28/07/2015

By Viv Copeland, Head of Croner Reward, Wolters Kluwer

Surprise budget announcement is great news for employees, but a costly burden for business.

The big Budget surprise and an announcement that was not leaked in advance was the introduction of a national living wage to be set at £9 per hour by 2020 for people aged 25 and older. A rate of £7.20 an hour will be introduced in April 2016 (which is 50p an hour more than was expected from the National Minimum Wage (NMW) due in October). By 2020, the national living wage (not yet confirmed as the official name) will be 13% higher than the NMW would probably have been.

The living wage will be compulsory and will, the Chancellor said, have minimal impact on unemployment (perhaps a 0.2% rise).

While they wait for those changes to be delivered, public sector workers will see their pay rises capped at 1% for another four years.

The impact on business

The announcement will be an improvement in pay for some but may prove a headache for businesses. How does the living wage and the increases affect current pay structures? Will businesses need to adjust not only the lower end of the pay scale but adjust higher up to preserve the job hierarchy? A pay and grading review may well be necessary particularly if a business has not undertaken this task recently. Maintaining that fair balance of pay at the lower end of the scale is important but what ripples does this set further up the pay hierarchy and can businesses afford to pay more to staff further up the grading structure to maintain differentials and fair pay all round?

In addition, how are changes to be made – all in one go or amendments each year? A potential headache for HR teams concern the admin required to maintain a gradual pay increase and any effect it has for grades that are higher. All this and a requirement to increase the living wage as set out in the budget up to 2020.

The factor of someone’s age needs to be built into the equation as individuals are paid differently according to their age; i.e. from 2016 those over 25 and on the living wage. Also are they based in London as this is weighted differently?

The proposed changes will impact businesses differently. Small businesses will be impacted less from an admin point of view but financially it may be more difficult to accommodate the change in pay. Large businesses may be able to ride the cost more but it may have a greater impact from an administration point of view because of the volumes of staff on the living wage and the impact on the tiers above.

In the current economic climate and with pay rises hovering around 2%, there will be a cost implication for any size of business. Add to this the fact of retaining staff and the cost of developing businesses as well as staying ahead of the competition then there are significant challenges for a business.