Living wage surge leaves employers a brutal choice

Statutory pay rises could trigger huge job losses in industries with large, low-paid workforces ‘Many companies simply cannot afford to go the suggested step further’

People need secure work and a decent salary to be able to pay their rent and build a stable future. Those are the words of London members’ club The House of St Barnabas, which used the explanation to justify why it guaranteed hours and the London living wage to its staff. The not-for-profit group – originally set up in 1846 as a refuge for “the waifs and strays of the turbid sea of human society” – redirects any money it makes towards ending homelessness.

Sadly, The House of St Barnabas closed suddenly last week amid rising costs. Its mission was more important than ever: homelessness is on the rise after a cost of living crisis, housing shortages, and surging inflation and interest rates. Its demise underlines a depressing reality: in today’s economy, it can be a difficult balancing act for non-profits and businesses alike to be viable and hold on to their values. Staff wages are just one cost base where many managers are struggling to keep both plates spinning. Bosses across the country are getting themselves into a tangle over pay behind closed doors, knowing that extra pay is the morally right thing to do but wondering how they can afford it.

Brewdog became the focus of attention earlier this month after it dropped a pledge to pay what is called the “real” living wage, a voluntary minimum set by non-profit the Living Wage Foundation. The brewer blamed cost pressures for the decision but attracted pelters from unions and staff.

Days after Brewdog’s about-turn, the outsourcing giant, Capita, followed suit. Later this week, shareholder activists are expected to pile pressure on to the US owner of Boots over its promise to pay the real living wage at the pharmacy chain – one pressure group wants it to go even further and expand its London pay policies across the whole of Greater London.

The Office for Budget Responsibility has warned that Britain is facing the largest reduction in real living standards since records began in the 1950s. Businesses don’t want to penny-pinch at a time like this, but many are being forced to reconsider their values out of necessity.

Executives admit that pay is a live topic inside boardrooms, especially ahead of AGM season. It is particularly a focus within low-paying sectors such as retail, leisure and hospitality. From a financial perspective, reducing wages to the statutory minimum is a simple way to save money; 14,000 businesses have promised to pay the real living wage, which is set at £12 an hour or £13.15 in London.

Capita’s decision to ignore the voluntary rate and instead pay 8,000 of its lower-paid staff £11.56 ( just above the mandatory figure) will save it around £3,520 every hour, according to The Telegraph’s calculations.

However, the reality of dropping the pledge is far more complicated. A big part of the problem is publicity: cut wages and you are probably going to find your company on the wrong side of negative headlines in the press.

The real living wage will soon narrow to just 56p an hour more than the mandatory minimum wage set by the Government, which is jumping by £1.02 to £11.44 from April. Most of those signed up to the voluntary amount would rather pay that difference then face the public’s wrath. And yet, already faced with a record rise in the mandatory minimum wage, many companies simply cannot afford to go the suggested step further.

The conundrum highlights the risks with outsourcing such a key decision to a third party. Sainsbury’s resisted becoming an official real living wage employer in 2022 for this reason, arguing it didn’t want to become accredited by the charity because it needed flexibility. That doesn’t mean it is ignoring the recommendations – like rival Aldi, the supermarket giant recently said it will pay staff a minimum of £12 an hour – but it means Sainsbury’s is not bound to pay the rate if it deems future increases unaffordable.

For those who are signed up and are now struggling, there really is no cunning route out of this one. You either pay up, or you don’t. Everyone knows that workplace perks don’t matter one jot for families struggling to get by. Try to cut corners by offering more money but fewer hours and nobody will stick around anyway. Investors are watching closely.

With or without the real living wage, the hefty increase in the statutory minimum wage could trigger job losses in industries with large, low-paid workforces. Currys’ chief Alex Baldock lashed out at the Government last week for ramping up minimum wage and increasing taxes at the same time. He echoed recent warnings from the bosses of Timpson and Next. There are concerns that the spike in wage bills could backfire and lead to job cuts, a lack of investment and closures. Revolution Bars recently cited higher pay as a key reason it has had to shut eight branches.

Companies that signed up to the voluntary real living wage promise and are now dropping the pledge have made the argument that lower pay is better than no pay as the change helps avoid redundancies. “We took a decision that will help save hundreds of jobs,” Brewdog chief executive James Watt wrote in a Linkedin post last week, defending the brewer’s decision not to pay the real living wage. “Business is incredibly hard, especially when the UK economy is in such poor health.” He isn’t wrong, even if the photos of him swimming with stingrays in the Maldives seven weeks before the announcement didn’t do him any PR favours.

A fear in some circles is that higher paid jobs could be axed as a result of the broad increase in wages. This could pile more pressure on the lower paid staff who are left standing.

Whether firms decide to pay the voluntary real living wage figure or not doesn’t take away from the reality of what makes a good employer. Tony Wilson, director of the Institute for Employment Studies, adds that if those on minimum wage end up quitting to go somewhere that offers 50p-an-hour extra, they are probably leaving for reasons other than money.

What might drive staff away? Paying the real living wage rate while trying to save costs by cutting hours, for example. Or getting rid of jobs in order to save money to fund the pledge, or perhaps offering less job security.

There’s no point looking like a decent employer without actually being one. The wage debate is a highly emotive one but focusing on a single number can often be overly reductive.

There is no one right answer. As money managers at Schroders pointed out during the debate over whether Sainsbury’s should join the voluntary living wage pledge in 2022, this is a topic that needs nuance. No chief executive wants to be viewed as a villain during a cost of living crisis but part of the job is to make unpopular decisions when necessary.