Care Homes and the National Living Wage

Paul Zalkin, an Insolvency and Restructuring Director at Quantuma LLP, considers some alternative views on how the National Living Wage will impact the Residential Care sector.

On 1 April 2016 payment of the National Living Wage will become a legal obligation. Employees aged 25 and over who are not in the first year of their apprenticeship will be entitled to be paid at least £7.20 per hour, which is nearly 7.5% more than the current National Minimum Wage of £6.70 per hour.

In a sector where staff costs typically represent 60% of fee income it is easy to understand the sentiment behind headlines such as “Care home chiefs warn of sector ‘collapse’ from living wage plan” (Nicola Merrifield, Nursing Times, 20 August 2015), quoting Professor Martin Green of Care England.

However, having worked on dozens of care homes insolvencies across the UK, I suggest the impact of the National Living Wage will display a regional component and more subtle effects.

Sector stratification and care home distress

At its broadest level the residential care sector can be divided into new and older generation facilities, respectively those that provide modern, purpose built environments and those that are converted houses.

Experience indicates that older generation facilities are less cost efficient in a number of respects. They require more capital and maintenance expenditure, use technology less efficiently, are less energy efficient and, in some cases, not correctly configured to meet changing demands and statutory requirements in terms of standards of care.

It is these facilities – often privately owned, sometime as part of a small group, and often burdened with significant bank debt – that are most susceptible to the impact of changes in the operational, regulatory, financial and macro-economic environment.

Inevitably as a consequence, a significant proportion of care home distress within the SME sector over the past 5 years has been centered on older generation facilities, compounded in no small part by over-reliance on local authority funded service users for whom fees have been dropping year on year. According to the King’s Fund, local authority spending on social care for older people fell in real terms by 17 per cent between 2009/2010 and 2014/2015 (The King’s Fund, March 2015, “How serious are the pressures in social care?”).

Care home distress and staffing

A care home struggling under the burden of increased costs and falling revenue can become a difficult and demotivating place in which to work, especially for those being paid at Minimum Wage. Retention of permanent staff therefore presents a further challenge and it is this that often leads to excessive use of expensive agency staff.

Herein lies a potential dichotomy between the conventional wisdom – that struggling older generation homes will suffer most from the National Living Wage – and an alternative view that homes already burdened by higher than average staff costs will not be the first to suffer. It is the successful homes still employing permanent staff at minimum wage that now face a large increase in their wage bill and these homes are most likely to have the biggest shock from the National Living Wage.

New generation facilities and the regional dimension

Some commentary has suggested that more successful newer generation facilities are already paying care staff at or above the National Minimum Wage and that the forthcoming legislative change will have little impact upon them. However, the regional dimension is more subtle and mirrors general patterns of wage rates across the UK.

 

Figures from the Office of National Statistics show median gross weekly earning remain highest in London and the South East and notably below the UK average in Wales, Northern Ireland, the East and West Midlands, the South West, the North East, the North West and Yorkshire/Humber regions of England (Source: Annual Survey of Hours and Earnings, Office for National Statistics). It is in these regions that hourly rates for permanent care staff –  even in successful newer generation homes – are more likely at present to be set below the rate due to be imposed by the National Living Wage.

The effect of an employee’s age?

The minimum wage varies considerable depending upon age and employment status.

National Minimum Wages Rates per hour 21 and over 18 to 20 Under 18 Apprentice aged 16 – 18 or first year apprentices aged 19 or over*
2015 £6.70 £5.30 £3.87 £3.30

The new legislation might therefore provide care home employers with an incentive, albeit one which flies in the face of age discrimination legislation, to employ younger, less qualified or experienced staff in preference to those over 25 who are entitled to the National Living Wage.

Some predictions

Ultimately it seems inevitable that the number of care homes at risk of decline and failure will increase but, somewhat counter intuitively, it might not be those currently at risk that will fail first.

The level of distress will also display a regional variation whereby homes in areas currently paying below the rate of the National Living Wages will find it harder to accommodate the forthcoming increase.

Finally, might we see an industry which accommodates the National Living Wage by employing younger, less experience staff?

About the author:

Paul Zalkin is an Insolvency and Restructuring Director in the London Office of Quantuma LLP, a leading restructuring and insolvency practice assisting businesses and individuals facing financial distress.

In additional to being a Chartered Accountant, Paul is a qualified Insolvency Practitioner with over 15 years’ experience working with across the UK with businesses and investors exposed to the risk of failure of residential care homes in financial distress.

Advice and services for the stakeholders of care homes in distress or facing the challenge of the living wage

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For a free initial discussion please contact:

Paul Zalkin
Director, Quantuma LLP
+44 (0)20 3856 6730
+44 (0)7469 850 972
paul.zalkin@quantuma.com