How the Introduction of the National Living Wage Affects SMEs

How the Introduction of the National Living Wage Affects SMEs

In an effort to improve workers’ terms and conditions and eradicate low-pay employment, Leo Varadkar, the Tanaiste and Minister for Enterprise, Trade and Employment, has announced a National Living Wage. The National Living Wage in Ireland will be 60% of hourly median wages introduced over four years and is expected to replace the National Minimum Wage. The announcement comes after the end of the employment wage subsidy scheme for businesses, which means employers have to prepare for the additional costs. 
Discover what the National Living Wage entails and its impact on small and medium-sized businesses in Ireland.

What Is National Living Wage? 

The National Living Wage is an income that allows employees to meet the minimum acceptable living standards. It is based on the principle that employers should pay adequate income to afford the workers acceptable standards of living. For instance, workers should live with dignity and participate in normal day-to-day activities. A living wage provides for needs, not wants, to make it an income floor for affording the essentials of life. Earnings below the threshold suggest workers are forced to live without certain basic needs. 
With the National Living Wage announcement, employers will be expected to adjust workers’ earnings in phases until they meet the set amount. The new living wage will be set according to the recommendations of the Low Pay Commission. The Low Pay Commission body comprises employer and workers representatives and industry experts who use evidence-based research to decide on the living wage and recommend steps for implementation. 
Some of the recommendations from the Low Pay Commission include the following: 
• The adoption of a fixed threshold approach in determining the living wage. For instance, the commission recommended a fixed threshold of 60% of the median wage instead of calculating the living wage using the basket of goods approach. 
• Implementation of the living wage in stages by adjusting the minimum wage within five years to match the living wage expectations. 
• After achieving the 60% median wage threshold, the commission will review its economic practicality and increase the living wage to 66% of the median wage. 
• The Low Pay Commission can slow down or speed up the progress towards achieving the 60% hourly median wage based on the economic conditions. 

What Are the Benefits of a National Living Wage? 

Introducing a National Living Wage is one of the measures aimed at improving the conditions and the pay for minimum wage workers. The living wage will afford them a socially acceptable lifestyle, and they can afford their basic needs. During the introduction of the National Living Wage, Mr. Varadkar described it as the legacy of the pandemic. He also recognised the contribution of low-income workers to the economy through their services in the retail, manufacturing, transport, and hospitality sectors. 
Besides, the new living wage is more practical since it is based on research done by Maynooth University and Low Pay Commission. Industry experts and representatives from the employee and employer groups were also part of the decision-making. Hence, the figures recommended for the living wage reflect the cost of living and the economy.

National Minimum Wage 

The National Minimum Wage has been around since April 2000 and was 60% of the median wage. While the minimum wage has increased gradually, it doesn’t match the average income and the increasing cost of living. For instance, the minimum hourly rate for adults above 20 is €10.50 per hour. The downside of the National Minimum Wage is the lack of research and evidence used in setting the amount. Policymakers usually set the rate, which doesn’t always change with the changing cost of living. 
With the announcement of the National Living Wage, the minimum wage will be phased out since it is updated yearly to reflect the changes in the cost of essential living standards. For starters, the National Minimum Wage will increase gradually until the living wage replaces it. In January 2023, the minimum wage is expected to increase to €11.30 per hour for adults above 20. The amount will increase over four years until it meets the National Living Wage requirements.

What Is the Timeline for the Introduction of the National Living Wage? 

According to the recommendations by the Low Pay Commission, the National Living Wage will be introduced in Ireland from January 2023. There will be a gradual increase in the minimum wage until 2026, when the living wage will replace the minimum wage. 
The first phase in January increases the minimum wage to €11.30 per hour, which equates to an 80% increase in the minimum wage. The 164,000 employees in Ireland earning minimum wage in 2021 can expect an increase in hourly wages. If the commission were to implement a living wage of 60% of median earnings, workers would earn €13.10 per hour. 
The research undertaken on behalf of the commission shows that the median wage can be increased without affecting employment rates and hours worked. When the commission achieves the floor rate in 2026, it will recommend the next steps for increasing the living wage to 66% of the median wage. 

What Is the Impact on Employers? 

The announcement of a National Living Wage comes at an additional cost to small and medium-sized businesses since the hourly rates for minimum wage workers will increase. Fortunately, you have time to prepare for the new wages since the living wage is implemented over the course of four years. 
You can review your business costs and make projections on how to cover the additional wage costs and the annual increments. For instance, in January 2023, the hourly wage rate will increase by 80%, which means you have to adjust your budget to cover the additional salary expenses without reducing employees or tampering with the work hours. 
If you operate a small or medium-sized business in retail and hospitality, you rely on a significant number of minimum-wage employees. Hence, adjusting a living wage can cause financial constraints to your business. That means you need to review your financial policy and find ways to increase the business income or lower expenses to afford the living wage rates for workers. 
The Low Pay Commission recognises the challenge faced by hospitality and retail businesses and has recommended a support mechanism to be introduced for employers to avoid layoffs. Besides, the Low Pay Commission will regularly review the economic conditions and prevailing cost of living and adjust the implementation of the National Living Wage. For instance, if the economy doesn’t support the payment of a living wage, the commission can slow down its implementation. 
Additionally, the Low Pay Commission recommends the provision of an exemption clause for employers facing financial hardships. The exemption will allow employers to pay the minimum wage until they can afford to pay the living wage. 
The gradual introduction of living wages also has a minimal impact on payroll costs. For instance, the initial increase of €10.50 to €11.30 only increases the cost by €0.80, which has minimal impact on your revenue. Besides, increasing employees’ hourly wages will increase productivity since they are motivated. You can also recoup the increasing wage bill by reducing staff turnover. When you pay minimum wage, workers are always looking for greener pastures, and you spend a lot of money recruiting new employees to make up for the high turnover. If increasing the living wage can reduce your staff turnover, you will save money on hiring costs. 


The introduction of National Living Wages aims to improve working conditions and ensure workers live within acceptable standards. The Low Pay Commission provides recommendations for increasing wages gradually to ensure the new living wages are manageable for small and medium-sized businesses. You need to review your finances and budget for the introduction of living wages.

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