring costs and enable employers to be more flexible to meet these new pay obligations. The British Independent Retailers Association warned of the impact of the national minimum wage on rising costs and the tough trading environment faced by retailers. Employers may have to employ fewer people as a result of the rise.

The impact on the individual

Zero hour contracts are one way in which affordability can be managed by businesses, but there is growing awareness around the potentially negative impact this type of contract has on individuals. This has driven the “Living Hours” campaign by the Living Wage Foundation to tackle the fact that one in six workers are in insecure, low paid work, “with millions facing cancelled shifts, a lack of stable hours or short-term contracts”.  The new programme requires organisations to pay the real Living Wage, above the national legally required, and guarantee to provide workers with four weeks’ notice of shifts, a contract that accurately captures hours worked and a minimum of 16 hours per week. Whilst pay alone is not responsible for work poverty, this acknowledges the practices whereby rotas are sent out on a weekly basis with varying hours and the financial insecurity this brings for individuals.

Mitigation strategies

Relatively few had passed the cost onto their customers when we explored the mitigation strategies employers were taking in the 2017 edition of our UK Reward Management Survey. At a recent customer seminar, former Chief Executive of The Recruitment and Employment Confederation (REC) and ex HR Director at Royal Mail, Kevin Green discussed how to tackle the turbulence of the labour market. Consistent investment in up-skilling the workforce to accommodate upward pay pressures is something that could future-proof organisations against further national minimum wage and living wage increases.

Kevin described the skills shortage and buoyant labour market as the ‘perfect storm’ – preconditions to a full-blown talent crisis that the UK is heading towards. The minimum wage should be a tool to ensure that pay is not lagging for the lowest paid in society and future increases must be carefully managed to ensure it is not an additional burden that could exacerbate operational costs to businesses.

Increases grounded in evidence: a risk/benefit analysis

It is vital that a careful balance continues to be struck when implementing national living wage costs across businesses, so that they can balance fairness with the ability to keep pace in terms of affordability with the legal requirements around pay, to ensure that the UK can sustain its high employment rates.

To find out how we can help you balance affordability with fair pay practices throughout your organisation, get in touch.

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