Partner Article

Understanding the minimum wage debate

Employee wages have taken centre stage following George Osborne’s first post-election budget that heralded the arrival of the National Living Wage. Coming at a time when annual earnings have risen at their fastest rate for five years – 3.2% annual rise to June 2015 – the announcement of a new compulsory living wage of £7.20 an hour for employees under 25, rising to £9 per hour by 2020, has sent shock waves through UK companies.

As SMEs begin to analyse the potential costs, assess the options for employing younger staff, reconsider flexible and part time working and even apprenticeships, the role of payroll has never been more important. Neil Lagden, Head of Bond Payroll Services, explains, not only do these changes place a new burden on already stretched payroll teams but the pressure is on to deliver in depth financial payroll reporting to support essential, strategic HR planning.

National Living Wage

Many SMEs were already considering the implications of the New Minimum Wage (NMW), due to come into play in October 2015, when the Chancellor changed the game by announcing the introduction of the National Living Wage (NLW) for all employees under 25 years old. Now businesses need to understand the bottom line costs of wages rising not just 20 pence to £6.70 per hour, but actually up 70 pence to the £7.20 per hour NLW.

When industry figures show mixed reactions – with the CBI calling it a ‘big gamble’, while Simon Walker, Director General of the Institute of Directors (IoD) said it was time for employers to increase wages – it is no wonder businesses are confused. Now there is a fear that smaller organisations already struggling with the additional costs associated with Shared Parental Leave (SPL) and Auto-Enrolment (AE), simply will not be able to afford the change.

There is also some confusion in terminology and timing. The existing minimum wage for those over 21 is £6.50 per hour. The new compulsory NLW affects workers over 25. Companies now have to consider the minimum wage, (official) living wage, (new) living wage, and London living wage – with different rates and relating to different age groups. At a time when companies were already forecasting a 3% annual wage increase in 2015, according to a Salary Trends survey by ECA International, it clearly essential that organisations get a quick handle on the bottom line implications of the changing government policy.

Understanding Costs

This is not an issue any organisation can afford to ignore – especially given HMRC’s increasing determination to improve compliance and the Department for Business, Innovation and Skills’ willingness to ‘name and shame’ those businesses who have failed to pay their workers the National Minimum Wage.

An assessment of the immediate impact on the wages bill may well be the first step for employers. That is just the start of the reporting burden on payroll teams. Payroll may additionally need to deliver reports with full age break down to understand the different rates applicable to the different age groups. From a planning viewpoint there may also be a need to project ahead if the employee base is predominantly young, to track the rise in wages as employees turn 25.

HR Strategy

What are the options for companies facing an escalating AE contribution? One approach would be to reduce individual employee hours and opt for higher numbers of part time employees. While this avoids the potential AE cost by limiting the number that reach the threshold, what will be the additional overhead both in recruitment costs and payroll processing overhead of the extra employees? Would it make more sense to retain core customer facing employees and look again at outsourcing back office functions, such as payroll and HR?

Conclusion

The wages debate is probably long overdue. However, one point is clear: organisations cannot afford to make knee jerk decisions. In a time of rising employment, effective employee management and retention is business critical. Organisations need trusted, accurate insight into wage costs – and the ability to ask ‘what if’ questions regarding the financial impact of different strategies.

This was posted in Bdaily's Members' News section by itpr .