Living Wage – In Name Only?

In his emergency summer budget, Chancellor George Osbourne this week announced a new burden on the SMEs that employee around 15 million people[1].

The so-called (by the Chancellor) Living Wage will not be at the rate that the campaign group the Living Wage Foundation describe it as , but at a rate “aiming to reach 60% of median UK earnings by 2020[2]”. In other words, rather than a Living Wage based on cost-of-living calculations – the calculation normally used for the well-known Living Wage rates – the Chancellor’s version of the Living Wage will be based on 60% of median earnings nationwide, not even taking account of what it might actually cost to live in specific areas of the country (London has its own rate, £9.15, already higher than the forecast rate of the new Living Wage rate of pay for 5 years’ time: £9.00).

Iain Duncan-Smith, the Work & Pensions Minister was observed cheering the announcement,  but the Office for Budget Responsibility & many employer’s groups have expressed fears the policy could actually lead to less jobs, as staff are made redundant.

The Office of Budget Responsibility considers that these changes to the National Minimum Wage could be met by a response in a variety of ways by employers affected:

“B.14 At the firm level, employers that are affected by the higher wage costs associated with the NLW would, absent adjustment, face a loss of profits. Those employers could respond in a variety of ways to try to offset that loss:

• reducing the number of hours worked by their existing employees;

• reducing the number of people employed, either by firing existing employees or by hiring fewer people until attrition has reduced the workforce by the desired amount;

• changing the composition of their workforce, potentially by replacing those who are 25 years old or older with those aged 24 or less; or

• increasing prices in order to pass on the higher wage costs to their customers.”

So while this “introduction of the living wage” is widely seen as spin, there will nonetheless be an impact on SMEs.

The Living Wage Foundation – the organisation that sets the (non-binding) Living Wage in London & elsewhere – while “delighted that over 2.5 million workers will receive a much needed pay rise”,  have raised a number of important questions.

The first change to the National Minimum (NMW) wage rates – at this new tier to be added to the legislation – will come in from April 2016, and the subsequent increase – to apply from April 2017 – will be determined by the Low Pay Commission.

Armed with the knowledge that there will be a further increase to the wage bill six months’ after this October’s increase of 3% – by another 7% in April (six months later) for staff over 25 – a potential 10.7% increase over a six month period – employers will need to think now about how to manage this & their staffing. The OBR fears it could result in job losses or a reduction in hours, and whatever option is taken by individual employers, care will be needed to ensure this is done fairly & lawfully.

Filed under: General News, Laws & Regulations by Employment Law Clinic           Post created on: July 9th, 2015