From April 2016, workers over the age of 25 will be entitled to a national living wage (NLW) of £7.20 an hour, rising to £9 an hour by 2020.
While many small businesses already pay their staff the living wage and recognise its importance in attracting and retaining talent, some are expecting to face challenges.
A survey, carried out by jobs site Indeed with Censuswide, revealed that over two thirds (77%) of SMEs believe that the NLW will negatively impact their ability to make hires and grow. A quarter already see costs as the biggest challenge they face when hiring.
Challenges
How will SMEs deal with these challenges? The Chartered Institute of Management Accountants (CIMA) anticipates that small firms may decide to employ fewer people than they otherwise would, pass on all or part of the increased cost to customers, or, if demand for products is very elastic, they may feel obliged to absorb the imposed increased costs as the least damaging option.
However, CIMA’s head of public policy Naomi Smith insists that given the number of SMEs already paying their staff at or above NLW levels, they are unlikely to react adversely.
She says: “They understand the need to attract and retain talent in an increasingly competitive and global marketplace, but will rightly want assurances from government that any future changes to the NLW will be rooted in evidence and that reasonable adjustment periods will be built in.”
Smarter working
Window manufacturer Building Product Solutions, based in Goldthorpe, South Yorkshire, employs 56 staff, all of who are paid a wage above minimum requirements.
As a result of the introduction of NLW, sales director Lynne Darwin believes they could experience problems in growing staff numbers, investment and training.
She says: “All our employees earn above minimum wage, however, the leap to the national living wage will significantly increase our wage bill. To continue to grow as quickly as we’d like we may have to make capital investments to increase production capacity, rather than the ongoing recruitment we currently undertake.”
The company’s plan for dealing with the cost impact will involve finding ways of working smarter and make the most out of their existing team. Longer term the focus will be on careful recruitment to facilitate growth.
Situated in South Yorkshire’s Dearne Valley, a deprived area with above average unemployment, the company prides itself on the good working environment and fair remuneration that it offers staff.
Darwin adds: “The NLW does not take into account the difference in the cost of living anywhere other than London. This varies vastly across the UK, however the £7.20 rate is based on a national average. While we agree with the sentiment, as a small business employing primarily from the local area, the jump seems a little unfair as it is not reflective of the cost of living in our area.”
The care sector
Small firms in the care sector could be among the hardest hit by the hike in wage bills. Mary Hunt, founder of Beyea Care based in Ipswich, which employs 43 people, says: “Local authorities are constantly reviewing what is paid to agencies providing care in the community. We understand that, like any other business, they want to be competitive and work to budgets, but obviously it does put pressure on those providers who then want to tender for the work.
“We have always taken pride in paying a good rate to our carers and so we see the NLW as a good thing to ensure that loyal carers, who work long hours, are getting fairly paid for their time and commitment. Yes, it makes margins tighter for our business, but we also want to retain and train great staff.”
Like others in the sector, Beyea Care will be looking carefully at how they manage the business to gain maximum cost efficiency without compromising care, reviewing budgets and looking for opportunities to streamline.
Tech companies
Fast growing firms in the tech sector are also anticipating the impact of higher wage bills. Qudini is a cloud-based digital queue and appointment management system based in Shoreditch, London. They have a team of 18 in the UK and three overseas. The company is now working within Europe, America, and moving into Central America, which has created demand for extra staff.
CEO Imogen Wethered says: “We have to make sure that we are investing correctly and strategically. We do, however, look to support our staff with the best possible salary we can offer, as we know living in London has never been more expensive than at present. Ensuring our staff are recognised for their hard work and achievements is very much part of our business ethos, and of course salary plays a part in this.”
Qudini’s strategy for dealing with the NLW cost impact is simple. “We need to bring in more business and revenue to support the additional costs,” says Wethered. “Our cloud-based solution allows us to work remotely from anywhere around the world, and with more overseas business coming in we might have to consider employing further staff that work remotely, through companies such as Cloud Employees.”
Is the NLW fair to small business? Certainly increasing the national living wage by 5% each year for four years will have its impact, and will mean that any expansion in staff or resource will need to be planned out with care.
“Small business trading prices can’t increase by 5% year on year for four years, because it would hugely impact a small business’ break even point and potentially mean businesses could be running at a loss, in turn reducing the growth of SMEs in the UK,” says Wethered. “Vital planning includes building financial forecasts that map out the impact of increases in staff cost, not just for the first three years, but beyond this to ensure income targets support this increase.”
UK economic recovery remains fragile, particularly in manufacturing sectors, but many SMEs are, for the first time since the financial crisis, finally in a position to raise wages and increase recruitment levels, says CIMA’s Smith, adding: “The introduction of a National Living Wage is a good step towards ensuring a high-skill, high-wage economy for the UK.”
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