As many will be aware, from April 2016 the National Living Wage (NLW) was increased bringing into effect a £7.20 per hour (£9.15 per hour in London) minimum wage for employees aged over 25 which is expected to increase over the coming years exceeding £9 per hour by April 2020.
These rises are expected to directly affect many employees in the region and could benefit other employees that are having their pay differentials reviewed.
Many might think that the 80p per hour rise appears small. However, in statistical terms the rise not only represents a nominal increase of 7.5% (the largest since 2004) it also denotes the largest rise since 2001 (10.8%) on an annualised basis. The rises are therefore significant, especially in a zero inflation context.
Will the living wage herald a loss for local business?
For many the answer is ‘no’. Sectors such as financial services and construction are likely to be largely unaffected as the majority of workers are highly skilled and can, therefore, command higher wages. In fact, the Office for Budget Responsibility estimates that the NLW will only have a 0.1% effect on the total national employee compensation figure.
However, in certain sectors important to the region – namely retail and hospitality – absorbing the NLW will be much more difficult to bear, especially for those already suffering from other economic pressures, such as the impact of the pension auto-enrolment legislation.
Hospitality and Leisure
The hospitality and leisure sector performed well in 2015 due to an increase in consumer confidence and an improving marketplace. The NLW, however, is expected to significantly affect sector growth, especially for those within hotels and food services, where over 40% of staff are expected to receive pay rises as a result of the new legislation.
The industry is highly competitive and local positioning is likely to dictate the impact of the rises: in the restaurant sector absorption through increased menu prices may prove more difficult and businesses in this position risk being squeezed out: they may need to focus on operational efficiencies to bear the rising cost base.
Amongst hotels, the initial reaction may be to limit employee benefits, or even make redundancies and business owners will need to have in mind the impact that this could have on staff morale and whether this could affect the standards of their customer service.
The retail sector, historically, has benefited from employing workers at a lower rate of pay, although the market has reportedly shown some signs of recovery in recent months, it remains extremely competitive with high street retailers battling the rise of online operators and only recently we have seen BHS and Austin Reed both being added to the list of household names calling in the Administrators.
The impact of the NLW is likely to have a significant impact on the high street, with the Centre for Retail Research estimating a cost of £1.08 billion to the sector in 2016 alone.
So what will the impact be?
Initially, the NLW is likely to hit consumer pockets with price rises to goods and delivery charge rises. This could push more consumers to online traders and exacerbate the competitive tension on the high street for market share.
Staff levels and store numbers are expected to fall nationwide as marginal stores become unprofitable and surplus to requirements. In addition, exiting from these stores, often on long leasehold contracts, may lead to a further influx of Voluntary Arrangements or other insolvency procedures which could have a detrimental affect on landlords.
Suppliers may also feel the pressure from retailers continuing to squeeze margins in an attempt to save costs, consequently presenting difficulties to their suppliers.
For those juggling work and family commitments, many may also find the cost of nursery and pre-school care rising as a consequence.
So while the introduction of a National Living Wage offers benefits for the lower paid in the economy, businesses will now each need to assess the extent to which they absorb or pass on the additional costs involved.
If you are concerned about the implications of the National Living Wage for your business, we can provide the following advice to help you respond to these changes:
- Advising on business pressures and suggesting solutions;
- Looking at performance benchmarking and ways to improve your profitability;
- Identifying and implementing performance efficiency improvements;
- Assisting with the disposal of marginal or unprofitable assets or units;
- Contingency planning in the event of business critical events not coming to fruition;
- Ensuring that you maximise tax reliefs available to your business; and,
- Outsourcing of your payroll or accounting function to save time and money.