What the new National Living Wage means to the UK hospitality industry - Insights

What the new National Living Wage means to the UK hospitality industry

minimum wage increaseIn July 2015, the British government announced that it will introduce a new National Living Wage (NLW). National Minimum Wage (NMW) jumped from £6.50 to £7.20 an hour, an almost 11% increase, for those who are 25 or over, and is set to rise up to £9.35 an hour by 2020, a 43% increase over five years.

This came after Boris Johnson, who in a speech at the British Hospitality Association Hospitality and Tourism Summit earlier in the year said, “When businesses pay the Living Wage they have higher loyalty and commitment from staff, better productivity and lower staff turnover and HR costs.” The NLW legislation came into place this month in the UK.

According to the Resolution Foundation, by 2020 wage increases in the food services and hotel accommodation sectors are estimated to be up 3.4%. They also suggested that the number of employees affected by the NLW in food services and hotel accommodation could be as high as 48%. To compensate for the wage rising for almost half of their workforce by 2020, employers will almost certainly have to make cut-backs. The research indicates that wage increases could be nearly six times more than the average across all sectors and this rise in the wages paid in the accommodation and food services industry is the highest increase of any UK industry.

The labour market in the hospitality industry already faces a big challenge of retaining its staff, and currently has a turnover rate of 32%, and 36% in restaurants alone. Experts suggest that this figure could be as high as 55% in London, and 40% in bigger cities like Manchester and Birmingham. The north of the UK is particularly volatile with almost 80% of the workforce in most hotels and restaurants on an hourly rate. With the turnover rate higher than most industries, it has become more challenging than ever before to recruit and retain talent within the business.

However, amongst hospitality workers, there still seems to be a range of criticism regarding the long unsociable hours and poor pay as they believe it still falls short of a living wage of £7.85 and the London living wage of £9.15 as estimated by the Living Wage Foundation.
There is also a risk for those who are 25 or over to face discrimination at work or even unfair dismissal. Employers are seeking to minimise extra costs by compromising on service standards and many are looking to hold back on recruitment, or focus on recruitment of young workers who are not entitled to the NLW. Furthermore, employers are looking into saving costs on amenities, quality of products, and potentially increasing the price of products on menus and in hotel rooms. However, at the most part, the cost will have to be compensated with redundancies, layoffs and a hold on recruitment.

On the other hand, there is a strong debate amongst a few who suggest that the new wage increase will motivate the ones who are entitled to it, so the vicious cycle of labour turnover may be more in control. Oakman Inns and Restaurants Chief Executive Peter Borg-Neal, who claimed his company already pays at least £7.85 per hour, urged the industry to “stop whinging” about the wage, saying “We need to talk more about the positive points about working in our sector.”

Many hospitality professionals believe this to be the biggest decision the government has announced in over 20 years. A chain of restaurants operating 20 plus units may face a rise in their payroll by up to £1m, where as a hotel chain with 20 plus properties may find their numbers jump up as high as £2.5m. This is making employers think about how they can absorb the cost with productivity and training. Training can be very costly by itself, but employers believe that they can get more out of their workers, especially if they are happy with the wage increase and have remained in the business a long time.

Moreover, the recession eight years ago hit economies worldwide and the hospitality industry faced the challenge of making cuts, just like many other industries. According to Matthew Welbourn, Managing Director of Compass Hospitality, technology will have to play a major role in reducing the labour cost in the future. Another industry professional Paul Johnson, Chief Executive of Kew Green Hotels, says that his group is looking into cutting shift patterns to seven and a half hours from eight hours, and he believes it will compensate for the overall rise in pay. He also suggested that in most of his new properties, they look at the major costs associated with telephone line rentals as most people don’t use landlines anymore. Furthermore, Simon Lester, Chairman and Chief Executive of Lester Hotels, suggested that they were looking into down skilling the quality of chefs. He realized that 38% of all dishes served in his food and beverage were burgers, and he argues that grill chefs are easier to come by than fully trained ones.

According to Tim Hart, owner of Hambleton Hall in Rutland, the people more at risk from the increase in NMW are the employees themselves. Employers are inevitably looking to cut jobs as they are feeling the brunt of a rise in wage costs, but it will be the employees who will suffer discrimination while at work and while looking for new employment. Mr Hart runs high end hotels, restaurants and a bakery, and his wages represent 33% of turnover. He has 200 employees, out of which half of them are on £7.20 an hour. He says the increase in wages of 100 employees is going to cut his bottom line profit by almost 20%8.

Mr Hart says “Politicians and economists tell us that the correct response to higher wages is for employers to increase productivity. This model, taken from manufacturing industry, has little relevance to us. Our clients come to us for personal service, handmade food and immaculate housekeeping. All of these need people, not machines. Coming on top of an unsustainable, high level of VAT, the outlook for caterers in the UK has been further undermined by this misguided budget.”

According to Restaurant Property, International Restaurant and Leisure Specialist, the UK will need to collectively find an extra £4bn to pay minimum wage staff. If we take the share of Hospitality workers alone, and limit to only Full-Time NMW jobs, it will equate to 200,000 job losses.

About the author

Prateek AdhikariPrateek Adhikari works for the University of Derby Online Learning (UDOL) as a Lecturer of Hospitality and Business. Prior to joining UDOL, he worked for the London School of Business and Finance as a Lecturer of Hospitality, Tourism, and Business, and Sheffield Hallam University as an Associate Lecturer of Hospitality. Prateek worked as a General Manager and a consultant of high end restaurants and hotels over the period of eighteen years in the hospitality sector internationally. He is currently also a Director of PA Hospitality which is a hospitality consultancy company, where he overlooks the entire operations of the company and takes on projects from time to time to keep up to date with developments in the sector.

He teaches across a range of Hospitality, Leisure, and Business Programmes both at Undergraduate and Graduate Levels. His teaching focusses are around Human Resource Management, Hospitality Operations Management, Business Environment, Organisations and Behaviour, Employability Skills, Service Excellence, Food and Beverage Management, Conference and Banqueting Management, Managing People, Developing Manager, and Developing Professional Business Skills.

Sources:

1http://www.bighospitality.co.uk/Business/Boris-Johnson-urges-hospitality-businesses-to-pay-Living-Wage

2http://www.resolutionfoundation.org/wp-content/uploads/2015/07/RF-National-Living-Wage-briefing.pdf

3http://www.restaurant.org/News-Research/News/Hospitality-employee-turnover-rose-in-2014

4http://hospitalitypeoplegroup.com/2015/06/04/staff-turnover/

5http://www.livingwage.org.uk/what-living-wage

6https://www.thecaterer.com/articles/359553/stop-whinging-about-the-national-living-wage

7https://www.thecaterer.com/articles/364712/round-table-the-effect-of-the-national-living-wage-in-2016

8https://www.thecaterer.com/articles/359826/national-living-wage-bad-news-for-hospitality

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