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State of the Nation

How SMEs Set Pay Rates – And What The New Living Wage Means For Small Businesses

By October 6, 2015 No Comments
How SMEs Set Pay Rates – And What The New Living Wage Means For Small Businesses

Living WageAs of last Thursday, businesses will be busy rebalancing their books to take into account the latest increase in minimum pay rates for adults. The National Minimum Wage, which has increased to £6.70 an hour, has had a mixed reception among the small business community since it was introduced in 1998. Many see it as an extra burden in terms of time, money, and administration. But, business owners will have far bigger financial headaches next year when National Living Wage rules come into force pushing bills even higher for SMEs. So, how can business bosses manage these ongoing changes to the way they pay their staff?

Minimum wage changes

The latest increase in minimum pay levels is the largest real terms boost to the basic pay rate since 2007, the Low Pay Commission estimates. As of October 1, the law says:

  • Adults must be paid a minimum of £6.70 an hour, an increase of 20p on the previous rate.
  • Those in the 18-to-20 age group get a 3.3 per cent increase to £5.30.
  • Teenagers aged between 16 and 17 only get an extra 8p an hour, with the new level being £3.87.
  • Apprentices’ hourly rate increases to a recommended level of £2.80.

Small companies account for more than a third of all National Minimum Wage jobs, with hospitality, retail, and social care sectors particularly represented. So, the new law will be affecting many smaller enterprises at present, but there’s more to come …

Watch out for the living wage

The surprise announcement of Chancellor George Osborne’s summer Budget speech was the introduction of a compulsory National Living Wage from next April. This is defined as a rate of pay sufficient to provide a worker’s family with the essentials in life.

  • Working people aged over 25 must be paid a minimum of £7.20 an hour as of April 2016.
  • This will rise incrementally to reach £9 an hour by 2020.

Critics have been quick to lambast the move, and say it will disproportionately impact small firms. Think tank the Resolution Foundation calculates £4.5 billion will be added to UK firms’ wage bills in 2020, with the smallest firms – those employing fewer than ten staff – seeing the greatest increase. This on top of the hassle of implementing pension auto-enrolment legislation, which kicks in for many smaller companies next year, as we’ve outlined on this blog before.

Despite the Government claiming other changes to welfare and tax payments in the Budget will offset the damage for employers, business groups have warned that many small business bosses will be forced to cut staff hours, jobs, or will simply be unable to pay the extra.

How will you pay?

So, what are the options for embattled business owners? The choices are quite stark.

  • Accept your profits will be lower. Higher wage bills mean less money going back into the company, so your bottom line could take a hit. Few firms will want to accept this as an inevitability.
  • Raise your prices. Some businesses will decide to make up the shortfall by charging customers more for goods and services – though whether clients will understand is another thing. There’s always the risk of losing business.
  • Restrict your wage bill by offering few increases to staff above the legal minimum. Equally, some firms may decide they have to cut back on employee perks, bonuses, or reduce pension contributions. Either way, the danger here is a demotivated workforce, and a knock to productivity.
  • Employ fewer people. This may be the route many companies pursue, automating processes where possible, and trying to get a smaller workforce to do the same workload as previously. Again, this is likely to have an impact on customer service, productivity, and possibly business reputation.

It’s not a pretty picture, is it? But the dangers of not playing by the rules are too great for any sensible business to take …

The cost of non-compliance

Bosses who think they can flout the law, and get away with paying what they like should think again. It’s estimated about 208,000 employees over the age of 21 were paid below the current legal minimum rate in April 2014, some of them legitimately so, for example, if employers were deducting a small sum from wages for housing up to the allowed level of ‘accommodation offset’. But those illegally short-changing their workers can be subject to serious punishment – fines of up to £20,000, plus the reputational damage of being named and shamed by Government agencies.

The Prime Minister David Cameron recently went further, and wrote in The Times newspaper warning business owners that those who don’t comply with next April’s living wage rules will also be subject to penalties up to a maximum of £20,000. Those who persist in not paying up could even be disqualified as directors for up to 15 years.

Of course, most businesses are law-abiding, and there are small firms that already choose to pay a living wage before legislation has made it obligatory. But, for the rest, the law has made its mind up for you, so act now to follow the rules, juggle the numbers, and take advice about how best to pay your way, while staying in profit.

Image courtesy of digitalart at FreeDigitalPhotos.net

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