National Living Wage Increase in April 2020 – A Time to Take Stock?

In April 2020, the National Living Wage will rise again from £8.21 to £8.72 per hour for workers over the age of 25, from £7.70 to £8.20 per hour for workers aged 21-24 and from £6.15 to 6.45 for workers aged 18-20.

Providers will be legally obliged to ensure that all employed staff receive at least the National Living Wage. The increase represents a rise of up to 6.5% depending on the age bracket, which will be a significant additional burden on health and social care providers in respect of staffing costs. Agency staff fees are also likely to increase.

Many providers already work to extremely tight margins and these increased staffing costs may simply make businesses unviable or cause providers to encounter difficulties in maintaining appropriate staffing levels.  To keep businesses viable and, perhaps more importantly to ensure quality and service levels are maintained in line with regulatory requirements, the additional staffing costs will need to be recovered from somewhere. Ultimately, service fees are likely to have to increase.

For privately-funded service users it will be a matter for providers to assess what a reasonable increase in fees may be, and ensure that any increase passed through to service users is dealt with according to any existing contractual arrangement(s) in place, and in line with consumer law.

For state-funded placements, providers should be preparing themselves for new fee proposals from local authorities if they have not already been received, and where providers disagree with those proposals representations should be made to challenge them.

In either case, now is the time for providers, if they have not already, to take stock of their fee charging structures and the contractual agreements they have in place. Some agreements may need to be terminated, re-negotiated, amended or will require notice to be given, all of which can take time.

The future viability of providers in the social care sector is likely to depend on whether they have the nerve to regularly challenge fee rates when (or before) they become unviable, and retain – and in extreme cases exercise – the option of terminating placements if those fees cannot realistically meet costs. Whilst termination should be a last resort, it may be an important tool in sustaining a viable service, particularly where providers are subject to increased costs which are beyond their control.

Whilst there continues to be providers who are willing to accept the fees at below the cost of maintaining placements themselves local authorities will continue to be able to pay as they see fit. It is a short-sighted approach which meets the immediate goals of balancing local authority budgets but fails to take into account the disincentive impact paying under the required amount has on the sustainability of the social care market at large.

Funding agreements with local authorities are often very one-sided and are tied into local authority budgets. Local authorities’ ability to pay fees is a consideration which is often given priority, it would seem, to the detriment of the actual cost of the placement.  Providers may therefore have little power to re-negotiate fees for publicly-funded service users, even if they wanted to. However, if providers take a stand against unfairly low fees and actively engage with local authorities on the issue, it is more likely that reasonable increases in the placement costs will be accounted for.

Providers should bear in mind that the Government has pledged further increases in the the National Living Wage over the next five years. It makes sense to factor that in to contractual arrangements now, as fees which may be sustainable in the short term may not remain so when further increases in the statutory minimum wage are introduced.

If providers have any concerns about, or require legal advice on funding or contract matters, please contact Ridouts Professional Services plc on 0207 317 0340.