From 6 April 2016, over 25s will see the effect of the National Living Wage (NLW) being introduced, increasing their hourly rate from £6.70 to £7.20. This has risen over 43 per cent since 2005 and by 2027 the rate is forecast to be over £10 per hour.
How will clients manage their costs?
For clients already operating on a razor thin margin, the statutory increase in the NLW could mean higher overheads. Even if a business runs into financial difficulty, or ceases to trade and has no assets, each employee is entitled to outstanding wages etc.
Those hit hardest are expected to be businesses operating in the retail, social care (care homes), education (children’s nurseries), leisure and hospitality and infrastructure (plumbers and security) sectors.
What if your client cannot pay these extra costs
The Government offers two schemes which can assist directors who may not have enough money to pay staff, to help protect their employees.
Avoiding financial difficulty
The Financial Difficulty Scheme can help businesses to avoid formal insolvency by enabling them to cut costs, enabling them to stay afloat by making redundancies, even when they are unable to afford the cost. The National Insurance Fund (NIF) can make an interest free loan available to the company to cover the cost of redundancies, which the company can pay back over time. An application would need to be made to the NIF with evidence to show this is a suitable course of action.
Protecting the employee
When a business has become insolvent, the Redundancy Payments Service (RPS) can protect an employee’s rights to monies due to them. Provided the business goes into formal insolvency, employees will be able to recover their outstanding entitlements, even if the business has no cash or any assets.
RPS allows employees to submit claims, up to certain statutory limits, for unpaid statutory monies. Payments are capped at £479 per week (from 6 April) and are usually processed by the RPS within 4-6 weeks. Consequently, an employee with a reasonable length of service can potentially recover a substantial amount of money.
Directors can also claim monies from the RPS, provided they can show they were employees of the business. Such payments can help the director pay for the cost of the liquidation, which will therefore enable their staff to receive any employee monies due.
Exceptions to the rule
If a business is dissolved or struck-off, the RPS will not make any payments to employees. RPS will only pay following the employer entering a formal insolvency process, an administration or liquidation. The only exception for access to this funding is when a business is facing financial difficulty.
Options available to directors
When a director is looking to wind-down the business or is considering available restructuring options, it is important to get good advice on the most appropriate route. The chosen solution will determine whether employees receive their outstanding entitlements.
We understand that in any business, employees are a key stakeholder. The RPS and NIF schemes are available to ensure that monies can be paid to employees, even if their employer faces financial difficulty.
Delivering effective turnaround strategies and restructuring plans can often not only lead to improved outcomes, but it can reduce the stress for stakeholders. Please contact your local RSM adviser to find out more on how this may affect your clients.