Managing the employment cost agenda

Two key changes will have an impact on the direct cost of employment: increases to employer National Insurance Contributions (NICs) (introduced in the Budget) and the National Minimum Wage.

With such a direct costs increase employers are naturally looking at how to balance that increase, at least partially. There are several steps we recommend.

Firstly, conduct a thorough review of pay, pension and benefits policies. There may be opportunities here to optimise reward spend: 

• Check whether salary sacrifice arrangements are efficient and being used to the full extent possible.
  
  
• Review and amend payroll processes to ensure you don’t overpay leavers either pay or holiday pay – there are a range of strategies to avoid this and, where necessary recover overpaid PAYE where payments are made that cannot be recovered.
  
  
• Assess the extent to which specific benefits are being taken up. Are some popular only in theory not practice? Is take-up for some so low that they should be removed and budgets refocused on more popular items?
  
  
• Review your minimum-wage compliance check. This is a complex area and we’ve seen employers being both too cautious and too permissive in how these are undertaken, leading to either pay top-ups that aren’t needed or unnecessary risk.
  
  
• Are any benefits being duplicated inadvertently? We see this often with employee assistance programmes, as arrangements with different providers have evolved over time. Is there scope to rationalise your offering?

Promoting salary sacrifice and holiday-buying schemes can generate huge potential savings (and the latter will reduce your NICs). Don’t make assumptions about which employee groups will and won’t go for salary-sacrifice arrangements. One employer KPMG worked with saved around £200,000 by extending salary sacrifice arrangements to lower-paid staff they had assumed wouldn’t be interested in such a scheme. That simple change paid for the additional employer NICs on 10% of its workforce.

Of course, you’ll need to ensure any alterations you make to your reward structures are compatible with your broader workforce strategy and can be introduced and managed in a way which will not damage employee relations.

It isn’t just direct costs that needs consideration. Some of the changes anticipated by the Employment Rights Bill could lead to the need for more frequent and proactive management in respect of operational HR matters, which in turn may indirectly increase employers’ costs:

Good examples are the extension of Statutory Sick Pay and Unfair Dismissal protections to be Day One Rights. 

The extension of SSP may mean that employers see an uptick in the amount of sickness absence they need to manage, as well as an increase in sick pay costs. They may therefore want to look at the trigger points for managing sickness absence in their policies. In addition, they will need robust and consistent decision making ‘on the ground’ to manage this risk.

The same is true on the extension of Unfair Dismissal protection to be a Day One Right. While we don’t know exactly what form this will take yet travel is clear. The indirect cost impact of this is likely to mean more HR/operational management will be needed in the early months of employment in order to ensure consistent, robust decision making and management of risk.

Changes to the unfair dismissal regime will heighten the risks attached to recruitment. For example, employers may not be able to easily manage out employees in situations where the employment arrangement has not been successful.

All of this can only intensify the compliance burden on the HR function. The associated costs and the effects of these developments will be especially sharp in sectors with large numbers of employees on relatively low pay, such as retail, hospitality and food production.

Ultimately, no one solution will work for every business. Employers will need to look at HR policies and compliance procedures from every angle for opportunities to manage the cost agenda.

The extent to which this changing employment landscape will affect any business depends on the shape of its workforce. Understanding this will be crucial, from several points of view:

The challenge is to find an optimal mix of these elements in terms of cost and operational imperatives and ensure that it is fit for the future.

As well as addressing your organisation’s cost levers, it is imperative to look for productivity gains through taking advantage of artificial intelligence (AI).

AI has enormous potential to automate compliance procedures and HR tasks. Many organisations KPMG work with are exploring how AI solutions can reduce costs, by helping their people to do more with less.

KPMG’s tax, employment and legal teams are on hand to help you adapt to workforce change and stay compliant. We’ll help you to develop and implement your strategic and operational response.

Please get in touch to see how we can help you navigate the new employment landscape, or if you’d like to arrange a cost reduction workshop.

Please contact our KPMG Law team for further details: