What does the National Living Wage mean for businesses?

The new National Living Wage comes into effect today - HR specialists Citrus HR share essential advice to help you understand the changes...

As of today, all UK employers have to pay staff aged 25 and over at least £7.20 an hour – this is the new National Living Wage (NLW).

If you run a small business that employs staff on Minimum Wage, you could find this extra cost makes a big difference. And, with the additional cost that auto-enrolment will bring, ensuring these HR costs are factored into future budgets is crucial.

Remember, this is not a voluntary pay rate, unlike the very similarly named ‘Living Wage’. The ‘Living Wage’ is a much higher rate calculated by the Living Wage Foundation, which changes depending on if you’re in the capital or not. Currently it goes from £8.25 an hour for most of the UK to £9.40 an hour in London.

What should I do if I think my staff are eligible for the National Living Wage?

If you employ staff on the minimum wage, we advise you do the following:

1. Assess your payroll with the following in mind:

  • How many employees earning less than £7.20 per hour are aged 25 or over?
  • What would the net payroll increase be to your business should you need to make changes?
  • If the increase proves too costly for your business, consider how you can save money in other ways. Are you spending more than you need to in other areas that could be reduced, such as marketing or operations for example?

2. Keep on top of performance and attendance:

  • Set objectives and targets for your team to achieve, and monitor them carefully.
  • Proactively manage lateness and absence to get the most out of the hourly rate.
  • Try and find out what really motivates staff. A pay rise may bring an increase in motivation for some. But to get the best out of all staff try and discover what makes each of your employees work harder.
  • Consider changing staff hours, or hiring new staff with more flexible hours in mind. Staff being paid a little more may become more productive, so this could work. However, be sure to run any changes to your existing employee’s contracts by them first and get written agreement.
  • At worst, you may need to consider making some staff redundant. In which case you should familiarise yourself with proper redundancy procedure.

3. Communicate with your employees

  • You may even like to discuss the changes with your workforce, or at least explain what is going on. You may find that your staff come up with some ideas to help, like job sharing.

What happens if I don’t pay staff the National Living Wage?

Should you fail to pay the National Living Wage rate to eligible staff, you could face a fine of up to £20,000, as well as having to pay 100% of unpaid wages.

Keep in mind, although the law has changed, you aren’t powerless over your small business’ finances. Even though it might feel like costs are suddenly spiralling out of control. Take the steps above while keeping employment law in mind, and you should be able to manage the impact on your small business.

If you’re unsure about any of the above though, it’s always best to seek the advice of an HR professional who should be able to advise with your specific needs in mind.

Kirsty Senior is director of small business HR software specialist Citrus HR.

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