The living wage – does it make financial sense?

In and amongst last weeks fan fare of the American Presidential election there was a UK story arousing discussion. Last week was the UK’ Living Wage Week, where businesses are encouraged to pay their lowest paid workers more than just a minimum wage. The current living wage level is set at £8.55 in London and £7.45 elsewhere in the country. At the moment the scheme is voluntary and there is no law that says businesses have to change salaries, the question for many is whether or not they need to be seen to be paying a living wage and weigh this against the potential drawbacks.

Why should businesses consider this?

  • It makes for happier employees who are more loyal to their employer & decreasing staff turnover and increasing productivity
  • Leads to a decreased in absenteeism (statistics suggest up to 25%)
  • Presents the opportunity to lift many out of poverty and gives them a better standard of living & fulfilling a businesses moral obligation to their staff
  • It is an excellent PR piece for businesses and for CSR policies

Why might a business need to think carefully?

It may be difficult to argue that workers who work hard and long hours, often travelling long distances to work should not be rewarded with a salary that allows them an independent, more secure life. But, how does this affect a small business and can it benefit in the longer term? While many argue that employee moral is bolstered by such a pay increase, in reality it may be counter productive. For example a new member of staff on a living wage as opposed to minimum wage may mean that they have to forfeit a pay rise at their first review due to the extra wage throughout the year. This could be worse for moral in the end and cause for the staff member to think about taking their talent elsewhere. Some other considerations might be:
  • Increased wage equals higher NI payments (and if relevant and linked to salary, increased pension contributions) for the business
  • A need to reconsider salary bandings across all employees in order to accommodate experience and skills
  • Employers paying a living wage are encouraged to review annually and with inflation levels are likely in increase each year
All of these things create a more expensive outlook for businesses and it easy to see why many are turned off by the idea. It is likely that in the wider scheme of things the idea will not catch on, given that approximately 80% of businesses fall into the small-medium category where balance sheets are tight. It may be that it works better for the more unskilled jobs where the job is never going to change and evolve, like a cleaning role. As a business owner you may want to think about using suppliers, such as cleaning companies, delivery services etc, who endorse the living wage as this may be a way to support the concept as this will contribute on its own to any CSR policies and strategy, even if it does not make sense at this time for your own business. If you are thinking of implementing the living wage or would like to know more about how these ideas might impact on your employment strategy, Setfords has a number of experts who can guide you through the legal implications. We also offer free initial half hour consultation to give you the opportunity to discuss your matter with no financial obligation.