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The cost of employing people is increasing – key considerations for employers in managing these costs

The food and drink sector is facing significant increases to payroll and other staff costs. We have seen a lot of changes recently that impact the food and drink sector because of the nature of the sector’s workforce.

Why are employment costs increasing?

The factors driving this trend include:

  • The introduction of the National Living Wage (NLW) for over 25s and associated upward pressure on wages. The government’s own advisers estimate that the NLW will cost UK businesses more than £1bn.
  • Recent legal decisions holding that overtime and commission must be included in holiday pay.
  • Compliance with government initiatives including Modern Slavery and gender pay gap reporting.
  • The Apprenticeship Levy which is due to start in April 2017.
  • Increasing numbers of claims for ‘worker status’ made by individuals previously regarded as self-employed or consultants.

The government is also doing its best to recoup as much tax as possible. The government has stated that it is ‘scrutinising’ the widespread use of salary sacrifice schemes and is also proposing to remove the £30,000 tax free allowance for non-contractual termination payments and replace it with a far less generous scheme.

This article considers:

  • What is happening?
  • What steps can be taken to manage increased costs whilst remaining on ‘the right side’ of employment law?

What is happening?

National living wage

From 1 April 2016, over 25 year olds must be paid a ‘national living wage’ of at least £7.20 per hour. In just four years’ time the NLW will have risen to £9 per hour. But it will not just be those earning the NLW that will be in line for a pay rise – more senior staff may also seek pay increases to preserve the gap between their pay and those earning the new NLW. Any increase in pay will also impact on total pension costs, holiday pay, overtime, bonuses and any other payments or premiums calculated by reference to basic pay.

Directors of companies who contravene the NLW risk being banned from being a company director for up to 15 years. The government is increasingly using its powers to crack down on employers who do not comply with the NLW requirements.

Holiday pay cases

Recent decisions of the European and UK courts have held that overtime and commission must now be included in holiday pay calculations. For further detail please see our article. This represents a huge shake up for many food and drink employers as they face a significantly increased holiday pay bill.

Mandatory gender pay reporting

Employers with at least 250 staff must publish a gender pay report on their website from April 2018. April 2018 may seem far away, but it is important that employers start their preparations now. See our article for more detail. The net effect of this development is that employers will be under pressure to redress any gender pay gaps that exist or risk reputational damage and claims for equal pay.

Modern Slavery Act

Businesses supplying goods and services with an annual global turnover of £36 million or more must now report annually on the steps they have taken to ensure that their business and supply chains are free from slavery or human trafficking. Businesses with turnover less than £36 million (whilst not directly in scope) may well be affected as their larger customers require them to provide assurances and safeguards on slavery and human trafficking. It is essential that the new rules are integrated into existing risk management, due diligence and supply chain management procedures.

A consistent and organisation-wide approach is essential. For example, it will be important to audit current risk management and due diligence procedures as well as supply chain relationship management procedures. Please refer to our article for more information.

Apprenticeship levy

From April 2017, employers with a wage bill of more than £3 million must pay a 0.5% levy to fund apprenticeships. The Government will then provide employers with an allowance of £15,000 in vouchers to spend on apprenticeship training. The apprenticeship levy will be payable through PAYE and calculated on the same total employee earnings figure as that used for class 1 national insurance contributions. Employers who operate multiple payrolls will only be able to claim one £15,000 allowance. This is yet another payroll cost to factor into your financial forecasts and budgets for next year.

Worker status

It is often difficult to distinguish between the self-employed and workers. Worker status gives individuals several rights which do not apply to self-employed individuals, including the right to receive the national minimum wage and the right to paid holiday. We often see claims where an individual is claiming that they are a worker which are low value in isolation, but could affect a significant proportion of an employer’s workforce. For example, the taxi hailing app Uber states that its drivers are self-employed. Uber is currently facing a group action by a number of its drivers who are claiming worker status because of the degree of control that Uber exercises over their activities. If they succeed, Uber will have to treat its drivers as workers and will face increased costs and administrative burdens.

As part of the 2016 Budget, the Government has announced it is to “clamp down” on anybody working through their own limited company for a public sector client. Departments and agencies will be made liable for tax which previously was the responsibility of the contractor. It is fair to say that this represents the general direction of travel in this area. The take home message is that engaging people on an atypical, zero-hours, casual, temporary, self-employed or consultancy basis will not necessarily absolve the employer of employment or worker liabilities and could lead to significant liabilities (taxation, NI and employment) later down the line.

What steps can be taken to manage increased costs whilst remaining on ‘the right side’ of employment law?

The good news is that with appropriate planning and forethought it is possible to make changes to workforce structures and working patterns with the objective of reducing costs or absorbing the increased costs into sustainable budgets. This is where your employment law advisers can add real value. Some of the options available include:

Workforce flexibility

  • Higher payroll costs may see the need for a greater degree of workforce flexibility. It may be expedient to use zero-hours, annualised or lower base hour contracts or to restructure shift patterns and premiums. Savings might be made by staggering shift start and finish times and existing overtime arrangements may need to be reassessed.
  • It may be worth looking at supervisory structures. Are they top-heavy? If so, consider flattening supervisory structures to reduce the number of higher paid supervisors. Non-supervisory staff could be given additional responsibilities and new, higher expectations of non-supervisory staff could be introduced, perhaps in return for additional benefits or flexibilities. Many employees may welcome structure flattening exercises as they often lead to a more engaged, democratic workforce culture.
  • Consider whether current contractual arrangements and shift patterns provide the right amount of flexibility for your organisation and to identify any potential payroll savings.

Always take legal advice if significant changes to contracts of employment or overtime arrangements are envisaged. The cost and time involved in Tribunal claims can outweigh the financial benefits of a change. If you recognise a trade union, consider whether it is worth initiating a discussion with it at this stage about the realities stemming from the increased payroll costs.

Getting value for money from staff

  • As pressure on margins continues to increase it will be as important as ever that employers are getting the best possible value from staff. Performance management procedures need to be effective and managers and supervisors need to be well versed on how to use them.
  • Competition for quality staff is increasing and many employers are seeking to differentiate themselves by providing new and innovative reward and recognition programmes. It is also worth bearing in mind that the imminent cut to tax credits may lead to many employees requesting to work more hours each week to boost their income and employers should think about how they would respond to such requests.
  • Now is a good time to check that the organisation’s performance management and staff retention policies are working. It is as important as ever to ensure that the correct standards and expectations are set and maintained. Conversely, ensure that staff performing above expectations are recognised and that staff retention strategies are working effectively.


Increased costs could bring about a need for headcount reduction or restructuring. If redundancies are anticipated ensure, in advance, that the organisation’s existing redundancy procedures are fit for purpose. If collective redundancies are envisaged start laying the groundwork for collective consultation in good time before the process begins.

Walker Morris’s employment team has a wealth of experience in advising on these issues. Please contact David Smedley or Andrew Rayment.



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