A study by the Federation of Small Businesses (FSB) shows the majority (64%) of small firms impacted by the NLW have stretched to meet the latest rise by taking lower profits.
Two in five (39%) small businesses affected by the NLW have put up prices to cope with the latest increase to £7.50 per hour, according to the research.
A further quarter (24%) have cancelled or scaled down their investment plans, and a fifth have reduced staff hours (22%) or hired fewer workers (19%).
FSB national chairman Mike Cherry said small employers have demonstrated their resilience in meeting the challenge set by the NLW, with many cutting their margins, or even paying themselves less, to pay their staff more.
“In sectors where margins are tight, small firms are resorting to more drastic measures to cope with the NLW,” he said.
“It is vital that the NLW is set at a level that the economy can afford, without job losses or harming job creation.
“Cost pressures on small businesses are building, and with most recent economic indicators underperforming, we are now facing the reality that the NLW target may need to be delayed beyond 2020.”
The NLW is currently projected to rise to £8.75 by 2020.
Cherry said to prevent the growing costs of employment from “stunting” job creation, the Government should use its autumn Budget to up rate the employment allowance and “focus it on the smallest employers”.
Employment biggest cost for businesses
Association of Licensed Multiple Retailers (ALMR) chief executive Kate Nicholls agreed and said the introduction of the NLW in 2016 increased the UK’s hospitality wage bill by £900m – with the increase to £7.50 per hour expected to add another £400m.
“The ALMR’s latest Benchmarking Report shows that payroll costs are the single most significant operating cost for employers [in the trade], standing at 27.9%,” said Nicholls.
“Gross wet margins have fallen to 67% so some businesses are clearly having to absorb this substantial cost increase.
“Our Benchmarking Report also shows that only 4% of businesses are able to fully pass the cost of the wage increase on and that one third had to fully absorb the cost.
“Businesses cannot keep doing this year on year and some will struggle as a result. It is crucial that any future increases to wage rates come after an assessment of the current economic climate, are affordable for employers and not politically mandated.”
Nicholls stated a freeze until 2020 may be necessary to allow smaller businesses to be able to “shoulder the cost”.
2020 target ‘should be delayed’
The FSB research shows the other sectors struggling with the NLW rise include retail, care and accommodation businesses.
In light of this, the FSB has urged the Low Pay Commission to consider whether the Government’s 2020 NLW target may need to be delayed “if the economy cannot bear the rapid pace of increases”.
The FSB has recommended the 2018 NLW increases to no higher than £7.85.