HR · 11 October 2016

Inside story: The National Living Wage impact on small business

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Initially set at £7.20 an hour, the National Living Wage is expected to reach £9 an hour by 2020.

Six months on from its launch and the National Living Wage has received praise and criticism in equal measure. Business Advice finds out what impact one of George Osborne’s key policies as chancellor has had on the health of small UK businesses.

On 1 April 2016, the government introduced a new mandatory National Living Wage for workers aged 25 and over in Britain.

Initially set at £7.20 an hour, the National Living Wage is an increase of around 50 pence relative to the UK’s National Minimum Wage, currently set at £6.70 an hour.

One of George Osborne’s flagship policies as chancellor, National Living Wage is a mandatory rate to be paid by all employers, large and small, and has provided a vital pay increase to 1.3m of the UK’s lowest paid workers since its introduction, according to The Office for Budget Responsibility (OBR).

Yet many have criticised the National Living Wage, expecting the impact of the policy to cause job losses and reduced hours for workers as employers struggle to meet the demands of higher wage bills. These worries have been more acute for small business owners, many of which may already be struggling to turn a profit.

In September, the Federation of Small Businesses (FSB) released its Small Business Index statistics for the second quarter of 2016, which found that 47 per cent of small UK firms now cited wage bills as the main contributor to the rising cost of doing business.

Despite largely having been able to meet the challenges posed by the National Living Wage, the impact has been that small business profits have suffered, with 59 per cent of owners reporting lower financial gains as a result of having to absorb higher wage costs.

Founder and manager at one such business, Neil Westwood, told Business Advice he’d witnessed profits tumble 12 per cent since NLW was brought in.

Westwood’s firm Magic Whiteboard – a small manufacturer of reusable whiteboards based in Worcester – has a small team of five employees, and he admitted the policy had negatively affected his outlook on recruitment.

“We will think very carefully about employing more staff in future,” said Westwood. “This is an added cost which has already lowered profits in the business.”

Jo Sellick, managing director at recruitment consultancy Sellick Partnership, said that he’d observed a similar attitude amongst many employers since 1 April, and that the decision to hire fewer staff could cause greater damage to smaller companies.

“The implications of National Living Wage for small businesses are far more severe than for larger employers,” he told Business Advice. “Some owners may well be tempted to hire fewer staff to keep payroll at the same level, simply adding to staff workload.”

“This approach could well prove more financially damaging in the long-run if your employees are forced to take time off due to stress, or if they choose to leave the company and you’re faced with the process of recruiting and training new team members.”

Whilst also making it less likely that small business owners will look to recruit new staff, Sellick said that the impact of National Living Wage may disproportionally affect training budgets and worker benefits at smaller employers.

He added: “If training budgets are reduced, employees may look for new opportunities where training and development is more readily available.

“Another concerning trend has been that of employers cutting other perks and benefits in order to foot the bill [of National Living Wage]. This was bound to happen, as the money had to come from somewhere, but the implications of this attitude could be far more damaging [to small firms] in the long-run.”

For Westwood, it’s the timing of the National Living Wage’s introduction that could cause the biggest impact, with economic uncertainty following the Brexit vote likely to worry small business owners more than larger corporate decision makers.

“In principle, we don’t have an issue paying [the National Living Wage],” he said. “The problem is that the economy isn’t growing at the moment. When the economy is good and sales are increasing, businesses can afford this extra cost.”

The government target is for the National Living Wage to be increased gradually over the coming years, so that by 2020 the rate will equate to 60 per cent of median UK earnings.

Experts at the country’s Low Pay Commission have predicted that it will mean a National Living Wage of roughly £9 an hour in four years’ time, and it is this gradual change that may prove most difficult for small business owners to adapt to.

“Although it isn’t currently affecting us much, it will affect us drastically over the next four years,” warned Andrew Dark, founder at Newcastle-based custom clothing manufacturer Custom Planet.

“It’s not necessarily bad news for business, as it will force us to become more efficient. But if we can’t adapt there’s always the fear that we may have to start letting staff go to balance the books,” he added.

In whatever way owners adapt to impact of incremental National Living Wage changes, the immediate impact of Osborne’s policy seems less drastic on smaller firms than some in UK business may initially have feared.

A new report, published recently by the British Chambers of Commerce (BCC), discovered that just 8.5 per cent of UK companies had been forced to cut recruitment budgets, and that a total of 11 per cent may ever need to. The study concluded the effects of the National Living Wage were nowhere near the “dramatic levels” feared by some commentators.

The extent to which Britain’s new-look government throws its weight behind the former chancellor’s National Living Wage policy over the coming years remains to be seen. Despite Osborne’s unceremonious sacking, newly–appointed prime minister Theresa May has so far defended the National Living Wage, all be it gingerly.

Whatever the future of the policy, the implications of the National Living Wage remain very real for small businesses. Sellick clarified that it was employers that took a financial hit during the recession that now looked in best shape to deal with current economic fluctuations and wage increases.

He went on to say: “Small businesses which keep a ‘rainy day fund’ to guard against these circumstances are well advised. It’s so important for owners to prepare for the worst in this way.”

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ABOUT THE EXPERT

Fred Heritage is deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London. He previously worked as a reporter at Global Trade Review magazine.

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