The Chancellor made clear in his budget speech that the new National Living Wage will be compulsory and will apply to workers aged 25 and over. It will be introduced from April next year, initially at a rate of £7.20 per hour and rising to £9 per hour by 2020. It is not clear at this stage whether the National Living Wage will be introduced under the current National Minimum Wage (NMW) rules or whether a new set of rules will apply.

Some have argued that the National Living Wage does not go far enough and does not amount to a true “living wage”. The Living Wage Foundation has calculated the current living wage at £7.85 per hour (outside London) and £9.15 per hour (in London).

The Chancellor’s announcement nonetheless represents a significant increase for workers aged 25 and over on the current NMW (£6.50 per hour for those aged 21 and over). It goes further than Labour even had promised in their election manifesto, and clearly will involve a significant increase in staffing costs for many employers.

The Chancellor said in his budget speech that the additional costs to employers will be offset by a reduction in corporation tax. However, this will provide little comfort for some employers in the charity sector, and other small and not-for-profit organisations.

In the care sector, in particular, providers will wonder where the extra money will come from without a corresponding increase in funding for social care. The Local Government Association have confirmed that they are of the view that councils’ outsourced contracts for provision of social and residential care would have to be renegotiated to take into account the fact that many workers in the sector earn less than £7.20 an hour. However, it is unclear where the additional estimated £330m would come from, and councils and providers alike may find themselves hamstrung by the limitations of their contract terms, and the restrictions on changing existing contracts that are imposed by EU procurement rules. Many providers will have existing contracts to deliver care services which could become unsustainable once the National living Wage is introduced. Individual providers will therefore need to understand clearly their options under the contracts they have already entered. This will be a real concern in particular for smaller providers and could seriously damage an already very fragile sector. On the positive side there are the potential grounds for challenge that the Care Act provides, but the prospects of making a judicial review in the coming months is rather cold comfort.

Social Care providers will now, more than ever, need to think carefully about what the staff costs will be for their organisation, what prices they agree for future contracts accordingly, and how they balanced it all out with the impact of increased regulatory scrutiny and transparency of ratings which is also not to be underestimated.

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Contact Matthew Wort or Anna Dabek.