The introduction of the living wage

After weathering the storm of the recession and managing the ongoing concerns of tight margins, pricing competition from supermarkets and rising overhead costs, the latest challenge to the leisure industry is the impending introduction of the National Living Wage (NLW).

From April 1, the new NLW rate of £7.20 will replace the current national minimum wage of £6.70 for workers aged 25 and above – that equates to an extra £910 per year extra income for a full time worker on the current minimum wage. By 2020, the NLW will rise to over £9, with annual increases each year between.

For business in general, this poses a potential financial challenge but one of those most affected will be the leisure sector – a labour intensive industry which already operates at increasingly tight margins. Statistics suggest that for pubs and restaurants, payroll accounts for around 30% of turnover. Furthermore, hotel wage bills have already gone up by 3.4% – the highest increase across all sectors.

Given the high proportion of a leisure operator’s income paid out in wages, the impact on the sector will be harshly felt. And while the NLW will come into being for every business, payment banding structures may have to be revised within individual organisations, incurring further costs – for example, if one level of staff is paid £2 per hour more than another, but the NLW reduces that differential, will the expectations of the employees be that the operator increases the higher wage to keep the ratio the same?

Broadly, there are three options that are immediately obvious to leisure operators to help mitigate the impact of the NLW, sadly none of which are particularly appealing.

One option is to cut staff – but in premises open for such long hours, and with seven day opening and peak times to cater for, to make any sizeable cuts to workforce will not be possible without adversely affecting the quality of service delivery.

Another is to reduce expenditure – this is probably the most likely outcome of their margins being squeezed even further but in vibrant city centres where competition from rival operators is high and new venue openings are frequent, failing to invest in and improve on your current assets is perhaps a dangerous route to take.

A third is to put up prices – unless this is an across-the-board introduction adopted by premises, operators run the risk of sending customers elsewhere due to price increases. This is all the more of a challenge for the “budget operators” who attract custom through their cheap deals – even a small price increase could have a significant impact.

From a legal perspective, a failure to pay the NLW can have significant consequences. Sanctions currently include a doubling of the penalty for non-payment to 200% of the arrears, together with a possible maximum fine of £20,000 per worker following criminal prosecution. Enforcement can be by the employee direct through employment tribunals or by HMRC and its dedicated team of enforcement officers.

The leisure sector has always struggled with tips in the context of minimum wage legislation.  It is worth remembering that for the purpose of calculating wages, tips that go through the employer’s payroll do count towards wages.  However, tips paid directly to the employee do not count and are ignored in assessing compliance.

Undoubtedly, the introduction of the NLW is a significant sector-wide challenge for pubs, bars, restaurants and hotels everywhere. The severity of its impact over the course of the next four years and the introduction of the £9 living wage will be something only time will tell.

Christopher Welch is Partner in the Company and Commercial department at Sintons. Contact him on or 0191 226 7831.

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