“Make sure we’re ready for the National Living Wage” – this needs to be pretty high on the HR team’s task list.

It hasn’t escaped anyone’s attention that in April, we see the introduction of the National Living Wage (NLW) replacing the National Minimum Wage (NMW) and requiring employers to pay £7.20 an hour for employees aged 25 and over and for those full time employees currently on the NMW of £6.70, this effectively represents an increase in basic pay of about £1,000.

Working on the basis that you’ll never please everyone all the time, there will be many employees for whom this is great news but there will also be groups who will say it doesn’t go far enough and that there is a difference in the cost of living in and out of London but, to be fair, the NMW made no distinction. Not only does the NLW prescribe that we need to pay £7.20 from April, we know that the target is £9 by 2020.

The NLW is a new cost for employers and certain low pay sectors such as retail, hospitality, cleaning and care will be the most impacted.

When a Company looks at its annual “across the board” increase, it looks at the previous 12 month performance, prospects for the next 12 months and bases its % increase on what it can afford. Crucially, also, there needs to be one eye on retention and specifically – is a below inflation increase going to mean that we lose good people to competitors. With the NLW, there is no scope to factor in the current financial performance of the business because it’s a legal requirement and for someone on £6.70 doing a 39 hour week, the jump to £7.20 is an increase of £1,014 or 7.46%.

That same employee in April 2020 will be on £9 an hour and will have seen their basic pay increase by over £4,500 or 34% since February 2016.

Unfortunately, you can never look at a situation in isolation and the true cost to the employer is greater than 7.46%. Those cleaners or care workers on £6.70 an hour getting a 70p increase in hourly rate have a line management structure above them and immediately, the gap will be closing and by 2020, the differential will be considerably eroded. The Chartered Institute of Personnel and Development have already challenged whether employees will put themselves forward for promotion and taking on additional responsibility if the pay differential is eroded too greatly.

Furthermore, when the basic rate increases, the employer faces an additional NI bill and the basis of premium rates for overtime increase, not to mention the cost of pension contributions, holiday pay, life assurance premium on higher sum assured etc. However, it is all a level playing field for employers because everyone will be in the same position but ultimately, there will be a focus on output and productivity to ensure that the NLW is affordable to employers.