Living wage word cloudFrom 1 April 2016, all workers over the age of 25 will have to be paid the National Living Wage (“NLW”) of £7.20 per hour. For workers under the age of 25, the National Minimum Wage (“NMW”) will continue to apply.

The NLW represents a 50p (7.5%) increase per hour compared to the current NMW for those over 25. In addition, the Government has stated that it aims to increase the NLW to more than £9 per hour by 2020, which the Office for Budget Responsibility estimates would be 13% higher than the projected NMW figure for 2020 for the over-25s.

Whilst this is welcome news for workers who will be entitled to the NLW, the increase in staff costs will present a real issue for businesses, especially those who currently employ a large percentage of their staff on NWM rates in sectors which are already struggling.

Sectors most vulnerable to the rise in their cost base include retail, hospitality and social care. In the social care sector in particular, staff costs are the single largest category of cost, with as much as 60% of revenue in the care home industry going towards staff costs. In that context, a 7.5% increase in wages for the over-25s will put real pressure on the profitability of those businesses. This will translate into even greater pressure upon occupancy rates within the adult social care market. Minor fluctuations in the occupancy rate against an increase in base costs may lead to those businesses no longer being profitable.

In addition, if providers in the adult social care market have a fixed budget for staff costs, they will have to attempt to offer the same level of service with less resource. If certain standards of care cannot be met, then the provider runs the risk of their rating being downgraded by the Care Quality Commission, which in turn may result in a decrease in occupancy rates and may potentially cause them to be in default under the terms of their funding arrangements.

There will be an inevitable knock-on effect on those who are currently paid slightly more than the NMW; those employees will expect a pay rise in order to maintain the pay differentials in the employer’s organisation. A failure to do so may result in those employees feeling disincentivised and undervalued.

Businesses are therefore going to be under pressure either to make their workforce more efficient, by increasing output at the same time as the staff cost base increases, or make efficiency savings elsewhere in order to maintain their current level of profitability.

For businesses that are currently only marginally profitable, the introduction of the NLW may push them over the edge and make them unviable as going concerns.

Whilst some commentary has suggested that businesses may look to employ more under-25s in order to bypass the NLW wage increases, such behaviour is likely to fall foul of the age discrimination regime, which could lead to adverse publicity and may ultimately prove to be counter-productive.

With the economy remaining in a fragile state, this laudable change for social justice could be the final straw for businesses on the edge – watch this space.