The relationship between selling prices and staff underpayment

As I write this article there is a current focus in the media about the underpayment of award wages across various industries, but lately focusing on the hospitality industry and in particular restaurants and cafes. This issue has been brewing for some years and I have had some difficult conversations with some of our clients about the potential for serious trouble arising from this practice.

Poor business viability drives underpayment

Long hours on fixed pay have caused the serious underpayment issues we now have to resolve

Long hours on fixed pay have caused the serious underpayment issues we now have to resolve

If viewed at face value it may appear that the exploitation of staff has arisen as greedy business owners seek to make more money, but this is a somewhat simplistic and perhaps biased view of the situation. A more accurate view is that most of the businesses I see doing this would not be viable if they did not do something drastic to reduce their costs.

The basic problem is that the selling prices for food and beverage have not kept pace with inflation at a time when all the costs in a food and beverage business have risen above inflation. Take protein purchases or your electricity bills as examples; these have risen dramatically in the recent past and the business owners have not been able to pass on these extra costs to their customers without pricing themselves out of the market. In short, profit margins across the board have plummeted dramatically and many businesses have to resort to problematic behaviours in order to stay afloat.

If you faced ruin, what would you do?

In my professional capacity as a consultant I am often seeing businesses that were good, solid businesses in the past, but are now battling an economic shift as selling prices stagnate while costs escalate dramatically. What would you do if you were facing financial ruin? The urge to survive is a powerful motivator; if you were in this situation would you bend the rules, or would you surrender?

We all need to increase prices, but it's easier said than done

We all need to increase prices, but it’s easier said than done

We all need to increase prices

What is really needed is a substantial lift in the selling prices for food and beverage to bring these businesses back into balance, so they can pay correct wage rates and still make a profit. I estimate that the average restaurant I deal with needs to lift its prices by 25% in order to restore comfortable viability to its business model. Unfortunately, this is unlikely to happen as you wouldn’t want to be among the first to raise your head above the parapet— you’d almost certainly price yourself out of the market. It would have to be a rapid, universal adjustment of prices, and that isn’t likely.

The other alternative is to ‘dumb down’

Given that a dramatic shift in pricing is not likely, what are the alternatives? Well, hospitality businesses could dumb down their offerings and buy-in more and reduce their service levels in order to reduce labour and wastage, but how would the public react to that? Some of our clients are moving in this direction, but there is an inevitable negative reaction from many chefs and other staff to the perceived attack on their ‘craft’. These same people are often presiding over kitchen operations where their staff are working 70 hours a week on a flat salary that is based on a 38 hour working week. The resulting hourly rate is pitiful — and illegal.

If you can't put your prices up, you will have to reduce costs by simplifying your current operation

If you can’t put your prices up, you will have to reduce costs by simplifying your current operation

Another potential solution is quite inflammatory. We could have an open labour market, without the complex award system we currently have. I’m not suggesting we abandon the concept of a minimum wage, but set this figure at a realistic level and let the laws of supply and demand regulate the rates people get paid. It’s obvious that there are many people in our industry who are prepared to work for less than they are officially due, because the alternative is no job at all. Good staff are very hard to find and I cannot imagine that sensible business people would not pay whatever is necessary to maintain staff stability if they were trading profitably.

Be very careful of your conditions of employment

Meanwhile, you would be very wise to carefully examine the pay and conditions under which you are employing your staff. The current spate of negative publicity about worker exploitation in this industry is motivating more and more staff to complain to the authorities and more and more businesses are receiving damaging negative publicity as a result. The same dining public who will rail against you putting up your prices are likely to soundly punish you with withdrawal of their custom if they perceive that you are acting unethically. It’s a classic no-win situation.

All this highlights the uncomfortable feeling that we are no longer the lucky country and that we may not be able to afford the rates of pay and the lifestyle we have been led to believe we are entitled to.