Picking the employer’s pocket?

Why the latest increase in the National Living Wage is a new challenge for so many employers.

The unreformed Ebenezer Scrooge famously denounces Cratchit’s appeal for a day off with his family over the festive period as:

“a poor excuse to pick a man’s pocket every 25^th December.”

And whilst it is difficult to feel sympathy with the old miser, employers might still experience similar sentiments when it comes to the Chancellor’s recent announcement of (yet another) significant annual increase to the National Living Wage (NLW).

Good intentions

Until now, “real” pay rises have flatlined

To avoid sounding like Mr Scrooge, I should first point out that the aims of the National Living Wage are nothing but laudable. It is a good thing for the lowest paid to be adequately rewarded for their work, not least during both a cost-of-living and cost-of-borrowing crisis. This need is further heightened by the reality that “real” pay rises (pay above the rate of inflation) have flatlined in the United Kingdom since the financial crisis of 2007/08.

Additionally, most – if not all – good employers would also agree with the idea of paying workers well, albeit after a more balanced decision that ensures that the employer retains enough margin to continue to operate effectively.

But what about the cost of “doing business”?

Yet the annual setting of the NLW does not actively involve most employers and also overlooks the cost-of-doing-business crisis which so many organisations – and particularly those in more marginal sectors with greater numbers of NLW employees – are currently experiencing.

So, the problem for employers here is not the idea of the National Living Wage as much as the way that level is imposed.

Government perspective

“Pay rise for the millions…”

The uprating of the National Living Wage is announced by The Chancellor of the Exchequer each year (usually as part of the Autumn Statement) after consultation with the Low Pay Commission.

Having announced this “pay rise for millions” the Chancellor is then likely to benefit from significant positive national media headlines and voter approval, whilst HM Treasury also gains through increased income tax receipts associated with higher salaries and lower payments for means-tested benefits such as Universal Credit.

The Scrooge analogy

So to stretch our Scrooge analogy further, this exercise is not so much picking the employer’s pocket, as one where the Chancellor openly borrows the employer’s wallet, buys a big round of Christmas drinks for all the low-paid employees present, takes the praise for doing so, pockets the change, and then passes the now much lighter purse back to the employer.

A political win-double

This unusual political win-double is unlikely to stop any time soon, and will no doubt continue well into the next parliamentary term regardless of who forms the next governing party.

Yet the implications for employers are far less welcome.

Costs & pay grades

Firstly, we have the pay increase itself…

Workers paid at the current National Living Wage level of £10.42 per hour will be receiving £11.44 per hour from next April. That is nearly a 10% salary increase and is the latest in a series of steep increases announced in recent years. Indeed, workers paid at the National Living Wage will be earning 28% more in 2024/25 than they were in 2021/22 – with employers having to absorb all those extra costs.

Does this mean a 10% pay increase across the board?

Yet these costs might not be limited to only the lowest paid. Many employers have established pay grades, with clear differences in pay between those grades. It follows that such employers might find themselves having to consider a 10% pay rise for all workers to maintain those differentials next year. Few employers would find that a comfortable prospect at present.

Attracting talent

Lastly, many employers set their pay to be slightly above the minimum level to attract and retain talent in a still tight recruitment market. Such a sharp increase means that they too will also have to spend more next year just to maintain their appeal as an employer of choice.

Benefits and salary sacrifice

The remuneration package

And then there are the implications for other elements of the remuneration package:

• Employer pension contributions will increase in April, as will any other premiums linked directly to salary level (such as Group Life Assurance and/or Group Income Protection).
• Employers may also need to revisit their salary sacrifice offerings. Employees using such a mechanism may have been comfortably above the National Living Wage level when payments began, yet the increases of the last three years may bring some perilously close to breaching the new legal minimum in 2024. An urgent review is recommended to avoid problems in this area.

The future

Corrective action now = securing a better future

The bottom line is that many employers may well feel that their pockets have indeed been picked when the April increase to the National Living Wage takes effect.

Embracing change

Yet A Christmas Carol is a tale of achieving future redemption through corrective actions in the present. It follows that HR experts should embrace the changes and challenges of the NLW increase early in the new year to achieve the best outcome for their organisation.