New 'living wage' to put sector under further pressure

From next April all employees 25 and over will be legally entitled to a minimum wage of £7.20 an hour, as announced by Chancellor George Osborne in last month’s Budget.

With just eight months to go until it becomes mandatory, action is needed now, the NDNA said, calling for the long-term impact of the NLW to be taken into account alongside the Government’s funding review and the planned increase to 30 hours of free childcare for three- and four-year-olds from 2017.

A Department for Education consultation with the sector on the funding of free places ends this week (10 August).

Although ministers have said they are committed to increasing funding for free places, any changes will not come into effect until after the NLW is brought in.

Settings already under pressure from long-standing underfunding for free places and increasing business costs could be forced to close with the knock-on effect of the NLW.

Without adequate funding for free places, employers could be forced to take on less qualified and younger staff in order to stay open.

Fees charged to parents will inevitably rise, with nurseries anticipating that they would need to raise them by 7-10 per cent.

The findings are based on a snapshot survey of 300 nursery employers from small and large nursery groups and single-site providers covering more than 10,000 staff.

It found that wage bills would be pushed up by 10 per cent from April, and by 35 per cent from April 2020 when the NLW is expected to rise to £9 an hour.

Early years settings will also be under pressure to put pay up for all their staff in order to maintain pay differentials, or risk losing well-qualified staff.

Nurseries reported the NLW could drive down quality, with providers struggling to reward and retain well-qualified staff and forced to rely on unqualified younger staff. Staff:child ratios may also change.

Some also said that the increase would inevitably lead to fee increases for parents above inflation to stop them from going bankrupt.

The NDNA’s workforce survey last month revealed current problems with recruitment and retention with low pay, poor-quality applicants and changes to rules over GCSEs creating a staff supply crisis.

Early years settings also continue to have the added pressure of business rates and are not exempt from VAT.

Purnima Tanuku, NDNA chief executive, said, ‘Nurseries want to reward their staff properly, but the combination of mandatory inflation-busting rises and chronically inadequate funding is a real threat to the sustainability and quality of provision of private, voluntary and independent nurseries.

‘Most nurseries will have to increase all staff wages to keep their pay differentials and incentives for qualified staff or risk losing practitioners.

‘Some qualified under-25s will find themselves paid less than unqualified 25-year-olds, which just isn’t fair – but many employers will not be able to find extra funds to rectify this situation, so fear their business will suffer because well-qualified staff will leave.

‘It all comes back to the inadequate funding that nurseries are currently paid for free childcare places – there needs to be a real step change in funding to allow for proper pay across the entire nursery workforce or risk childcare on the cheap.’

Half of the survey’s respondents said that the NLW would affect how much they paid employees under 25 as well.

Ms Tanuku added, ‘Changing the ratios or employing more younger, less qualified staff is not the answer, as this will affect quality, which is not negotiable. Childcare has to be of high quality for it to be effective.’

Spot the difference?

The Government’s ‘national living wage’ is actually a misnomer, as it is essentially a new national minimum wage (NMW) for workers of 25 and over.

This is the view taken by think tank Resolution Foundation in an analysis published last month. ‘The title of the new policy adds significant confusion to what was already a muddled debate on the purpose and definitions of the various rates,’ its says.

In the Budget document, the Government’s new policy is accurately described as a minimum wage ‘premium’ for those aged 25 and over.

It has nothing to do with the Living Wage Foundation, which oversees the living wage as it is currently known – calculated based on public perception of what is needed for a minimum acceptable standard of living and a voluntary wage rate. It also takes into account in-work support. The living wage is currently £7.85 an hour and £9.15 in London.

CASE STUDIES

Nurturing Childcare, Surrey, has two nurseries in Tongham and Guildford employing 35 people, with just two unqualified staff members currently paid less than £7.20 an hour. Level 3 staff earn £7.50 an hour. The nursery is also opening a baby unit for under-twos in Ash in September.

Co-owner Sian Bath said, ‘When we increase the salaries of those on less than £7.20 per hour we will be increasing their pay by 9 per cent. These people are unqualified and inexperienced. While we agree the minimum living wage should be higher, it means that unless we increase all hourly rates to all other staff, our qualified staff will be earning very little more than the unqualified staff.

‘To ensure a fair pay structure we will aim to increase all hourly rates by at least 5 per cent if we can afford it. Initial cash flow forecasts suggest that this will increase our average hourly cost of childcare from £4.99 an hour to £5.35 an hour. We don’t get hourly funding of anywhere near the first amount, so we may have to go bust or continue to pay poorly.’
Tracey Kenton, who is joint owner of the nursery, said, ‘People will be coming in at £7.20 so everyone has to jump up. I feel you have to [increase wages] and rightly so, but where does the money come from? It’s a fine line. We don’t want to go bankrupt.’

The nursery has responded to the Department for Education’s funding consultation. ‘How do they expect us to deliver 30 hours?’ Ms Kenton added.

Nature Trails Day Nursery, Rugby

Owner Steve Dyke runs an 88-place nursery (above) and is opening a 55-place nursery next month attached to a primary school. He said he expected his setting’s wage bill to go up by about 9 per cent, so that he could keep wage differentials in pay.

‘We’ll probably weather the storm, but there are nurseries that are already struggling.’ With wages accounting for 75 per cent of a nursery’s total costs, he anticipates nurseries will need to put up fees by at least 7 per cent and even as much as 10 per cent to cope with the increased wage bill.

He added that the combined impact of the NLW and the increase to 30 hours for funded places was a ‘lethal combination’. ‘If there isn’t increased funding (or reduced costs) to the early years sector many businesses will go bust.’

Mr Dyke suggested that the Government should exempt nurseries from VAT and business rates and guarantee funding for places at a minimum cost ‘plus a reasonable margin’ to reassure the early years sector.

KEY FINDINGS: THE IMPACT OF THE NATIONAL LIVING WAGE ON NURSERIES

• Payrolls will rise by an average of 10 per cent from April 2016 and by 35 per cent from April 2020.
• lSixty-two per cent of the workforce is paid less than £7.20 an hour (NLW rate from April).
• Two-thirds of employees earning less than this are over 25 and will be legally entitled to the NLW from April.
• Nurseries that responded to the survey had a payroll of on average 31 staff, with the most common answer being 20.
• Fifty-eight per cent of nurseries plan to recruit younger staff, use tighter ratios or employ fewer supernumerary staff, which could affect the quality of childcare they offer.

Source: NDNA