Minimum Wage Increase: How to Manage

The Government has announced its commitment to increase the minimum wage to $20.00 an hour by April 2021. Reactions to the news from businesses across the country have been mixed with some wondering how to afford this increase. The first stage of this will be an increase from the current minimum wage of $15.75 to $16.50 in April 2018. No details have been provided at this stage on how the Government plans to step the rest of the way to the $20.00 an hour mark, however an assumed annual increase of around 6.6% would reach the $20.00 mark by 2021.

It is worth noting that under the National Government, from 2008 to 2017, the minimum wage increased by an average of 42 cents (or around 3%), with an increase of 50 cents a year since 2013.

Gross Minimum Hourly Wage graph BDO

According to the most recent MBIE Minimum Wage Review, minimum wages are paid to approximately 73,300 NZ workers which represent around 2.9% of all employees. They are more likely to be young people, women, people without formal qualification and disproportionately Maori, Pacific peoples. These workers are also more likely to work in the hospitality and retail industries.

The impact of the rise in minimum wages is likely to be felt most by small businesses. Businesses with less than 20 employees make up around 97% of all enterprises in New Zealand. Some of these businesses face tight margins and difficulty in paying employees (or even themselves) more than the minimum wage, particularly in startups or where funding is largely sourced from borrowings. If these business decide the rise will result in wages costing too much, this could result in cuts to hours or even jobs.

It is not just the increase in the hourly rate that businesses need to consider but also the associated increases in ACC, Kiwisaver contributions, holiday pay and other entitlement costs. Businesses need to have IT and payroll systems capable of managing these changes seamlessly. It is likely that other employees who are paid slightly above minimum wage will require increases to maintain their relative position compared to those on minimum wage.

Our advice to small businesses around managing the impact of the minimum wage increase include:

  1. Understand the full impact of the minimum wage increase, including how the increase will impact holiday pay calculations and the associated increases in ACC, Kiwisaver, holiday pay and other entitlements.
  2. Know your Gross Profit percentage and recalculate customer prices. Undertake regular pricing reviews.
  3. Communicate well in advance to customers any potential price increases, outlining the drivers for the increase. The key will be preventing customer ‘price shocks’. Customers are more likely to stomach small annual price increases rather than bulk increases once every few years.
  4. Payroll system – consider systems like iPayroll that can manage your PAYE for you and withhold the relevant tax deductions from each payroll payment, to smooth and ease the cash flow burden of paying a bulk amount to the IRD each month.
  5. Prepare a budget and realistically forecast your operations for next year, taking account of the increase in wages and any planned price increases.
  6. Consider opportunities to improve operational efficiencies. This change is a reminder to businesses to be continually improving business process, pricing and your target customers.

The Government has indicated it intends to look at other changes to the tax system to help small businesses, including exploring the possibility of having a stepped tax bracket, so that businesses with lower turnover would have lower income tax to pay. No firm details are available or expected any time soon.

In today’s rapidly changing business environment, successful businesses are those that can adapt and respond quickly to new challenges. The policy by the Government continues to highlight the need for all businesses to engage in regular strategy, budgeting and pricing reviews.