Creating a fairer paying field
The government has always set its face against setting minimum wages at regional level, but this is one piece of legislation the industry could usefully lobby to change, say Bob Cotton and Miles Quest.
George Osborne’s hike in the National Minimum Wage in the last Budget, and calling it the National Living Wage, is yet to impact the hospitality industry in full. This year’s increase from £6.95 to £7.20 per hour for adult workers sounds little enough, but over a 35-hour week that’s another £8.75 for each NLW worker. The target of £9 per hour by 2020 is in another league.
Compared to 2016, it would mean each NLW worker would earn £63 a week more. How much would this cost the industry? No one really knows.
Information on the number of hospitality workers on, or below, the NLW is difficult to come by, although it’s possible to make a rough calculation from People 1st figures. In 2015, the average hourly pay for the three lowest paid hospitality occupations was on, or just below, the National Minimum Wage – average pay for the (estimated) 425,000 kitchen and catering assistants was £6.80; for 260,000 waiting staff, it was £6.50, and for 200,000 bar staff; it was £6.60. In fact, there are probably far more hospitality workers on the minimum wage than the 885,000 listed here – perhaps as many as 1.5million – but we don’t know how many of these workers are aged under 25 and are thus unaffected (so far) by the legislation. But even to bring half the 885,000 up to the 2016 NLW rate of £7.20 will have cost the industry millions this year. To raise it to £9 per hour by 2020 will cost several billions. How can the industry profitably sustain such a massive hike in its payroll bill?
Payroll-to-turnover ratios will rise inexorably without action: a fairly hefty increase in prices (possible in the London hotel sector where the wage ratio is quite low, but more difficult for provincial hotels and almost all restaurants), or by employing more workers under 25, or through an increase in productivity which is unlikely given the industry’s dependence on manpower and its patchy training record. In hospitality, the opportunities to save labour through automation are limited.
Arguing to keep wages low, however, will not endear the industry to either the government, or those working in hospitality.
Indeed, the industry would have much to gain if wages could be raised; a better profile would lead to easier recruitment and retention, and greater employee satisfaction. But wages are not low because businesses are making excessive profits; they are low because prices have to be contained to meet levels of demand. The published results of successful public restaurant and hotel companies reveal only average profit levels and return on capital; at the same time, the number of failed businesses indicates that hospitality remains a difficult industry in which to succeed.
Significantly, the hotel industry is currently making a good fist of keeping wage ratios – its highest cost – under control.
Hotels inside central London are currently operating in the region of 26 per cent payroll to turn over (less for some properties); outside the capital, it is 30 per cent and can be nearer 40 per cent for more carefree establishments. London wage ratios are lower partly because many hotels in the capital enjoy economies of scale; they also have a reduced F&B operation relying on guests eating out. In effect, many have become bed factories rather than full-service hotels. It is thus ironic that establishments in the capital already offer wages above the NLW because of the difficulties of recruitment and retention, although the high prevalence of migrant labour is helping keep wage levels lower than would otherwise be possible.
However, an overriding advantage for London hotels (and restaurants to a lesser extent) is that they operate in a market of high demand, resulting in levels of hotel occupancy (80-85 per cent) that most provincial hotels can only dream about. Prices can thus be more easily increased to cover higher wages than in the regions.
Operating at half the RevPAR, and with more uncertain levels of demand, occupancy in regional hotels is at least 20 percentage points slower on average than in London (published figures tend to overestimate occupancy in the regions because they are based on surveys of busy city centre hotels and do not take account of the provincial hotel sector generally). Because price increases for hotels outside the capital are thus far more difficult to sustain, the increase in the NLW to £9 an hour will have a far more serious impact on them.
It’s a similar story in the restaurant sector where wage ratios are higher, averaging at least 35 per cent and typically higher. Restaurants demand high levels of staffing, with chefs who are more highly paid than other workers (though the average rate of pay for a chef is only £23,000). The London restaurant sector, in particular, is also highly competitive with new restaurants opening every year creating new demands for skilled workers and, at the same time, reducing the ability of existing restaurants to increase prices if they are to maintain a competitive edge; in ethnic sectors, the wage level for immigrant labour is impossibly high.
Furthermore, often forgotten in any discussion on the NLW, is the impact it exerts on workers’ wages higher up the scale. Inevitably, by the time the £9 rate has been reached in 2020, pressure will have been exerted by other workers who want to maintain the difference in their earnings.
All this surely argues for a re-examination of minimum wage legislation. At the time of its imposition in 1999, the then Labour government argued that to introduce regional variations would be too costly and, administratively, too difficult. This was nonsense then and it’s still nonsense now. There are plenty of sophisticated software systems available that enable businesses throughout the country to cope with different levels of pay, taxation and entitlement based on regions and industry sector. Those with longer memories will remember the Wages Boards (later Wages Councils) that routinely laid down minimum wage rates for different sectors of the hospitality industry in different parts of the country – and there were no technical difficulties in implementing this legislation.
Why can’t a similar, differential rate be introduced for the NLW? This is something the Living Wage Foundation has always recognised by its £9.40 rate for London and £8 .25 rate for the regions.
This would surely be an opportune time for the industry to research the impact of the NLW on hospitality by 2020 and to lobby in favour of regional variations – either one for London and one for the regions (similar to the Living Wage Foundation’s two rates) or one which is based on the three countries and English regions. This would take account of the higher living costs in London and the South East, but would justify a lower NLW rate for businesses in regions where living costs are less onerous.
In fact, regional and sectoral variations may be with us sooner than we think. Devolution issues in Scotland (and Northern Ireland and Wales) are likely to encourage administrations in these countries to recognise that a National Living Wage unfairly blights their employment prospects and pressure will inexorably be exerted on them to implement local variations.
Of course, wages generally will continue to rise, but there is no doubt that a national NLW imposes an unfair burden on provincial businesses. This surely makes it a good time for the hospitality industry to argue its case. The cost of success to the government would be negligible, but the benefit to hospitality would be significant, reducing pressure on the ever-increasing cost base of regional employers and enabling them to compete on a more level playing field with businesses in London.
Article by Bob Cotton
Featured in epmagazine.co.uk (pp10-11)