Workforce challenges on the horizon

Consumer businesses in the UK are facing an uncertain and challenging time.

Workforce challenges are causing a headache with the rising cost of employment, the shrinking pool of candidates due to political uncertainty, and continued scrutiny on contracts.

How is your business going to manage your people needs? Do you have a long term plan for recruiting and retaining talent?

We take a look at the three main challenges and how your business can begin to address them.

The rising cost of labour

The increase to the National Living Wage (‘NLW’) on the first of April 2017 applies to all workers aged 25 or over. The current rate is £7.50 per hour and this could increase to around £9 per hour by 2020.

However to meet the 2020 National Living Wage target of £9 per hour pay will need to increase by six – 6.7 per cent each year for the next three years for eligible workers.

This level of pay increase alongside the increases in business rates and higher import costs due to the current exchange rate, will place extra strain on consumer business, who rely heavily on workers earning at or near National Minimum Wage.

Businesses looking to recoup increased labour costs via savings elsewhere should proceed with caution. We continue to see well-known high street retailers and restaurants making headlines in the press after having found themselves in breach of the National Minimum Wage by deducting the cost of work uniforms from pay or using tips to contribute towards hourly pay rates.

The penalties for failing to comply are severe with fines of up to £20,000 per underpaid worker.

Perhaps more significantly, non-compliant businesses may be named and shamed by the Government. The resulting reputational damage will impact every area of the business from customers to employees and shareholders.

Businesses should carry out annual wage audits to ensure they are paying at least National Minimum Wage to all workers. These audits should be carried out in March to coincide with National Minimum Wage rate increases taking effect in April.

Expert advice should also be sought quickly if the business operates unusual payment practices and employees are paid at or near National Minimum Wage. John Lewis recently established that its practice of pay averaging to spread pay out over the year breached National Minimum Wage. It’s estimated that this practice, introduced to help employees’ financial planning, could cost John Lewis approximately £36m in back pay.

Shrinking pool of labour

Whilst Brexit will not take place for another two years, its ripples are already being felt within the sector. Every aspect of consumer businesses relies heavily on a pool of labour from outside of the UK whether it be pubs, bars and restaurants through to hotels, tourist destinations or retailers.

The UK’s future immigration policy is unclear and whilst negotiations will be closely watched, the increasing uncertainty over individuals’ right to remain at the point of exit will mean we may see more vacancies and less people available to fill them. Unless UK nationals plug this gap, businesses may soon find themselves severely understaffed or having to pay increased wages to attract staff.

If increasing wages is not an option, businesses should review their engagement practices to ensure they are flexible enough to adapt quickly to peaks and troughs in demand. For example, businesses could operate with a skeleton workforce and use casual or agency workers to meet peaks in demand. Businesses may also need to consider other employee engagement methods to attract UK recruits. This could include introducing apprenticeships which offer long-term career opportunities, or incentive schemes enabling staff to profit from future success of the business.

Could flexible working practices come at a price?

Zero hours contracts have been an attractive option for many consumer focused businesses. They allow flexibility, meaning staffing levels can be adapted at short notice to meet seasonal fluctuations in demand, allowing labour costs to be reduced during quieter times. However, their use is unpopular amongst trade unions and politicians who argue that the uncertain nature of the work is stressful for workers who have fixed costs to meet at the end of each month.

Matthew Taylor, appointed by the Government to review these working practices had suggested that businesses could be required to pay an hourly premium to use zero hours contracts. In his latest comments, he has hinted that businesses could be required to consider requests from employees wishing to convert from a zero hours contract to a permanent one. McDonalds recently gave its staff this option. Surprisingly, despite the unpopularity amongst politicians and Trade Unions, around 80 per cent of staff stuck with a zero hours contract as the flexibility suited them.

Matthew Taylor’s comments indicate that the introduction of restrictive measures on the use of zero hours contracts will be recommended in the Government’s working practices review. Whilst such measures may not necessarily include a financial penalty, there may almost certainly be a cost impact on businesses should the government decide to implement such recommendations.

Businesses should look out for Matthew Taylor’s report which is due to be released in June 2017. Whilst no immediate changes will be introduced, the report will give an indication of what businesses will need to plan for in the future.

What should I be doing?

  • Review your people budget and factor in future rises to have a clear view of your employment costs.
  • Look at your recruitment strategy and plan ahead to recruit for busy periods as it may be harder and take longer to fill vacancies over the next couple of years.
  • Have you got strong staff engagement, do you need to address retention issues and do you need to address existing flexible working arrangements?

Please contact Carolyn Brown or Steve Sweetlove if you would like to discuss your people strategy or the challenges you are facing in more detail.