New UK living wage adds to pressure on margins
15 JULY 2015 6:16 AM
A new U.K. government policy to create a national living wage is putting more pressure on hotel margins, with costs likely to be absorbed into guest bills.
LONDON—In its 8 July budget, the British government pulled a surprise out of its hat: a new, compulsory National Living Wage to start in April 2016.
The government said the NLW will ensure those aged 25 and over will receive an increased hourly stipend to begin at £7.20 ($11.09) and rise to more than £9 ($13.86) by 2020. The initial NLW increase constitutes a 10.8% increase on the minimum hourly wage of £6.50 ($10.01). The minimum wage per hour for those aged younger than 25 years will rise to £6.70 ($10.32) in October.
For many hoteliers who already feeling margins pinched by online travel agency commissions and rising alcohol prices, to cite two examples, any increase in costs will ultimately trickle down to the consumer.
Hotel company Bespoke Hotels, which manages eight U.K. properties under the umbrella of Hallmark Hotels, is the type of small, medium enterprise that probably will see no option than to offset higher wage costs to guests, according to CEO Haydn Fentum.
“Margins are under pressure, and not just from upward pressure in payroll, but also utilities, insurance, for example, are high. It has been a long period since 2008 that hotels have been discounting to maintain a level of trade,” he said, adding he does not necessarily feel hospitality employees are underpaid.
“It is not a complex science; you know what you have to pay, and there is only so long we can take a hit to the (profit-and-loss account) before we pass that cost to the consumer,” Fentum said. He said any costs increases are substantially higher than the rate of U.K. inflation, which in recent months has hovered around 0%.
Fentum said some wage announcements might sound good to the ears of the electorate, but it is those same voters who might not be applauding when costs get transferred to them.
Fentum is not alone in his prediction.
“Given the reliance the (lodging and hospitality) sector places on employees who typically receive the minimum wage, this measure is likely to represent a significant additional cost, and businesses may find it difficult to pass on such extra costs to their customers,” said Paul Newman, head of leisure and hospitality at business consultancy Baker Tilly, in an emailed statement to Hotel News Now.
“Perhaps in an attempt to compensate, there was a surprise reduction in the rate of corporation tax, (with) the rate (falling) to 19% in 2017 and to 18% by 2020,” he added.
Some see the NLW emanating from the government’s need to have in place bold policy statements in what is the first fully Conservative Party budget since 1996.
George Osborne, the government’s chancellor of the exchequer, said on 8 July when he delivered the budget that its intent was to move the U.K. from a “low-wage, high-tax, high-welfare economy to the higher-wage, lower-tax, lower-welfare country we intend to create.”
The NLW is the part of that equation intended to see higher wages, while the lower welfare part was tackled by reducing tax credits, extra monies paid to better take care of children and to top up the wages of the lowest paid.
The British Hospitality Association, already in dispute with the government over the government’s refusal to reduce value-added/sales taxes on accommodation and attractions to a rate more in line with what the country’s European neighbors charge—which it claims will make U.K. hotels more competitive—worries increased hotel-operating costs will lead to job losses.
Consumers already bear the 20% VAT charged on hotels and attractions.
“As an industry employing a large number of individuals earning more than national minimum wage and less than the proposed living wage, we have tried to have a constructive dialogue with (the government) on building towards the living wage without job losses,” Ufi Ibrahim, the BHA’s chief executive, said via email. “We were very surprised the chancellor made this announcement without consultation.”
Ibrahim does not believe the reduction in corporation tax is sufficient to reduce the impact on industry and stem potential job losses.
“Constructive dialogue with (the government) is now imperative to identify measures to counterbalance the government’s ambitious agenda with the realities of running a high service and very low-margin business,” she added.
David Turnbull, regional officer, London, for trade union UNITE, which represents many hotel workers—those who work for hotels, hotel chains and independent contractors—also said changes were needed in government policy.
He said the consequence of cutting tax credits and other benefits will simply result in low paid workers being worse off in real terms, particularly in expensive London.
He is worried about other practices in the hospitality industry, too.
“Our experience … in the contract catering sector is that where clients have instructed catering contractors to pay the (minimum) wage because of their own public accreditation, there has been a tendency for contractors to try and take something back from the workers to compensate for the higher hourly rate. This often results in a situation where the enhanced hourly pay rate masks a murky undercurrent of detrimental contract changes,” Turnbull said.
He said low pay is a “wholly false economy.” He said what employers think they gain in the short term by paying low wages they lose in the long term by turnover, skill shortages, poor attendance and customer service, and conduct issues.
“Our message to the industry would be for them not only to embrace the £7.20 rate but to go much further in terms of embracing the actual (NLW) rate without any knock-on detriment to other terms and conditions,” Turnbull said.
“That way we might move toward having a hospitality sector in the U.K. that workers can take some pride in and that young people actually want to build a career in,” he added.