Small businesses struggle to comply with National Living Wage

Small businesses are stretching to meet the National Living Wage, new research has revealed.

The Federation of Small Businesses (FSB) 2016 Q2 Small Business Index has found that small firms are meeting the challenge posed by the National Living Wage (NLW) with the majority (59 per cent) absorbing the costs by taking lower profits.

The NLW was introduced in April 2016, and almost half (47 per cent) of small businesses now cite wages as the main contributor to the rising cost of doing business.

The FSB is now calling for the Low Pay Commission to be given flexibility on how to meet the Government’s NLW target of 60 per cent median earnings by 2020. It wants this target adjusted if it becomes clear the economy cannot bear the rapid pace of the NLW increases.

The National Living Wage is predicted to rise by £1.85 per hour over the next four years, reaching £9.05 by 2020.

The majority of small businesses already pay their staff above the new NLW of £7.20 an hour. Despite this, a third said the new wage had led to some increase in wage costs, and one-in-five said labour costs had gone up significantly.

Of the businesses that reported increased labour costs from the NLW, the majority (59 per cent) absorbed the increased cost through profitability.

However, others resorted to increasing prices (35 per cent), reducing staff hours (24 per cent), cutting investment (23 per cent), and recruiting fewer workers (16 per cent) to stay afloat. Some also sought to meet the increased cost through improved efficiency (13 per cent).

The sectors found to be most affected by the wage increase were those with tight margins and where low wages were more common. In particular, retail, wholesale and hospitality, and accommodation businesses said they have been negatively impacted by the NLW.

Mike Cherry, national chairman at the FSB, said: “Small employers have stretched to meet the challenge set by the National Living Wage, with many paying their staff more by reducing operating margins. This will get harder for many firms in later years, with the targets set in a ‘pre-Brexit-decision’ economy.

“Considering the uncertain economic climate, the Low Pay Commission must be given the opportunity to adapt the target in future years, so that it can be met without job losses or harming job creation. The rate of the National Living Wage should be set at a level the economy can afford, based upon economic and not political priorities.”