Pinnacle Advisory Group


The Nation's Leading Full Service Hospitality Consulting Firm.

Payroll Pressures

Written by: Karen Johnson 


Budget season is upon us, and it is time to study the factor that would change the single greatest expense category:  Labor

Wage Rates
In real dollars, the American worker earned 0.1 percent less in July 2013 than in July 2012, after the nominal adjustment for inflation.  Because of the weakness in the economy, wage rates are likely to be stable during 2014, with some notable exceptions:

  • California’s $8.00 minimum wage will increase 12.5 percent to $9.00 in July of 2014
  • Minimum wage in the State of New York will increase 9.4% on January, 1.  The base wage rate for tipped employees did not increase.
  •  Connecticut will increase its minimum wage by 3.5%.
  • Minimum wage rates will be increased at inflation in: Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington DC.  Nevada has already announced that there will be no change for 2014.

Pressure is building however.  Back in March, estimated that the federal Fair Minimum Wage Act of 2013 proposed by President Obama had less than a 14% chance of getting out of committee, and less than a 2% chance of getting passed unless the Democrats regain control of the House.  The next congressional election will be held in November 2014, and numerous surveys have shown that the majority of Americans (80 percent according to the Huffington Post) support the increased minimum wage.  Its odds of passing could increase mid-2014, if Republicans seeking to preserve their 33 seat majority decide to court the working class.

If passed, the Fair Minimum Wage Act of 2013 would increase the federal minimum to $8.20 beginning three months after the legislation is passed, then to $9.15 one year after the legislation is passed.  It would stabilize at $10.10 in real dollars, and then be indexed to changes in the consumer price index.  Only seven states currently have 2014 minimum wage rates above $8.20: California, Connecticut, Illinois, New York, Oregon, Vermont and Washington. The vast majority of states match the current federal rate of $7.25.  If adapted, the legislation could increase starting wages for low-skilled jobs by as much as 13 percent.

This may be a good time for the hotel industry to reconsider its vehement opposition to an increase in the minimum wage rate.  When unions sponsor living wage laws, the outcome is generally far less favorable.   In 2013 the City of Long Beach became the most recent community to enact a living wage law for the hotel industry:  $13 per hour (California does not permit a tip credit.)  An LA mayoral candidate who was narrowly defeated in May ran on a campaign of $15 per hour for all hotel workers.  Other pressure is being exerted by “living wage” referendums that are typically funded by Unite Here Hoteliers in the Seatac area of Seattle, who are fighting a union sponsored $15/hour “living wage” campaign that will be decided in November.  Living wage campaigns for hotel, airport and rental car workers have already been passed in San Francisco, San Jose and LAX.

Increased Union pressure is being exerted across the county.  At various times this summer fast food workers from picketing for $15/hour; protests and walk-outs were organized by the Service Employees International Union (SEIU) in Chicago, Detroit, Flint, Kansas City, New York City, Milwaukee, and St Louis.

This external pressure is not going away.  When the incremental costs of the Affordable Care Act (Obama Care) are known and absorbed, it may be time for the hotel industry to defuse the Union pressure by proactively granting wage increases for its hourly employees.

Health Insurance Costs
There have been a number of headlines across the country regarding double and triple digit increases in health insurance premiums as a result of the Affordable Care Act.  For example, the Society of Actuarials forecast that individual plan premiums would increase 32% in 2014, as previously uninsurable individuals entered the system.  Most of these jaw-dropping numbers relate to premiums purchased by individuals, they do not refer to group policies.  That being said, it is a safe bet that group premiums will increase as insurers anticipate worst case pay-out scenarios.

Some 56 of working Americans were covered by an employer-sponsored program that is grandfathered in as of the date of the ACA’s passage (March 23, 2010).  These programs are exempt from some (but not all) of the new rules.  Your hotel’s existing program may be grandfathered in if it has not:

  • (1) significantly cut or reduced benefits since March, 2010,
  • (2) increased the co-insurance charge percentage,
  • (3) raised patient co-payments by more than the greater of $5 (adjusted annually for medical inflation) or a percentage equal to medical inflation plus 15 percentage points,
  • (4) raised deductibles by more than a percentage equal to medical inflation plus 15 percentage points,
  • (5) lowered employer contributions by more than 5 percentage points,
  • (6) decreased the annual dollar limit or add an annual dollar limit where none existing previously

What are the key exceptions for a grandfathered policy?

  • The maximum $2,000 individual deductible and the maximum $4,000 family deductible do notapply.  For the rest of the policies, these will commence in 2015.
  • Preventative care is not born 100% by the policy provider
  • There is no 10% cap on policy premium rate increases (before triggering a 3rd party audit)

If your policy is not grandfathered, the ACA says that employers cannot require an employee to pay more than 9.5% of W-2 wages for an individual plan.  If your hotel has full-time employees earning $9.00 per hour and they have an annual income of $18,720 ($9.00 x 2,080), then your hotel  may not pass on more than $1,778 in the cost of coverage, or $148 per month, or be faced with a $3,000 per employee penalty.  The Human Resource Department will need to monitor this, and complete more paperwork, i.e. incur more hours.

Offsetting tactics include:  increasing deductibles (beware, there are new mandated maximums); increasing employee contributions (up to 9.5% of W-2 wages), replacing full-time positions with two ineligible part-time positions, or sub-contracting/outsourcing some positions.

Beware though that “gaming” the system by converting full-time positions to two, part-time positions adds grist for union-organization efforts.

How much will the average group policy premium increase?  That answer appears to be a function of the relative cost of insurance in each state.  In general, in high-cost states like Massachusetts, Blue Cross Blue Shield is anticipating nominal (3.7%) increases, whereas in a low-cost state like North Carolina, Blue Cross is advising employers to expect an 18% increase in premiums.

Nationally, the average large group premium (per employee) rose 6.2% in 2010, 8.5% in 2011 and 4.9% in 2012.  At their worst in the early 2000’s, employer-sponsored insurance premiums rose by 10% to 14% per year.  If your insurance broker has not provided a premium estimate for 2014, a 12% increase seems as good a number as any.

About the author:

Karen Johnson MAI, ISHC is Principal of Pinnacle Advisory Group West located in Newport Beach, California. Ms Johnson has been active as a hospitality consultant since 1981. Ms Johnson has prepared valuations and analyses for urban hotels, suburban hotels, resort hotels, casino hotels, conference centers, economy lodging, convention hotels, branded residences, condo-hotels, fractionals and entire resort communities. She has testified or provided expert witness reports throughout the US as well as arbitration proceedings in the UK.

Ms. Johnson is an MAI and a member of the Urban Land Institute, sitting on the Entertainment Council. She was also admitted to the International Society of Hospitality Consultants (ISHC.)