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Raise productivity to make National Living Wage a success

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Are businesses ready to pay the National Living Wage in 2016?

Firms must focus on raising productivity to mitigate the cost of implementing the National Living Wage (NLW), and the hospitality and retail sectors must be “front and centre”, according to non-partisan think-tank the Resolution Foundation.

Announced in the summer budget, the NLW is initially set at £7.20 and will be paid to all workers aged 25 and over. It will be introduced in April 2016.

However, many firms remain concerned at the speed of change. Conor D’Arcy, policy analyst at the Resolution Foundation, told HR magazine that the NLW takes UK wages into uncharted waters.

“Given how poor the UK’s productivity growth has been, it’s crucial that the government does all it can to assist employers to achieve [raised productivity], particularly in low-paying sectors that will be most affected,” he said. “There’s no magic lever the government can pull to get productivity moving, but it’s key industries like retail and hospitality are front and centre.”

Many remain unsure of the implications of the legislation. Steve Rockey, head of people for American-style dining chain Big Easy, said that government advice has not been clear.

“There was an idea that TRONC [pooled tips] should count towards the living wage, and if so the effect on the service industry would likely have been negligible,” he said. “But the government hasn’t yet made it clear [if tips will count towards the NLW or not].”

Rockey added that the impact would differ depending on business size. “When considering a company’s yearly budget, it will have a substantial impact,” he said. “For smaller companies with smaller margins who cannot pass on the cost by increasing pricing, this could push them over the edge.

“For larger firms the impact increases by orders of magnitude. For some this represents an enormous extra cost for payroll.”

Sarah Dillon, director of ESP Law, provider of HR magazine’s HR Legal Service, added that for some, increasing productivity is not an option. “In some areas, like manufacturing, increasing productivity could be a good strategy to recoup the cost,” she said. “They can improve processes or invest in machinery. But in some industries, such as childcare, there are a minimum number of people who have to be working at any time because of regulation.

“It’s going to be hard for them to make savings without passing the cost on [to customers]. We might see smaller firms falling out of the bottom; either becoming part of or being replaced by the larger companies that can absorb the cost.”

According to the Department for Business, Innovation and Skills, 93% of bosses think the new wage is a good idea, with 88% believing it will lead to higher productivity. However, just 45% have updated payroll to take account of the changes, and only 39% have communicated the upcoming changes to staff.

Business minister Nick Boles has urged firms to start preparing now. “By taking these measures companies will be able to properly reward their staff and avoid falling foul of the law,” he said.

The penalties for non-compliance will be the same as those for the national minimum wage. Fines will be 200% of any arrears, and will be halved if employers pay within 14 days.

Rockey advised HR professionals to remain part of the discussion, and not leave difficult decisions up to finance and operations. “Be a part of whatever due diligence your organisation is undertaking,” he said. “Some employers may try to offset the costs by scrapping benefits in kind, but I think that would be a negative response. Encourage employers to embrace the changes, rather than add to the burden of cost.”