Changes to paid holiday will hit profits

Despite rising numbers of overseas visitors and a generally buoyant economy, this is proving to be a tough year for hospitality operators. Rising utility costs are out of our control but increasing wage costs (the result of Government legislation) means that profits are really being squeezed.

Proposed Government legislation on paid holidays, which enshrines the so-called Warwick Agreement between the government and the trade unions, is about to enter the consultation stage and could be in force from late 2007. A survey of BHA members suggests that this could cost the industry an estimated £190m

The legislation will increase the number of statutory paid holidays from 20 to 28 days for an employee working five days a week. Those working less than five days a week would get a pro-rata increase, so a three-day-a week worker's statutory entitlement would increase from 12 to 16.8 days.

How will this affect the industry? Our survey of members suggests that only 19% of businesses give 28 days paid holiday to five-day-a-week workers. The remainder say that some or all of their employees (73,925 workers, or 62% of the total) do not currently receive 28 days.

This means that the new rules will add about 450,000 extra days' holiday, or 6.1 days per affected worker.

The National Minimum Wage rises to £5.35 per hour from October, which National Insurance will boost to an average £5.885 per hour or £47.08 for an eight-hour day. We calculate that this will represent a 'cost' of just over £21.3m a year for those employees in the survey.

This means that employers are currently paying that amount to employees for working on the 450,000 days which, under the new rules, will become paid holidays.

If we extrapolate this figure across the whole of the industry's 1.8 million workers, this would equate to 675,000 affected employees and a 'cost' of around £190m a year.

This is quite a large sum of money and would add about 1% to the industry's total wage bill - not something that is needed at a time of other rising wage costs and soaring utility bills.

Opinion is divided on how industry will deal with it. More than a third of respondents said they would effectively muddle through and work short-staffed; a quarter said they would buy out the extra days (if this is allowed); while 40% said they would hire staff to cover.

In the latter case, employers would presumably have to pay the extra £21.3m as basic hiring pay but would have to add on holiday pay of around £730,000 for the hired staff, excluding recruitment costs.

Cynics may say that these are merely figures and that it's easy to cry 'doom' at times of rising costs and more competitive market conditions. Nevertheless, 2006 will remain a very difficult year for operators trying to maintain - let alone increase - profit levels.

Energy costs have spiralled by around 40% in the past 12 months to account for 3.2% of total turnover and similar increases can be expected in the next 12 months.
Meanwhile, wage ratios have grown from around 24.5% in 1997 to 30.7% in 2004 - and minimum hourly salaries for adults will rise by another 5.9% this October.

At a recent meeting of leading hotel managers, the general consensus was that most operators will need to increase revenues by at least 5% just to stand still in terms of profit. That's quite a tall order.