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What small businesses can do to manage the extra costs of the National Living Wage

September 28, 2015

In April 2016 the National Living Wage legislation will come in to force. From this date all employers will be required to pay staff over the age of 25, a minimum rate of £7.20 per hour.

With experts suggesting that National Living Wage (NLW) could be a step into the unknown, many business owners are rightly feeling nervous about the new legislation.

Lord Wolfson, the boss of Next, for example has stated that prices at the retailer could be driven up by the legislation, which would mean an extra £27million being spent on wages each year. Similar soundings have come from businesses like Whitbread, owner of Costa Coffee and Premier Inn, too – warning that the National Living Wage would cost them an extra £20million.

All businesses with employees will be affected, but those that employ staff with pay rates at, or near the existing minimum wage will be hit hardest. So what can employers do to prepare themselves for the National Minimum Wage legislation?

Financial planning for the National Living Wage

First of all, financial planning is perhaps the most obvious response for a small business – many may already be considering it. However, for those that haven’t yet begun any serious thinking about how the National Living Wage might affect their business, what should small businesses take into account?

Perhaps most importantly, how many of your low earning staff are actually over 25? Of those, how many are paid under the NLW’s required £7.20/hour? What therefore would the net increase be to your business?

You may employ primarily younger staff on the Minimum Wage, in which case it could be that the effect is minimal, however it’s certainly worth considering.

From this information, it’s important for a small business to think about how they will absorb these costs. Especially considering other changes to employment law that are coming on stream and being finalised over the next few months, such as auto-enrolment pensions and also the various rulings about holiday pay, overtime and commission.

However, remember that National Insurance contributions are also being lowered by the government, something that should really help smaller firms when they take on staff.

Improving staff performance to offset the additional costs from the Living Wage

Whilst the arguments about the impacts of the NLW are varied, one thing that we do know for sure is that the monthly salary bill for many employers is going to increase. So how can a small business absorb additional costs?

First of all, you should look at improving the productivity and performance of all employees. By carefully managing staff performance you can help to ensure the investment you put into your staff is returned. To achieve this, you should;

  • Have regular two way conversations to assess performance, and set future objectives and targets
  • Proactively manage lateness, absence etc. to ensure that poor attendance is minimised
  • Are clear with staff about the responsibilities of their role and helping them to understand the consequences of poor performance
  • Focus on what motivates your staff to get the best from them, often a pay rise will only encourage a short term incentive to work faster and harder. If an employee was feeling demotivated and undervalued before the pay rise, chances are a few months down the line they will start to feel like this again.

When managing performance though, make sure that this isn’t just for those affected by the new Living Wage. You will need to be consistent with your management and treatment of employees to avoid any potential disputes that could arise.

Getting the right skills

If you feel that performance is something you have covered, then the next area to look at is ensuring you have the right skill mix and working arrangements.

Is your recruitment strategy still ‘fit for purpose’? Sometimes stepping away from the more traditional working contracts (full-time, permanent) and exploring part-time, job share, growing your own talent from within, bringing apprenticeship schemes on board, or exploring placement or graduate schemes can be a great way of keeping overheads down while maximising fresh talent.

However if you are in a position where you don’t feel the current wage bill isn’t sustainable under the new regulations, then you may have to consider reductions in staff numbers, ensuring that you follow proper redundancy processes whilst exploring all avenues.

Raising prices

Finally, there’s the option to raise prices. If you want to retain your current staff on the same hours this is likely the only option you have to fully offset the costs of the new Living Wage.

Remember, the National Minimum Wage legislation will apply to all employers so your competitors will also be affected. It may be that everybody increases their prices so your business won’t be any less competitive.

Final thoughts…

The facts are that it will cost small businesses more to employ many low-wage staff. How they handle this is down to them, after all, if you’re a small business owner you need to make the right choice for your business.

Whether there will be the large number of job losses and rise in inflation that some have predicted is yet to be seen, all small employers can do is prepare to do what is best for their business and staff.

You can find more information on exactly what the National Living Wage regulations mean for employers from April 2016 in;

About the author

This guide has been written for ByteStart by Georgina Read, Co-founder and Director at citrusHR, the small business HR experts offering a fresh approach to HR support.

More help on managing staff

For more guidance on employment issues, try some of ByteStart’s other guides;

And for tips and ideas on how to get the best out of your staff;