Bosses Stop Staff Pay Rises to Fund the New National Living Wage

21 July 2017 -

Different WagesThe impact of the £9 per hour National Living Wage set to be met by 2020 is already leading some employers reportedly freezing or reducing staff pay to soak up the cost of the new measure

Jermaine Haughton

Despite coming into force more than a year ago, the UK’s National Living Wage is still a much-discussed topic for business leaders and managers alike, for which many businesses are still trying to adapt to.

Devised by former Chancellor George Osborne, the policy entitles workers over the age of 25 to earn a minimum of £7.20 per hour, with the total due to eventually increase to £9 per hour by 2020.  

With the government aims for the national living wage to reach 60% of median earnings by 2020, this means the minimum rate of pay will need to increase by just under 5% each April for the remaining 3 years.

Based on this, the Office for Budgetary Responsibility (OBR) estimates that a full-time worker who currently earns the minimum wage would earn an additional £4,800 by 2020.

The surge in costs for businesses has led some employers to limit the salaries of other staff members to handle the impact on the bottom line of increased wages for minimum wage earners, according to new research from online HR resource XpertHR.

Nearly a quarter (23%) of organisations say they have frozen or reduced pay for some workers to fund the extra increase in wages. Not only have employers had to find additional funds for the increases, the survey also showed many bosses feel it has impacted on their pay structures. More than half (59%) found that pay differentials had been squeezed; although a further 33% did maintain their differentials.

Sheila Attwood, managing editor, pay and HR practice at XpertHR, advises managers to seriously consider the impact the National Living Wage on their operations, when planning ahead for the coming years.

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

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

Independent retailers, restaurants, hospitality firms and entertainment businesses are those most likely to feel the full brunt of the changes, due to typically razor-thin profits and traditionally employing lower-skilled minimum wage workers.

The representative body for small local shops, the Association of Convenience Stores (ACS), for example, claims that the overall cost of a £7.20 living wage is around £166m. “We know from our work on previous increases in the minimum wage that the first thing retailers do is look at reductions in staff hours,” a spokesman said. “Other things that retailers may have to do to mitigate the cost are to delay investment plans, take on more hours in the business themselves and even reduce their product range.

“All of these measures affect the potential success and profitability of the store, stifling growth.”

Those opposed to the regulations argue employers are effectively losing a large element of control over what they pay some of their staff. Changes to pay structures have already been enforced at some companies, particularly smaller businesses with different tactics used to move budgets around, from some halting the recruitment of new staff to other banning overtime pay.

In other cases, there has been a reduction or stopping of bonus payments and the cutting back on other employee benefits.

But then there is still the potential issue of employee relations. How will bosses handle disgruntled supervisors who see their junior’s wages inflated to around the level of their own? Do you give your supervisors a pay rise too? Or perhaps, managers will increasingly employ younger or self-employed workers? Some difficult decisions are being made.


Not all quarters of the business community are averse to the staff income changes, however. And many have, by the contrary, welcomed it.

Some businesses, such as Costa Coffee, have passed on the costs to customers, and former Sainsbury’s chief executive Justin King even proposed that the policy will give employers greater impetus to make their workforces more productive, with fewer jobs.  

The Living Wage Foundation, working with Cardiff Business School, has highlighted key long-term benefits of the increased real Living Wage on British business.

Based on a survey of more than 800 accredited real Living Wage businesses – large and small – the report found that 93% of organisations reported they had gained as a business after becoming a real Living Wage employer.

Over half of employers reported that the Living Wage had improved both recruitment and retention; while 76% of large organisations (those employing over 500 people) reported improved retention of employees receiving the Living Wage. And as such organisations have embraced the changes.

The new XpertHR survey shows that many workers under 25 are also benefiting from the national living wage. Some organisations have chosen to extend its scope to include a wider group of employees, with more than half (54%) paying the national living wage to all employees, regardless of age.

Only two in 10 (23%) have limited it to employees aged 25 and over, with the remaining organisations paying it to employees aged 18 or 21 and over.

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