The New Living Wage – the compulsory pay rate of £7.20 an hour minimum for those over 25 – comes into effect on 10th April, and while everyone would agree that we all deserve to earn enough money to live on, realistically some employers will struggle to pay their employees this new rate. Are you one of them?
The Challenge
Although some smaller employers are already paying their over 25s £7.20 or more an hour, others have been paying an hourly rate closer to the 2015 minimum wage of £6.70 – because that’s all 
they can afford. For them, the jump of 50p an hour will be significant.
“Our research suggests that over half of small firms already pay their staff more than the voluntary Living Wage,” says Mike Cherry, Chairman of the FSB. “But those that don’t are often operating in highly competitive sectors with very tight margins.”
And those businesses that can cope with the £7.20 rate can’t rest on their laurels, either. The Government has set a target for the NLW to rise to 60% of average earnings by 2020, meaning it’s likely to be around £9.15 per hour by 2020. However, the FSB believes the Low Pay Commission, which advises Government on the minimum wage, should be allowed to recommend a change to this target if it becomes clear the economy can’t afford it.
Which SMEs Dread The NLW?
Last October, FSB surveyed its members to find out how small businesses felt about the NLW and how they were planning to handle it. They discovered that 38% of small employers expected the NLW of £7.20 an hour to have a negative impact on their business, with only 6% believing it would have a positive impact on their business. Over half of their members (54%) thought the rise to around £9 an hour by 2020 would have a negative impact.
The sectors most likely to worry about the negative impact of the NLW were wholesale, retail, accommodation and food services. This is unsurprising, as the Low Pay Commission’s recent spring report named agriculture, food processing, textiles, retail, hospitality, social care, childcare, leisure, hairdressing, employment agencies, office work, non‑food processing and transport as the lowest-paying sectors.
The areas where there was most concern about the impact on business were Yorkshire, the West Midlands, Wales and the South West.
Last October, HMRC named and shamed the top 100 companies that had failed to pay even the minimum wage – and while some of these were small firms, others were big brand names such as Monsoon.
How Will SMEs Cope?
The FSB Survey asked SMEs what changes they were planning to make in order to afford to pay the NLW.
- 52% said they would put off hiring new staff
- 50% said they would raise their prices
- 41% said they would cut staff hours
- 31% said they would cut staff numbers
- 29% said they would be cancelling or postponing planned investments
- 26% said they would freeze or cut the wages of higher paid staff
- 29% said they would absorb the cost through reduced profits
Mike Cherry said: “While it is easy to say everyone deserves a pay rise, the only way to deliver and sustain higher wages in the long run is to improve productivity, boost skills and drive business growth. Without the right type of productivity growth, there is a real risk that in many sectors higher enforced statutory wages will lead to fewer jobs being created, fewer hours for existing staff and, unfortunately in some cases, job losses.”
Don’t Ignore The NLW, Warns FSB
The FSB are reminding small businesses that they can’t ignore the NLW; it’s a legal requirement and businesses not paying the NLW will face heavy penalties. FSB members with any queries about the NLW can contact FSB’s free employment advice line on 03450 727 727.
Will the NLW impact your small business? Has it affected your employment or investing plans for the future? How are you expecting to cope with the additional costs? Let us know.