Employment Costs

Employment Costs Are a Challenge for SMEs – But They’re Playing Fair

New research by the Federation of Small Businesses (FSB) shows that as employment costs rise, small businesses are playing fair and shunning zero-hours contracts.

A Living Wage

The FSB’s research found that 8 out of 10 small businesses do not employ workers on zero-hours contracts, and more than half of the businesses surveyed were already paying all their staff at least £7.83 an hour before the National Living Wage (NLW) rise in April this year, when that hourly rate became the new minimum pay rate for the over-25s.

FSB national chairman Mike Cherry said: “Very few of our members use zero-hours contracts. Where they do, they’re creating arrangements that work for both employer and employee alike.

“Small firms often play host to the kinds of supportive, flexible and family-centred working environments than can be found lacking in big corporates. What today’s findings show, once again, is that they also reward staff fairly.”

However, the FSB remains concerned about the apprenticeship levy, believing it’s not working as intended, and has also called on the Government to raise the Apprenticeship Minimum Wage (AMW) rate.

Currently, apprentices under the age of 19 are paid just £3.70 an hour, but there has been a steep decline in the number of people taking up apprenticeships across the UK.

“If we really want to create parity of esteem between academic and vocational routes into work, then paying apprentices £25 a day is not helpful,” commented Mike Cherry, who also wants to see more done to ensure apprenticeship levy funding is shared across supply chains and the current 10% cap on transfers increased.

To help small firms take on apprentices, he believes the exemption for training and assessment costs, which currently only applies to those with under 50 employees, should be extended to all small firms.

However, there is also concern about the suitability of young people for work. 70% of small firms said they feel school leavers are ill-prepared for the workplace, leading the FSB to call for a return to compulsory work experience for students under 16.

Impact of NLW on small businesses

The FSB found that the higher NLW is having a greater impact in specific sectors, with 60% of small retailers and 71% of accommodation and service companies saying that the NLW is putting upward pressure on wages. Companies have also had to contend with other rising costs such as increased employer auto-enrolment contributions, higher business rates and a cut to the Dividend Allowance.

The methods used to mitigate the effect of rising wage bills varies. Among small businesses affected, 70% said they are reducing profitability or absorbing costs, 41% said they are increasing prices and 30% are curtailing their investment plans.

“High employment costs dent the ability to invest in productivity-enhancing tech, innovation and training,” warns Mike Cherry. “Small firms operating in labour-intensive industries, especially retailers and childcare providers, are hit particularly hard by rising wages.

“Our high streets are up against a perfect storm of surging business rates, high inflation and rising employment costs.”

The solution? Mr Cherry says the Employment Allowance needs to be maintained, the promise of National Insurance holidays for small firms that employ those furthest from work needs to be delivered and Scotland’s lead in making childcare providers exempt from the “regressive business rates tax” must be followed.

How has your small business coped with rising employment costs? Are you worried about your ability to keep up with the upward pressure on wages as the national minimum and living wages continue to increase?

Kara Copple
An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.