The National Living Wage: cause for celebration?

There has been much publicity about the introduction of the National Living Wage (“NLW”) which came into force on 1^st April 2016.  The basic premise, a minimum hourly rate of pay for those who are aged 25 and over set at £7.20 per hour, appears to be uncomplicated.  However the increase from the National Minimum Wage rate which applied before 1^st April 2016 to accommodate the NLW is 50p per hour which is, for some employers, a difficult cost burden to deal with.

We have already had enquiries from employers asking “what they should do” to deal with the increased cost.  Some businesses, due to the flexibility in their prices, may be able to in effect “pass on” the cost to customers but others are hamstrung by the terms of their suppliers and the market in which they operate.  The resultant effect is that there is simply a cost to absorb to maintain the status quo.

Employers should have planned for the increase in costs well in advance of 1^st April 2016 so that they could assess what the extra cost of the NLW would be to their business.  If that analysis has not been undertaken then there is simply no time to waste.  Assuming the business cannot simply pass on the cost so that the status quo is maintained (and where this is possible it is unlikely to be implemented overnight) plans should be made as to how the increased cost can be offset.

Is there any scope to reduce other variable overheads?  Will the increased burden mean redundancies in order to maintain the business?  I have heard of considerations for redundancies, reducing overtime and even reducing trading hours in a bid to save costs. 

The key to success in any cost saving exercise is in the planning and this is especially true when looking at redundancies.  One point to be clear on, and I have my concerns that this will be taken too lightly by some employers, is that it will unlikely be satisfactory to simply quote the NLW as the reason for dismissing a role as redundant or reducing headcount.  Cost itself never justifies the decision to dismiss given that redundancies, in their implementation, are not about costs but are entirely about the need for labour.  Employers would be well advised to consider this when rolling out redundancies which are designed to combat the cost burden of the NLW.

Whilst the NLW may well be hailed as a “step up for Britain” to quote the Government’s media campaign it will be more than a step for some businesses.