Employers freeze pay to fund National Living Wage

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Employers have frozen or reduced pay to meet requirements, although some have extended the NLW to all staff

Almost a quarter of employers have frozen or reduced pay to cope with the National Living Wage (NLW) introduction, according to an XpertHR survey.

The HR resource company found 23% of the 212 large employers surveyed had taken this action since the NLW came into force in April 2016.

The survey revealed that three in 10 (30%) respondents across the private sector had to increase wages for at least some workers in April 2016 to meet NLW requirements, and a quarter (25%) expected to do the same again when the National Living Wage increased in April this year (the survey was conducted in February 2017).

As of April 2017 the minimum wage is £7.50 per hour for those aged 25 and over, £7.05 for those aged 21 to 24, £5.60 for ages 18 to 20, and £4.05 for under-18s.

More than half (59%) reported their pay differentials had been squeezed as a result of these increases, although a further third (33%) maintained their differentials.

However, the survey found signs of some employers being more generous than mandated by the government. It found some had extended its scope to include a wider group of employees, with more than half (54%) paying the NLW to all employees regardless of age.

The survey found around a third (36%) of organisations had modelled the potential cost of NLW uplifts. This included forecasting the impact on wages from the headcount and age profile of staff, the effect on pay bills and company profitability, and ways of coping with the increase.

But Sheila Attwood, managing editor of pay and HR practice content at XpertHR, said there is much work still to be done.

“It’s clear some employers are underestimating the impact the NLW will have on their pay budgets over the next three years," she said. "They need to be doing much more work; including forecasting and modelling the effect of this on their pay bill and profitability, and look at ways the business can cope with the increase.

“However, just planning the funding to cover increases in the NLW is unlikely to be the end of the story. Seeing how differentials will be affected is something all organisations will also need to take into account."

Conor D’Arcy, policy analyst at the Resolution Foundation, who previously suggested the real-terms value of the NLW by 2020 could be up to 40p lower than had been expected before the Brexit vote, said: “Our research shows that so far the main responses from firms to the NLW have been taking lower profits, boosting productivity, or raising prices, rather than cutting pay elsewhere in the workforce.

“But with the NLW just two years into five years’-worth of steep increases firms’ responses to the rising wage floor are likely to evolve. The key task facing employers and government is to encourage the kind of productivity gains in low-paying sectors that will help to make a higher NLW affordable."

The government aims for the National Living Wage to reach 60% of median earnings by 2020, a figure that the Low Pay Commission estimates to be £8.61 an hour. This means the National Living Wage will need to increase by just under 5% each April.

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