National Living Wage and what it means for Small Businesses

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Untitled designWhat is the National Living Wage?

That might sound like a simple question, but the reality could leave business owners confused.

In fact, there are two figures that are currently being promoted as the ‘Living Wage’, and it’s important not to get the two mixed up.

The National Living Wage

The National Living Wage, in its official form, is a legally required minimum hourly rate that must be paid to over 25s from April 2016. This minimum hourly wage will be set at £7.20.

The Living Wage

The Living Wage is a figure calculated independently by the Living Wage Foundation. It’s a voluntary figure, which means that there is no legal requirement to pay anything more than the National Minimum Wage (£6.70 per hour for workers aged 25 and over, as of early 2016). The Living Wage currently stands at £8.25, with a higher rate of £9.40 per hour for workers in London.

The Living Wage Foundation offers formal accreditation for businesses agreeing to go ‘above and beyond’ by paying at least their recommended Living Wage. Unilever, British Gas, ITV, Aviva, Sage UK and Google UK are amongst the big names to have already become Living Wage accredited, but they’re amongst thousands of other businesses of all shapes and sizes. Smaller businesses are welcome to apply for accreditation just as the larger companies do.

What does the Living Wage mean for a small business?

It is absolutely vital that small businesses adhere to the National Minimum Wage for their employees, taking into account lower rates for those under the age of 21.

If you run a small business and have employees that are 25 or over, then you should also be prepared to pay the National Living Wage from April onward. Paying this new National Living Wage is just the same as paying the National Minimum Wage, as far as your business administration is concerned. All you’ll need to do is ensure that you’ve identified who is eligible for a wage increase.

The Living Wage, however, remains an optional commitment. Agreeing to pay the Living Wage means that you’ll be paying at least £1.05 more per hour than is necessary, but could make you a significantly more attractive employer to those looking for a job. Advertising yourself as ‘Living Wage accredited’, showing that you’re paying an hourly rate that has been independently calculated to cover the cost of living in the UK, will boost your appeal. Arguably, there are also those that will be more likely to do business with Living Wage accredited employers, since they may be seen as more ethical – any business of any size that becomes Living Wage accredited can be listed on the Living Wage Foundation website.

Are small businesses more likely to be affected?

Large companies and organisations with high turnovers and considerable profit margins should not be hit too hard by an increase to National Living Wage for their employees aged 25 or over.

For small businesses, the situation may be a little more concerning. Whilst SMEs typically have fewer employees, they also have a smaller pot of money with which to pay the wages. An increase of 50p per hour to each employee’s wage (from National Minimum to National Living) can have a significant and dramatic impact.

Professionals have warned that some small businesses will struggle with the increased expense, and that job losses are very likely. It may be that a small business owner can no longer afford to pay every member of staff and will be forced to make some employees redundant.

With less than a year’s notice from the time of the National Living Wage first being announced to the time when it comes into play, and with effectively a matter of weeks from now until the big day, it’s absolutely essential that employers running SMEs have accounted for higher wages. Businesses with 10 employees or fewer are expected to be the hardest hit.

Critics of the National Living Wage have argued that it’s been brought in too quickly and is too steep an increase, leaving small business owners to struggle with suddenly having to find more funds to pay their workers.

How should a small business owner prepare for National Living Wage?

If you’re not already fully prepared for the arrival of the National Living Wage, and if you don’t feel that you’ll be able to comfortably find the extra money, then you should act now for the benefit of your business.

If you can avoid recruiting anyone new by spreading the workload, providing extra training or reshuffling existing teams, then you can avoid recruitment fees in the near future along with the relatively high wages that a new employee will require.

If you currently offer paid overtime then imposing an overtime ban may also help you to keep tighter control of your outgoings.

These need not necessarily be long-term changes to the way that you run your business; short-term adjustments could provide you with the time that you need to adapt to the new hourly rate and to safely take stock of your situation.

What about the future?

The National Living Wage will gradually rise to £9 by 2020. Whilst the initial increase may have come as a shock, you now have longer to budget for future increases.

You might also decide to follow the Living Wage, as calculated by the Living Wage Foundation, more closely.

Use your HR software to keep track of current employee wages and hourly pay rates, and ensure that you accurately record the increases when they come into play in April. By keeping on top of your HR admin, you’re able to reduce the risk of a shock at the end of the next financial year.

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