Employee benefitsEmployee engagementReward & Recognition

Living Wage has Hidden Costs for Employees and Employers

This month, the Living Wage Foundation announced that over 2,000 employers have signed up to pay the Living Wage.  That sounds good but does that bode well for employees and employers – have the hidden costs been glossed over?

Individuals should be paid a fair wage for their skills/effort provided they maintain such skillls, are flexible and work in the interests of their employer.   The living wage is currently a minimum of £9.40 per hour in London and £8.25 for the rest of the country.

Employers who sign up to the living wage code may have several reasons such as:

  • the need to recruit and retain versatile staff;
  • to pay staff a reasonable wage/salary;
  • to be seen as a progressive employer;
  • to give prestige to their organisation.

Ripple Effect and Cost Spiral

Large employers and others in market niches will probably be able to offset the increased wage bill by price or cost adjustments.   Other employers may experience pressures in recruiting and retaining staff but may not be in a position to afford the Living Wage rates.  They will have to afford the national adult mimimum wage at £6.70 per hour and, from April 2016, the new minimum wage of £7.20 per hour.for those over age 25.  A cost spiral is likely to arise which will not just affect employers – employees may also find their increase in net pay to be less than they expected.

Employees May Lose Out

Employees are likely to find their rise is soon eroded by:

  • increases in the price of basics such as food;
  • tighter control of available hours of employment;
  • higher deductions from pay.

Some employees will find that their deductions increase because they have crossed the threshold for being auto enrolled into a pension scheme.  In 2017, the rate of contributions for employees will increase from 1% to 3% [see update note at end].  A pension is an important benefit and we urge employers to persuade employees to stay in the pension scheme and not opt out.  Managers can help to shape the expectations of employees by forewarning them of the likely effect on their gross and net pay so that they are not taken by surprise by a smaller net increase in their pay.

Pressure on Employers and Alternative Options

Employers may encounter difficulties in retaining and recruiting staff.and creeping resentment as employees see media reports and some friends receiving more pay.  Even so, the question of affordability may be a barrier to many.  Are there other options employers can explore?   Some options are summarised below.

Market Supplements

If the pressure centres on certain skill groups, then one answer may be to introduce market supplements for key individuals or teams.   A market premium is an addition to pay that may be increased, reduced or stopped to match changing labour market conditions.    If composed appropriately, the premium can be terminated or amended without affecting the main employment terms. See an earlier article about market supplements.

Academy Schools may also wish to consider the use of market supplements for teaching staff.  Head Teachers and Governors can read more about such supplements and other reward and recognition ideas in the following school focused article. (sorry the link needs to be revised)

Focused Bonus/Profit Share

If the wage/salary pressure affects most of the organisation, you may not be confident to increase rates generally but you could make lump sum rewards to employees based on reaching ‘performance’ milestones or spread those across future months.  A simple but focused bonus scheme or quasi profit share scheme could be used.   No special concessions for income tax are involved so the milestones can be kept simple but realistic to achieve and to understand.  You can read  more about those and other ideas in the following article – Productive Productivity.

Update to this Article Dec 2015 – since writing this article, the Chancellor has announced that the increase in contributions for auto enrolment pensions will be deferred from October 2017 to April 2018 – fuller details of the implications can be seen in the following article – Temporary Respite in Costs of Auto-Enrolment Pension Schemes.

If you would like help on reviewing organisational and/or pay structures or writing appropriate terms of employment as above, please feel free to contact the author via this route.

© 2015 HR Management Dimensions Ltd.

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