The government sets a national minimum wage and a national living age to guarantee the lowest-paid workers get a minimum standard of pay. This is a legal requirement for all businesses, of any size, so it is important to make sure your company is complying with the latest rates for the different age groups and apprentices.

National living wage vs minimum wage – what’s the difference?

Introduced in 2016 by the government, the national minimum rate of pay for workers who are at least 25 years old – the national living wage.

Changes made in 2021 saw the national living wage age bracket reduced to 23 and over, and a new national minimum wage set out for workers aged 16 to 22.

So to summarise, the difference between the national minimum wage and the living wage is related to someone’s age:

• the living wage applies to workers aged 23+*.
• the minimum wage applies to workers aged 16 to 22.
• apprentices aged 16 and 17 get a different rate of pay.

Workers under the age of 23 are eligible for the National Minimum Wage (NMW), which is the lowest hourly rate if they fall under one of the following categories:

• Full-time employee
• Part-time employee
• Casual employee
• Agency employee
• Apprentice, in some instances.

Employers are required to pay employees aged 23 and above at least the National Living Wage.

Impact on SMEs

Profitability

For the manufacturing, production, and hospitality industries, the increase in the National Minimum Wage will significantly impact their bottom-line profitability due to the volume of minimum wage staff they employ.

Their business model is such that there is often not the capacity to pay staff more, especially during this economic slump, where their margins are already squeezed.

Labour

Since the end of the UK’s transition out of the EU, the introduction of a new points-based immigration system shrank the UK labour pool, we saw many companies increase salaries to try and attract both temporary and permanent candidates, during this labour shortage. These employees, who had received an increase, will now find their pay is aligned, once again, with NMW.

Some SMEs have opposed the rise, as they just cannot afford to pay an extra £1600 a year for a full-time NMW worker (who is aged 23 or over).

Price increase

October 2022 data from The Office for National Statistics shows that a sizeable proportion of businesses are yet to pass higher costs to consumers through price increases. This is particularly apparent for small businesses with 0-9 and 10-49 employee ranges. This finding falls in line with reports that smaller SMEs are afraid to pass on a price increase to their customers, for fear of losing their customers to larger businesses that are able to keep their costs low due to purchasing power and resource-rich operational models.

Practical steps

We look at some steps our clients are taking now to counter the potential impacts these NMW increases will have on their business in April.

Change Employee Working Hours

Look at both full-time permanent employees and temporary staff contracts. There are some work-life-balance changes you could make to minimise the impact on employee satisfaction:

• Introduce a shorter working week, an early finish or 1/2 day Friday.
• Temporary workers start 30 minutes later.
• Add in more unpaid breaks during a shift.

Holiday Pay

Employee Holiday Pay is only paid on contracted hours, not overtime. You could employ fewer NMW workers but introduce an overtime programme. This strategy will allow you to reduce your wage bill but will minimise the impact on productivity.

For example, You currently have two temporary workers who both do the same job on the production line. They both are on a 5-day week, and their holiday entitlement works out to about 2.3 extra days of pay per month worked. If you employ only one temporary worker but offer overtime across other workers to make up the shortfall on your production line, you have saved a minimum of £24 on accrued holiday pay, together with the reduction in the overall wage bill, and temporary worker fees.

Outsourcing

Reconsider whether there is an area of your business that can be outsourced to an external Company. From reception to administrative support, there are plenty of virtual opportunities that can be used to allow you to increase and reduce the size and scope of your operation due to seasonality.

Employee Review and Restructure

Reevaluate the productivity of employees through appraisals. Where there are gaps, manage permanent employees through targets or undertaking a restructure.

At this point, it is also worth looking at those employees who will be automatically moved to the NMW with the increase. Is there a chance you could lose good people? Investigate whether contractual changes like an increase in holiday entitlement, flexible working and pension scheme, or an improved workplace culture could alleviate any disgruntled employees.

Celebrate Employee Success

Another way to promote a better culture and environment while having to make payroll cuts is to champion the people.

Work shadowing – the opportunity to learn about other areas of the business and equip your employees with a new skill.

Reward and recognition programme – include a list of achievements or merits as milestones, length of service, welcome bonus, reward voucher scheme for employee of the month, through to discounted gym membership.

Job share – offering job-sharing, lets you keep the best and brightest employees when life events make full-time work a challenge.

All these types of well-being activities motivate employees and reduce hiring costs through retention.

Final Thought

The upcoming NMW increases create a very real, short-term challenge for many business owners in the manufacturing, production, and hospitality industries.

Business owners should already be considering their current business models and investment plans and preparing to make significant changes to their employment contracts to put them in a longer-term stable position.