Playing the grey: non-compliance and the National Living Wage

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By Professor Monder Ram, Director of the Centre for Research in Ethnic Minority Entrepreneurship (CREME)
Department of Management, University of Birmingham

“I don’t know how we’re going to [cope with the annual upratings of the National Living Wage] … We have to negotiate price increases with the supermarkets every year going forward. If we don’t get the increase, the business is not sustainable, because once you go into making losses you can’t keep pumping in money” (Lloyd, owner of PatCo, 2017)

This comment from a hard-pressed business owner – who I have known and researched for over 20 years – is worrying. PatCo is a market leader in its food market niche and Lloyd has always been proud of the firm’s modern employment practices, including compliance with regulations. Yet he struggles with increases in the National Living Wage (NLW), which rose from £7.50 to £7.83 in April 2018.

If Lloyd is finding the NLW and competitive environment difficult, what about the more conventional retailers, restaurateurs and small-scale manufacturers that make up much of the business landscape in our cities? Are they coping or slipping into non-compliance? My colleagues and I at the Centre for Research in Ethnic Minority Entrepreneurship (CREME) and Professor Guglielmo Meardi (Warwick Business School) have investigated the responses of such firms to the NLW in a project for the Low Pay Commission.

Our research took the form of detailed qualitative interviews with owners and workers in 24 firms. We were interested in actual responses, including non-compliance; surveys that are conducted remotely are unlikely to pick up such processes. Our sample is novel as many of the firms were studied in previous research. The research highlighted three broad patterns of response.

First, firms like PatCo that complied with the old National Minimum Wage (NMW) continue to pay the NLW. Compliance for these firms is often necessary to operate in a particular market niche (like supplying to major supermarket chains). But it appears that the NLW is proving more difficult to accommodate than the NMW due to the rate of increases and the tough competitive environment.

Second, many firms are struggling to comply and have to make changes to recoup the cost of the NLW by finding savings elsewhere in the business. There are instances of firms that have removed overtime payments, reduced staff and cut training budgets. Owners in this group find few benefits in paying the NLW and are uncertain of how they will cope with increases in the future.

And finally, most of the cases in our study do not comply with the NLW. The boundary between compliance and non-compliance is blurred. One factor is the ambiguity over the status of workers in many firms. Firms appear to employ some workers at the NLW, but many also employ ‘helpers’ at below the NLW as and when the firm requires them. A second reason why businesses may not enforce the NLW is that the risks of being penalised are felt to be low, particularly because employers have little fear of complaints from workers. A third factor is the reluctance of workers to report non-compliance, largely because of the nature of their relationship with the businesses. These relationships are often based on strong personal ties, which serve to counter overt resistance from workers. Acceptance and accommodation therefore characterise employment relationships in these firms rather than obvious exploitation.

The evidence from our case studies shows awareness of the NLW, but very little awareness of new enforcement mechanisms. While this can change, the depth of non-compliant business practices suggests that for large-scale improvements in wage compliance, small- and medium-sized enterprises may need more specialist support and peer pressure.

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