Crowe Ireland calls for a 12-month payroll support for hospitality sector

Crowe calls for a 12-month payroll support for hospitality sector 

Crowe Ireland calls for a 12-month payroll support for hospitality sector
Loss-making hotels may be forced to close for the winter as payroll costs expected to jump to as high as 60% 

The following is an extended editorial from an Irish Independent article published on 11 June 2020.

Crowe partner Aiden Murphy, a specialist advisor to the hospitality sector, warns of the danger of widespread closures in the autumn and winter within the hospitality sector if the government does not continue to provide vital payroll support until demand recovers. 

The hospitality sector, which includes hotels, restaurants, cafes and bars, employs over 200,000 workers and the majority of these businesses have been forced to shutter their premises over recent weeks. Fortunately to-date, employees have had their wages largely covered by government subsidies within the TWSS and COVID-19 PUP schemes. 

The challenge for the hospitality sector is that as businesses re-open turnover for most is expected to be down by at least 40% for the twelve months after re-opening at the end of June.

In addition, new staffing structures required to operate safely with COVID-19 restrictions will drive payroll costs as a percentage of turnover to levels where the business is loss-making, increasing the risk of failure as it becomes less solvent.

As an example, Irish hotels typically record payroll costs of between 35-40% of turnover. However during the period that COVID restrictions are in place, where turnover is already reduced due to lower demand, this payroll cost will jump to 55-60% of turnover – making it virtually impossible for a hotel to make a profit.

As a result, we anticipate a new trend will emerge which will see hotels opening only for the high season of July, August and September and potentially closing for the quieter six months from October, reopening again in March 2021. 

There will be pent up domestic demand for the first three months which will fuel business for those hotels that decide to open up from July. However international trends are indicating that this demand will be satisfied within three months and traditional demand levels will return by October. The only demand expected for the coming 12 months will be from the domestic market which will not be enough to sustain the market. 

If tourism businesses like hotels are forced to close again after the summer, employees will only have actually been employed three months out of the 12-month period March 2020 – March 2021. The inevitable rise in redundancies could end up costing the state more in the longer term as it is left funding this cost.

Government support needed

To safeguard jobs in this sector and avoid business owners being forced into voluntary lockdows, it is essential that the government takes a pragmatic approach by extending payroll subsidies to support businesses beyond re-opening so they can re-employ and retain their staff and trade as viable operations for the year ahead.

We are proposing that, post 31st August, a variation of the current schemes where the government subsidies a third of an employee’s wage bill (at minimum wage) could really support the sector. This would result in employers obtaining say 30 hours of work for the cost of 20 hours and employers’ PRSI would also be saved on the government subsidy.

The resulting savings for individual hospitality businesses would bring payroll costs down from 60% of turnover to 45% of turnover and so bridge the gap from loss-making to potential breakeven. This could and so trigger a decision to stay open rather than close again for the winter months and retain the important link between employer and employee, preserving jobs and stabilising the sector.

If this support resulted in just 50,000 staff remaining at work during the low season, €910m would be saved over the 12 months from 1 September 2020 on social welfare and associated costs. The net cost to the exchequer could be closer to €300m (assuming a support of €100 per week per employee).

This is a critical time for businesses in the hospitality sector whose resources and cash reserves are severely depleted by the lockdown. With payroll supports only available to end of August, it is hard for businesses to justify trading through the winter at high levels of losses and urgent progress and guidance on longer term.

They are faced with a tight timeline in which they need to make vital decisions about their future. The government needs to respond quickly and provide an extended period of support to safegaurd the sector.   

Reviewing cost control has never been as important and we are working with hospitality businesses to understand their break-even points, particularly when looking to the future after re-opening. We can assist with accessing funding and finding the optimal solutions to ensure business viability. If your hospitality business needs expert support during this crisis, please contact a member of our hotel, tourism and leisure team.
Partner, Corporate Recovery - Crowe Ireland
Aiden Murphy
Corporate Recovery
Naoise Cosgrove, Managing partner - Crowe Ireland
Naoise Cosgrove
Managing Partner
Corporate Finance
Clodagh O'Brien, Partner, Consulting - Crowe Ireland
Clodagh O'Brien
Partner, Consulting