Posted on 23rd February, 2022

What do businesses need to consider when contemplating pay rises?

The post-pandemic economic climate promises to be a difficult one for employees and businesses across the board, with the cost of living rising dramatically. The latest inflation figures are at 5.5 per cent, with the cost of many things – including energy – rising dramatically, yet annualised wage growth sitting at just 4.2 per cent. This means that wages are not keeping up with the costs of living. Pay reviews and the amount any employer increases their employees’ salaries by is therefore set to become a thorny issue.

Employees will justifiably expect that their pay rises keep up with the rate of inflation and as a result there will undoubtedly be pressure on employers to increase salaries accordingly. This is especially the case in industries where employers implemented pay freezes during the pandemic and did not pay bonuses that were owing.

In other sectors, the shortages of labour because of Brexit have meant that new recruits have been offered higher salaries than long-serving existing staff. This, along with the increased cost of living, is likely to lead to existing staff feeling undervalued and therefore at risk of leaving for new employment.

From a legal point of view, unless an employee has a contractual entitlement to an annual salary increase in their contract of employment, such an annual increase is not guaranteed. These days such a contractual entitlement is rare and generally only seen in training contracts that have ‘milestone’ clauses when an individual completes a certain stage of their training. Otherwise pay increases are generally at the discretion of the employer, which is the good news for businesses.

The bad news is that there are more things to consider than just the legal side of things. Where pay rises are discretionary employers will need to review salaries and consider pay against the background of the increasing cost of living. The most important thing for employers is to show their employees that they are valued and appreciated.

When carrying out pay reviews, it is the best policy to be transparent about what the budget is for all pay rises. If you do that then it can be easily shown that it has been fairly applied. For businesses that are struggling and cannot afford immediate pay rises, one option is to put in place a bonus scheme. Another option could be to allow employees to work a four-day week without a pay cut instead of having a pay increase, or to offer employees personalised benefits instead.

One important factor to consider is benchmarking your pay increases to what your competitors are offering. If you pay less than your competitors, you will lose staff. Unfortunately for businesses, it is currently a good market for employees due to the labour shortage in some sectors.

One potential legal danger that employers could face if they don’t increase pay is if an employee alleges that they have been discriminated against. So, if you are paying your male staff more than your female employees then this could leave you open to sex discrimination claims.

Overall wage issues are likely to be a difficult issue for several months to come across all sectors in the UK. Just make sure any wage increases are fair across the board to avoid any potential legal action.

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