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Who picks up the tab for the Living Wage?

20-Dec-16
Article By: Donald Mackinnon, Law at Work’s director of legal services

Many will have applauded the recent announcement during the Autumn Statement of an above inflation rise in the living wage affecting more than a million workers. However, for many employers, especially in the social care sector, this increase could be too big a burden to survive.

It is estimated that the Chancellor, Philip Hammond’s announcement will mean an average annual increase of £500 for full time workers over the age of 25 from next April. This gives employers less than five months to figure out how to find an extra four per cent to pay for the increase. The change will also have further knock on effects such as increasing employers' National Insurance contributions, and may mean employers will need to make adjustments to maintain wage differences between different grades of workers.

Although no one would argue with the adage of a fair day’s pay for a fair day’s work, businesses will have some tough decisions to make in the coming months. With the additional burden of recalculating holiday pay to include overtime, allowances and commission, recent court decisions on whether travel time counts as working time and pensions auto-enrolment, many businesses are struggling to keep their heads above water.

Employers could aim to weather the storm by boosting the productivity of workers, accepting lower profits or raising prices but for many more drastic options such as cutting jobs or reducing service may be their only option. The reality is the new living wage could lead to many UK businesses struggling financially, especially those who traditionally pay low salaries.

While some sectors, such as hospitality and retail, can consider passing increased costs onto their customers, this option is difficult for other sectors, such as the care sector. The majority of adult social care is commissioned by local authorities and health trusts and with Government budgets being cut drastically in recent years, times are tough for the care sector. A perfect storm of increasing costs and static or reduced funding means that margins are being squeezed and some care providers choosing to give up some contracts rather than run them at a loss.

Without the government picking up the tab for the funding gap, put at £2.6 billion by the leaders of the four main political groups in local government, the future for social care sector looks bleak.

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