National Living Wage introduced

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The new rate of £7.20 an hour, rising to £9 by 2020, is payable to anyone over the age of 25

From today (1 April 2016) employers are required to pay all staff aged over 25 the National Living Wage (NLW), as laid out by George Osborne in the 2015 summer Budget.

The new rate of £7.20 an hour, rising to £9 by 2020, has caused concern for some business leaders regarding the impact of a higher wage bill.

Charles Cotton, performance and reward adviser at the CIPD, said the key to achieving sustainable increases in pay for the lowest-paid without damaging job prospects is raising productivity.

“Ultimately it [the NLW] will only be judged a success if employers can sustain higher wages for the low-paid without the need for job losses and cuts to other pay and benefits,” he said. “The NLW will increase costs for many businesses, particularly in the retail and hospitality sectors, which are set to be the hardest hit.

“There isn’t a how-to guide for navigating these payroll obstacles, but by improving productivity organisations can keep the financial impact to a minimum and improve the long-term performance of their business.”

Chris Rowley, professor of human resources at Cass Business School, described the introduction as a “bold experiment” that, while a sound idea, may prove challenging in practice.

“The aim is to make workers more productive and help break UK plcs' low-pay-low productivity trap and encourage a better paid and higher productivity economy,” he said. “And by taking low wages out of the competitive equation it forces firms to compete in other ways, for example by quality and innovation rather than cheapness and costs, avoiding a race-to-the-bottom by businesses. Furthermore, if people are paid more they can spend more money in the local economy, boosting demand.

“While we should certainly hope this all happens we may need to be a little sceptical. The headline rate of £9 per hour is only from 2020, from just £7.20 now. And while this might be a good rate in the Orkneys, I am not sure about the South East, let alone London; one of the most expensive cities in the world. Secondly, it only applies to workers aged 25 and over. Sixteen-year-olds entering the workforce will have to wait nine years until they are entitled to the NLW.”

There are, however, encouraging signs of businesses confident they can make paying higher wages work. Ikea this week reconfirmed its commitment to implementing the living wage as set by the Living Wage Foundation (£8.25 nationally and £9.40 in London), and announced that 1,200 team leaders will also see a proportionate pay increase.

And Costa has announced it will be paying all employees, both over and under the age of 25, the NLW. “Costa is an incredibly people-centric business and we believe in treating all staff equally,” Kate Daines, HR director for Costa UK and Ireland, told HR magazine. “We offer the National Living Wage to all staff regardless of age as more than half of our workforce are under 25. We feel it is important to keep our people motivated and to encourage them all to pursue career opportunities available to them at Costa.”

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