Small hospitality businesses could experience an increase in payroll costs of up to 37% by 2026 as a result of the cumulative impact of employment rights policies introduced by the Government.
That's among the findings of a new analysis by the Department of Enterprise, Trade and Employment examining the financial consequences of the changes.
These include the introduction of pension auto-enrolment, parent’s leave and benefit alterations, the addition of statutory sick pay, the new public holiday in February, the transition to a Living Wage and the right to request remote working.
The report found that overall, the measures will only have a modest effect on the economy as a whole, with estimates of an increase in the range of 1.8% to 2.2% in wage costs.
The analysis estimates that annual wage costs could rise by 1.24% due to the transition to a Living Wage, by up to 0.54% due to the sick pay changes, by up to 0.32% from pension auto-enrolment and by 0.09% due to the introduction of the new public holiday.
There would be no extra cost from the introduction of the right to request remote working, or from the extension of Parent’s Leave and Parent’s Benefit, it claims, as the State bears the financial cost of the leave entitlements.
The report does acknowledge though that there are likely to be certain administrative and compliance costs associated with the replacement of staff on leave, in addition to potential productivity implications.
However, while the overall cost burden across the economy is found to be low, those in hospitality and retail will feel the effects most because of the Living Wage changes, the report states, with a much sharper increase in costs compared to other sectors.
Smaller hospitality firms could see their costs rise by nearly 7% this year and 19% by 2026, the study claims.
"In overall terms, this equates to an increase of 14.5% and 36.7% by 2024 and 2026, respectively (when the full impact of the transition to a Living Wage is accounted for)," the report states.
However, the report also finds the impact of the policies to be much smaller in significant parts of the private sector where employment terms and conditions are already at or above those demanded by the changes.
The analysis claims there are many benefits arising from the various changes, including boosts to staff morale, productivity and staff retention for employers, as well as higher incomes and improved protections for employees.
It also points out that before Ireland introduced statutory sick pay early last year, it was one of just a few countries in the EU without such an entitlement.
While Ireland is currently the only OECD country without automatic pension auto-enrolment.
Ireland is also out of line with other EU countries in having fewer public holidays.
Minister for Enterprise Simon Coveney said the report provides important evidence of the impact of improved working conditions for both employers and employees.
But he added that it is recognised that businesses may face increased costs, in particular in the short term, as they adjust to these measures.
"Acknowledging that there will be a cost to certain sectors arising from these new measures I am introducing a suite of measures intended to assist businesses in adjusting to these increased costs as well as more generally to improve cost competitiveness of firms," he said.
"This includes making available up to €15m to Local Enterprise Offices to enable a top up payment of up to €3,000 in the Energy Efficiency Grant for businesses in the hospitality and retail sectors bringing the grant up to €8,000; preparation of an options paper on the application of the lower 8.8% rate of Employer PRSI contribution; a range of measures to reduce red tape and the administrative burden on business, including: an enhanced SME Test; accelerating the roll out of a fully functioning National Enterprise Hub with staff available to provide immediate advice and support to vulnerable firms."
Report widely welcomed by business groups
The publication of the report has been widely welcomed by business lobby groups, who have been calling for it for some time.
Ibec said the findings align with its analysis and advocacy, as it had urged the Government to acknowledge the cumulative effects of labour market policy decisions that have significantly increased costs for vulnerable companies and sectors.
"The report’s effectiveness hinges on how support is provided to sectors facing unsustainable cost hikes due to government policies," said Ibec CEO, Danny McCoy.
It called for the introduction of a PRSI rebate for the most exposed companies in line with their exposure to rising costs, along with an increase to the top-rate employer PRSI threshold above the minimum wage.
Chambers Ireland said it had consistently highlighted that most businesses would be largely unaffected by these policy changes, but that the sectors which were most affected by the Covid lockdowns were likely to experience the greatest rise in costs.
"The economic shock of these policies has been exacerbated by their implementation occurring over a narrow timeframe – reducing the time available to businesses to adapt," CEO Ian Talbot said.
Chambers Ireland recommended that in future, policy impact assessments be carried out in advance of the implementation of such policies and that the Department of Enterprise centrally coordinate their implementation across Government.
Small and medium enterprises association, ISME, said it appreciated that the assessment acknowledges major adjustments to costs in small hospitality and retail operations, as these will extend to a significant proportion of the services, leisure and experience economy sector.
It also noted that Irish small businesses in the main are not significantly profitable, and questioned whether the increases in the minimum wage are too large if the State has to assist in paying them.
Meanwhile, the Restaurants’ Association of Ireland welcomed the report’s acknowledgment that the cumulative effect of the policy decisions would have a disproportionate impact on the hospitality sector.
It also welcomed the acceptance that the increase in the VAT rate for tourism and hospitality businesses in the last budget added further cost pressures to those in the industry at a time when they were least able to withstand them.
It said the measures announced today to help businesses with costs would not assist in any meaningful way those restaurants and cafes which are facing closure and once again called for a cut in the VAT rate.
