Argos named and shamed among minimum wage offenders

Minimum wage: care provider says higher rate will drive reform

19 August

A leading provider of outsourced social care services has said the higher minimum wage coming into force from next year and escalating to upwards of £9 per hour from 2020 could wipe millions off its profits – but that 'chaos' in the sector would lead to reforms that would offset most of the hit.

The boss of Mears Group, one of the largest firms providing social care services to the elderly and disabled on behalf of local authorities, told The Times the new 'national living wage' could eat into its bottom line by around £5m. Based on company results published yesterday this would equate to well in excess of 10 per cent of operating profits in its care division – and 20 per cent of total group earnings after overheads.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

However, David Miles also pointed to what the newspaper branded "chaos in the social care sector", where council cut-backs and repeated delays to introducing funding reforms means most contracts are agreed on a short-term basis of no longer than 18 months. This will "perversely" help to "immunise it from the worst of the rising labour costs", which could be passed on to providers and "negotiated down to lower than £1m".

Elsewhere in the sector, rival Mitie has "been briefing investors that it does not expect a material effect on its margins" because its contracts allow it to "pass on rising labour costs". Other outsourcers are also watching for a hit to margins, with cleaning and construction contractor Interserve warning last week it could face a temporary hit of £10m to £15m next year.

The BBC says the changes to labour costs will increase the minimum amount councils will need to pay for outsourced care services to £16.70 an hour, well up from the current average of £13.66 and more than was paid in any area last year. The UK Homecare Association believes that the already stretched council budgets will need to be supported with additional central government funding of up to £750m to cope.

Miles said the sector "has reached breaking point with a number of our competitors looking for the exit", but that "these pressures have in turn created a momentum for change". He believes the minimum wage hike will "continue to encourage the development of a more outcome orientated system" based on "a single ring-fenced settlement for both the NHS and social care", which will benefit companies like his in the long term.

Minimum wage: cleaning contractor claims £15m hit

14 August

Business leaders against the introduction of the 'national living wage' have been saying for months that it will hit profits, but now one cleaning contractor has put a figure to its expected loss of between £10m and £15m.

Interserve, a FTSE-250 outsourcer that employs 15,000 cleaners in offices, public buildings, shops and trains nationwide, issued the profit warning this week alongside its half-year results figures, which has sent shares tumbling by around five per cent over the past two days.

The Times notes that its numbers are based on paying its 10,000 cleaning staff who are over 25 – therefore qualifying for the new higher amount – and between them work 250,000 hours a year, the additional 70p on the current £6.50-per-hour minimum rate. Starting in April 2016 at £7.20, the living wage will rise incrementally and be set at 60 per cent of median earnings by 2020, when it is expected to be worth more than £9 per hour.

Interserve also factored in knock-on effects for "supervisors and other senior staff, who would expect a wage increase to protect their pay differential from junior employees", as well as "a related rise in agency worker costs and rising pay- related bills within its own supply chain".

The hit is essentially a one-off. Interserve said "labour cost provisions in contracts would remain the same" in 2016, but as it agreed "new or renegotiated contracts" it would "be able to pass on higher labour costs to customers".

Contractors have been among the hardest industries to crack for campaigners for the independent living wage, which is currently £9.15 in London and £7.85 in the rest of the country and is the amount designed to reflect the pay needed to afford a decent standard of living.

As many as 50 cleaning and other outsourcers, including big-sector names such as ISS, are registered with the Living Wage Foundation as living wage employers. But in a sector dominated by agency staff and where costs are determined by competitive contract agreements, this means only that direct employees are paid the rate and businesses are offered the choice of paying a higher service charge or opting for the "market" rate.

Interserve will survive the hit to its margins. In the first half of this year revenues rose 16 per cent to £1.5bn, with pre-tax profits nearly a fifth better at £33m. The Daily Telegraph cites a broker estimate of pre-tax profits for the next financial year falling to £125m from £135m, but still up from a target of £119m this year.

Will supermarkets seek to avoid higher minimum wage?

04 August

Britain's big four supermarkets may stop hiring over-25s and push more services online as they struggle to cope with a profit hit of up to 10 per cent from the new higher minimum wage, according to a report.

Ratings agency Moody's said Tesco, Asda, Sainsbury's and Morrisons employ around 750,000 people who would be affected by the new 'national living wage', which will be set at £7.20 an hour in April 2016 and rise to above £9 an hour by 2020. The report estimates the early stages of the phased introduction would "not be overly taxing", says The Guardian, but that over time it will have a "material impact". It claims Morrisons' profit may be as much as 10 per cent lower by 2017 alone.

The food and drink sector, which employs many of the 6 million people Moody's says will benefit from the new rate, is particularly concerned over the impact of the changes. The report states supermarkets may seek to hire younger staff and move more services online to reduce staffing costs. Pub groups have also spoken out about the squeeze they will face on margins.

Focus has fallen on larger employers because of a range of measures in the Budget to mitigate the costs for smaller firms. The Daily Telegraph notes these include an increase from £2,000 to £3,000 in the discount offered on employer national insurance contributions and a big increase in the long-term allowance for tax-deductible business investment expenses to £200,000.

There are also those who argue that purely looking at the cost in payroll terms fails to take account of benefits to employers of improved wages, including reduced employee turnover and associated hiring costs, and improved productivity. Then there is the moral argument over whether workers were getting a fair deal from employers at a time of escalating wage inequality – and the reality that George Osborne was seeking to reduce the £30bn tax credits bill.

In the US, where many cities and regions are moving towards a $15 an hour (£9.60) minimum wage, economists have been split on the merits of sizable hikes. Writing in the New York Times David Brooks says one argument that "seems to make sense" is that higher wages "will produce winners among job holders from all backgrounds, but it will disproportionately punish those with the lowest skills who cannot "justify higher employment costs".

Businesses line up against minimum wage rise

30 July

George Osborne finds himself in unfamiliar territory for a Conservative chancellor, facing a growing backlash from businesses over an interventionist policy to boost wages for the lower paid.

The latest criticism of his 'national living wage', effectively an increase in the minimum wage to £7.20 per hour this year and in excess of £9 by 2019, has come from pubs and restaurants group Mitchells & Butlers, which owns the All Bar One and Harvester brands. The Times reports it warned in its quarterly results briefing that the cost of increasing wages could force it to cut costs elsewhere.

The paper says the comments come in the wake of remarks from Tim Martin, the chairman of JD Wetherspoon, who earlier this month said that increased labour costs affected pubs with "far greater force" than supermarkets and that the chancellor's announcement would be a major blow. Ratings agency Moody's has said the changes will result either in price increases or job losses across the sector, according to trade website Food Manufacture.

Another area which is likely to be hit is the home care sector, which is funded in the main by councils buying services from third parties. Earlier this week the UK Homecare Association said the introduction of the new minimum wage will require councils to pay at least £16.70 an hour for services, covering staff wages, running costs and around 50 pence profit, the BBC reports. According to the association's own research, the current average is £13.66.

This, it said, means an extra £750m may need to be put into the system next year to cope with the wage demands, at a time when budgets are being cut and councils are seeking to make savings.

Osborne's plans are designed to save billions of pounds currently paid in tax credits to those on wages too low to provide a reasonable quality of life. The introduction of the new minimum wage coincides with a move to taper off tax credits at a lower level and remove child tax credits from those with three more children.

Some in the business community have said that the argument against the living wage has been overstated. The Institute of Directors has said that nine out of ten of its member already pay the new minimum, while the Social Market Foundation revealed [4] that while some families with one earner could lose hundreds of pounds a year, those with both parents working would be more than £6,000 a year better off.

Minimum wage rise: Osborne's living wage plan criticised

9 July

Business organisations and poverty campaigners alike have criticised George Osborne's plans for a national living wage – effectively a large rise in the minimum wage – which were announced in yesterday's Budget.

The Chancellor said that from April next year all employers must pay workers aged 25 and older a "national living wage", which will initially be set at £7.20. The present national minimum wage is £6.50.

Businesses have warned that they will not be able to afford to pay, and will have to cut jobs. John Cridland, the outgoing director-general of the CBI, said: "The CBI supports a higher skilled, higher wage economy, but legislating for a living wage does not reflect businesses' ability to pay."

Small businesses are particularly concerned. John Allan, national chairman of the Federation of Small Businesses, said: "The introduction of a new national living wage will pose significant challenges for many small firms, particularly those in the hospitality, retail and social care sectors."

While the Office for Budget Responsibility says that a total of six million earners will see their pay packets boosted as a result of the policy, it warned that some 60,000 people could lose their jobs as a result of the changes.

However, Simon Walker, director-general of the Institute of Directors, believes the problems will be minimal. He said: "Nine in ten IoD members already pay even their most junior staff the living wage, and will accept this deal from the chancellor."

Poverty campaigners are mostly unimpressed. The Living Wage Foundation argues that Osborne's new 'national living wage' is not actually a living wage. "Without a change of remit for the Low Pay Commission this is effectively a higher National Minimum Wage and not a Living Wage, it said.

Alison Garnham, chief executive of the Child Poverty Action Group, welcomed a "higher minimum wage" but argued it "cannot disguise the truth that this is a budget that damages the economic security of working families".

Labour leadership contender Liz Kendall described the living wage as a "con", while the Institute for Fiscal Studies warned that Osborne was "taking a bet" on the economic impact of the policy.