Hoteliers and the ‘National Living Wage’

The political hot potato of a ‘National Living Wage’ has dominated headlines in recent months after George Osborne introduced it in his July budget. KAREN BEXLEY explores some of the issues the NLW could cause for businesses and how they can keep staffing costs to a minimum. With the introduction of the National Living Wage (NLW) in April 2016, all staff members aged 25 and over will receive a new premium on top of the National Minimum Wage (NMW) which will initially be at a rate of £7.20 per hour (increasing to £9 an hour by 2020). Industries with flexible workforces, such as the hospitality and retail sectors, are likely to be the most affected by the changes as around 26% of the workforce is paid based on the NMW. As a result, many companies are looking to revaluate their existing pay structures. The hospitality industry is likely to be one of the hardest hit by the changes to the NLW when they come into effect. The new ruling has the potential to significantly affect both employers and employees. Unsurprisingly, hundreds of jobs are in the firing line and profits are expected to take a hit, with shares in the hospitality sector already suffering. For example, Deutsche Bank expects that the profits of JD Wetherspoon could be decreased by 25%. Before the changes are put in place, now is the time for hoteliers to review their existing pay structures and make sure they understand what this could mean for their business. IMMEDIATE ISSUES This higher rate of pay will see employers face a direct increase in what they spend on staff wages for those employees who are aged over 25. And unfortunately, this rise could see jobs being cut or prices having to increase, if businesses are to remain profitable. This is likely to affect those businesses that already have tight budgets. The government has indeed recognised this implication but predicts that growth, in areas such as employment rates, will only be partially hampered. It estimates that there will only be about 60,000 fewer jobs under the new system by 2021 than there would have been under the old NMW system. But however accurate these predictions may be at present, if employers feel that the changes are going to greatly impact their business, it could well be the case that we begin to see recruitment freezes and restrictions put on investment projects. KNOCK-ON EFFECTS Aside from these immediate effects, there are perhaps some not-so-obvious consequences that are yet to be taken into account. For those employees who are under 25, the NLW will not apply to them. The government has said that this is to maximise the chances for the younger generation to secure employment positions and work experience opportunities, thus highlighting that it expects employers to look at recruiting younger members of staff. Having said this, this method of recruiting could land hotel bosses in hot water when it comes to discrimination and unfair dismissal claims. For example, if someone is unsuccessful in a job application and is 25 or over, they could claim that they were not offered the position due to minimum wage requirements pertaining to their age. Another example could be an existing employee who is dismissed from their role who could argue that they have been unfairly sacked as having turned 25 would entitle them to a higher wage, therefore incurring higher costs for the company. On top of this, there are also issues that may have a knock-on effect on those employees who wages will not be changed by the new laws. The NWL may actually bring some staff members up to similar wages as those in higher, more senior salaried roles. In real terms, this could make these senior members of staff feel as though they are on a lower level of pay than those who are paid by the hour. This opens up the possibility for a whole host of employment relations issues arising. To retain the existing pay structure, further pay increases may be required across the company so that senior members of staff feel that they are being fairly paid for their roles as well. HOW CAN YOU PREPARE? It is thought that many hotels will wait until they’ve legally got to deal with the issue next March, when actually they should be thinking about carrying out an audit now so that they’re not stuck come April. Favouring employees under the age of 25 over those above the threshold is not an acceptable strategy, and so businesses need to be reviewing their budgets and pay structures as soon as possible. It is likely that budgets will already have been set for the next 12 months so these will need revisiting to accommodate for the changes. One suggestion, for those who are currently paying all employees the adult standard rate regardless of age, could be to revert back to age-specific rates. This means that those under 21 would be on a lower rate and this would then help to subsidise the higher wages that will need to be paid to those aged 25+. Depending on the age profile of the workers in a business, this may allow increases to staffing costs to be kept to a minimum. Alternatively some businesses are reviewing their service charge policies to minimise the financial impact of the increase. The time for hotel owners to act is now so that they can be fully prepared when the changes do come into effect next year. Putting it off until the last minute will cause serious problems, and could leave some companies in hot water. For many in the hospitality industry, wages are one of the biggest business overheads, so it is not something they can simply ignore. About the Author Karen Bexley is a partner and head of employment law at MLP Law, a leading commercial law firm in the North West. 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