What does the highest minimum wage increase since 2011 mean for small business?

The Fair Work Commission today delivered its annual review on minimum wage increase. This decision will have a significant impact on all businesses and industries and over 2.3 million employees who are paid at the National Minimum Wage or minimum Modern Award rates.

From the first full pay period commencing after 1 July 2017:

  • all Modern Award rates will increase by 3.3 per cent (with weekly wages rounded to the nearest $0.10)
  • the National Minimum Wage will increase by 3.3 per cent to $18.29 per hour (and $694 per week for a full-time employee), an increase of $0.59 per hour.

The Commission’s decision only confirms the basic increase in minimum rates while confirmation of the specific rates (including new allowance rates) for each individual Award have not yet been released. These will be released before 1 July 2017.

The impact

In reaching its decision to increase the National Minimum Wage by the highest percentage we’ve seen since 2011, the Commission took into consideration living standards. However, we know Australia already boasts high wages and high living standards. Our minimum wage is one of the highest in the world.

We predicted the increase to be no more than 2.4 per cent, and are particularly surprised at the decision – 3.3 per cent is the highest we’ve seen in six years. Although some relief has come in the form of reducing penalty rates across some industries, the Commission announced that these reductions would be phased-in by increments over the next three years. Both decisions seem like a “double punch in two days.”

While the Commission took into consideration the strong economic environment, I question “why such a high increase, when we are doing so well?”

Consider the following:

  • real net national disposable income increased by 6.8 per cent over the year
  • all measures of inflation have increased since the March quarter 2016, but are currently at the lower end of the RBA’s medium-term target range
  • unemployment rate is steady
  • labour productivity growth in the market sector was higher than the previous five-year period and rose sharply in 2016
  • profit growth was particularly strong in 2016 compared with the preceding years and above the five-year and 10-year averages for both total industries and non-mining industries

The weekly wage bill for Australian businesses could increase up to $51.3 million and most SMEs won’t be charging customers 3.3 percent extra from July 1, but will need to come up with an extra $22.3 per week per employee, paid at the expense of their bottom line.

As I see it, SMEs will need to consider reducing costs, increasing prices, reducing staff or reducing operating hours or a mixed approach to maintain current profitability.

What happens next?

Each National Minimum Wage order made in an annual wage review comes into operation on 1 July in the next financial year, and continues in operation until the next National Minimum Wage order comes into operation. Publication of determinations changing the Minimum Wage rates in Modern Awards, and a National Minimum Wage order for employees who are not covered by an agreement or Award will be released over the coming weeks.

It usually takes the Commission two to three weeks to update the pay rates for each Award. Employers need to listen out for announcements and visit the Fair Work Commission and Fair Work Ombudsman websites for updates: we are immediately updating our 13,000 small business clients with the new rates relevant for their employees from today.

What do I need to do?

If you pay your staff at Award level, the increase to minimum rates take effect from the first full pay period commencing after 1 July this year.

If you already pay above Award rates, you may not be required to increase your employees’ wages, provided the rates you pay are above the increased minimum Award rates (and you are not required to increase employees’ wages under their contracts of employment or applicable enterprise agreement).

Ed Mallett, Managing Director, Employsure