The impact of increased National Insurance contributions on the UK’s hospitality sector.

Increased NI contributions means higher wage bills for employers. Absorbing these increased payroll costs is unlikely to be an option for those within hospitality sector, so on this basis, employers will have two options:

1. To pass the costs onto customers through raising prices – However, there will be a limit as to how much businesses can pass on these costs before losing customer support, particularly in a highly competitive market. For instance, hotel chains may need to increase room rates, however with the competitive nature of the hotel industry, there is a risk that customers may choose alternative accommodation if prices rise too much.
2. To pass the costs onto staff – This can be done by scaling back hiring, restructuring, reducing workforces through redundancies, limiting working hours, or reducing salaries for staff. However, if businesses such as independent cafes and restaurants reduce staff hours, this could lead to longer wait times and reduced service quality, potentially driving customers away.

For many businesses, passing high payroll costs onto customers, at the risk of alienating their clientele, will not be feasible. This could result in reduced bookings at venues, and effect the overall customer experience. Consequently, employers will have no choice but to consider restructuring their workforce.

Employers have a number of ways in which to restructure their workforce, and/or to reduce payroll costs. However, businesses should ensure any workforce changes are done in compliance with employment law, as well as factoring in any potential legal risks.

For example:

• Redundancies – Employers must follow a proper consultation process, including collective consultation if more than twenty employees are affected. Selection criteria and redundancy pools must also be fair and well documented. Failure to follow the strict legal processes for redundancies could lead to claims of unfair dismissal and discrimination.
• Varying contractual terms and conditions – If changes to an employee’s contractual terms are needed, such as reducing hours or pay, employers need to ensure they either have; (i) sufficient flexibility within the contract to allow them to make the changes, or (ii) seek express agreement from employees. Attempts to impose changes unilaterally are risky, and could open an employer up to claims of breach of contract, discrimination, or unlawful deduction from wages.
• Changes to hiring – To manage labour costs, employers may wish to consider using zero-hour contracts. This will provide businesses with the flexibility to respond demand whilst reducing wage bills, as zero-hour employees are only paid for the hours worked. However, changes proposed by the Employment Rights Bill seek to provide greater security and protections for employees on zero-hour contracts. For example, the right to guaranteed hours and to receive reasonable notice of shifts. Employers will need to be mindful of future legislation when restructuring their workforces.
• Reviewing Employment Contracts – Employers will need to carefully review their existing employment contracts for future and current staff to ensure salaries, benefits and other terms like working hours are such that businesses can continue to sustainably operate. Whilst reducing wages or hours may seem like a solution, employers must comply with national living wage requirements and should implement changes equitably to avoid discrimination claims.

Rising NI contributions will pose a significant challenge for the UK hospitality sector, threatening the viability of many businesses. Employers should begin to consider how to best adapt their workforces to meet the financial and operational challenges ahead, whilst ensuring compliance with their legal obligations.