Member Article

Hospitality executives: prepare for the National Living Wage

“Chancellor George Osborne’s new National Living Wage (NLW) is intended to negate the adverse effects of the minimum wage on employment by introducing a higher compulsory wage for over-25s. According to recent research by the Resolution Foundation, this stands to add £4.5bn to the wage bill of UK firms by 2020. For many, this additional expenditure will have to be offset by a consequential reduction in business costs elsewhere.

While it will likely prove more affordable to some industries including education, health, manufacturing and construction, where the wage bill is estimated to only increase by less than one per cent,[1] the NLW could have a severe impact on the hospitality, retail and support services, with a more considerable rise of 3.4 per cent.[2] These latter industries demand greater staffing and as the increase in salary will likely mean that employee numbers will have to drop, this does not bode well for employers or their staff.

Businesses of all sizes in the hospitality and retail sectors account for two thirds of minimum wage workers. Osborne’s proposed introduction of the NLW at £7.20 an hour in April 2016, expected to increase to £9 by 2020,[3] will have the biggest impact upon those smaller companies. Accepting increased costs and therefore tighter profit margins, could fatally damage a business’s sustainability and growth projections. As companies come to accept slower wage growth for higher paid staff and increased prices, job cuts may appear the most feasible solution. The question then becomes, how should executives react to these changes?

Board rooms will most likely need to restructure roles and responsibilities and find ways to increase productivity to cover the additional cost. Ultimately, finding productivity gains in the existing workforce is expected to reduce employment rates. For example, the Office for Budget Responsibility estimated that 60,000 jobs could be lost as businesses struggle to meet the ever increasing costs of employment.[4] Taking into account the increase in overtime costs, bonuses, and other benefits, the NLW will have a considerable material impact, not just on those in hospitality, but also on corporate real estate transactions and investments in the UK hotel sector.

There is little doubt that the chancellor’s changes will be far-reaching, and businesses should look to independent organisations, such as the Low Pay Commission (LPC), to help them cope with the introduction of the NLW.

As companies navigate the transformative structural change taking place within the industry, and attempt to successfully adjust to the higher wage floor, investors who are adopting a three to five year business strategy cannot help but be concerned by these numbers.“

[1] Resolution Foundation

[2] Resolution Foundation

[3] Resolution Foundation

[4] Resolution Foundation

This was posted in Bdaily's Members' News section by Suzanne Horne .