Oral evidence: Compliance with the National Minimum Wage in Scotland, HC 393Wednesday 25 June 2014
Oral evidence, 25 June 2014.
Witnesses
David Norgrove, Chair, Low Pay Commission and Tim Butcher, Deputy Secretary and Chief Economist, Low Pay Commission, gave evidence.
Chair
Gentlemen, welcome to this meeting of the Scottish Affairs Select Committee. For a period, we have been pursuing a number of issues relating to employment. We started off looking at health and safety and then got diverted into blacklisting. We have been pursuing zero-hours contracts, and we are obviously interested in the national minimum wage, particularly questions of enforcement, underpayment and the like. You are it today; you are kicking off our inquiry into this sub-area of employment. Can I start off by asking you to introduce yourselves for the record and say what your position is in whatever organisation you are part of?
David Norgrove
I am David Norgrove. I chair the Low Pay Commission, and have done for the last five or six years.
Tim Butcher
I am Tim Butcher, the deputy secretary and chief economist at the Low Pay Commission.
Chair
Can you give us an estimate of how many people you believe are illegally not being paid the national minimum wage in the UK, and, if possible, in Scotland? What issues are there around giving that figure?
David Norgrove
That kind of question is always very difficult to answer, because people who do not observe the law are generally not very open about the fact. You can measure the proportion of people who are paid below the appropriate minimum wage rate. Depending on the survey and how it is done, it comes out at between 0.6% and 0.8% of the relevant population. Scotland is more or less in line with that UK average. I think that in the last survey it was around 0.7%. But you cannot say that that is the proportion of people who are not being paid the minimum wage, because there are various reasons why they might be paid less than the minimum wage—for example, the fact that employers are allowed to offset what they pay for accommodation, within a specified limit, against the amount they pay for the minimum wage. That kind of deduction, and one or two other things, means there might be reasons why, when people are asked what they are paid, they declare less than the minimum wage. When you make allowances for that—we have looked at one or two individual sectors—although these are quite crude and difficult numbers, they might explain about half that difference, so you end up with 0.3% or 0.4% as the proportion of people not being paid the minimum wage. That sounds and feels much too low to us. When we go around the country and talk to CABs and employees, and look at HMRC’s experience, it suggests that the numbers are higher than that. How much higher? That is difficult to estimate. An academic did a study of the social care sector and came out with a figure of about 10% of people not being paid what they are due. You get to that by observing that in the social care sector quite a lot of people are paid just above the minimum wage. If they are not being paid, for example, for the travel time they are entitled to, it takes them below it, so you make an estimate of how many people might go over that boundary, but for a lot of sectors that is quite hard to estimate. The answer is that we do not really know, but it is higher than the numbers you come out with when you do surveys.
Jim McGovern
You said that an academic had done a survey. Who is this academic?
David Norgrove
I can’t remember her name.
Tim Butcher
Dr Shereen Hussein from King’s College London.
David Norgrove
She did a special piece of work on social care. What we do know is that there are certain sectors and types of people who are most vulnerable to not being paid the minimum wage: apprentices, hotel cleaners, cleaners generally, hairdressing, which is a bad case, and migrant workers, particularly illegal migrant workers who are most vulnerable to being exploited. Interns would be another kind of person where there has been a real problem. We have pointed to those kinds of problems over the last few years and encouraged HMRC to focus on those areas in their enforcement work.
Chair
We have in front of us a chart from your annual report—for the benefit of colleagues, it is figure 2.3—which tends to indicate that there is a lower percentage of minimum wage jobs in Scotland than in England, Wales or Northern Ireland. Particularly at the present time with the referendum running, there is a traditional sense of girn and grievance in Scotland. Some people always think they are worse off than everybody else, but this would tend to indicate that actually we are not, and we have fewer people working on the minimum wage, or just above it, than any other part of the UK, except the south-east and London. Are you sure these figures are right?
David Norgrove
They are as good as the surveys that are carried out by the Office for National Statistics. They are quite large samples. I do not think we have any reason to doubt them. There is a margin of error, but the difference is quite substantial, certainly if you look at Scotland and Wales.
Chair
The Welsh figure is almost 50% higher.
David Norgrove
Yes.
Pamela Nash
Following on from the Chair’s question, could you tell us a bit about which sectors are mostly associated with low pay and non-compliance with the national minimum wage? Does it change throughout the country, or is it the same throughout?
David Norgrove
The two largest sectors by far where people are paid the minimum wage are hospitality—pubs, clubs and that kind of thing—and retail. Then you have quite a range of other smaller sectors. I have mentioned some of them: social care and hairdressing. Then you think about the sizes of businesses and the type of people who are most associated with the minimum wage. Typically, the minimum wage is more associated with small businesses than with larger ones, with part time rather than full time and with women rather than men.
Pamela Nash
Is that low pay or compliance?
David Norgrove
That is low pay. In terms of compliance, very often you get more absolute numbers who are not being paid the minimum wage, or being found by HMRC, where there are more people in the first place who are being paid the minimum wage. With hospitality, hotel cleaning has been a real problem; people have been paid by the room and not paid enough, or the assumption about how long it takes to clean a room has been too low so they are on piecework and they end up being paid less than the minimum wage. I do not think I have anything much to add to that answer.
Pamela Nash
Are there any differences between the sectors that are more likely to be low paying and national minimum wage compliance? Are the guilty parties the same sectors, or do they differ?
David Norgrove
In terms of proportions, HMRC would probably be better people to answer this than me. Hairdressing is bad, particularly for apprentices. I think that in the last survey about 70% of apprentices in hairdressing were not being paid the minimum wage. Tim, do you want to add anything?
Tim Butcher
Non-compliance is more prevalent in social care, hairdressing, child care and nurseries.
Pamela Nash
I think one of my colleagues is going to explore that further. The Chair mentioned that Scotland has fewer minimum wage jobs as a proportion of jobs than the rest of the country. You said that was based on ONS figures, but is there any evidence as to why that is the case—why Scotland has fewer minimum wage jobs?
David Norgrove
When you look at where Scottish employment is rather than English employment, it is a sectoral thing. My understanding is that when you look at that you see a lot of small differences. You cannot say there are far fewer people in hospitality proportionately in Scotland than there are in England and Wales; it is just little bits across the piece.
Chair
You mentioned hotels, in particular room cleaning. Does that tend to be individual hotels or chains? Is it a matter of policy across a big chain?
David Norgrove
Occasionally, some household names in big chains have not been observing the rules.
Chair
You cannot tell us who those are.
David Norgrove
I cannot.
Chair
But you know.
David Norgrove
I do not even know them. That is what I have understood from HMRC. HMRC are also bound by confidentiality, unless those people have been named and shamed.
Chair
I am just pursuing the question of how you know that. HMRC have told you that there are chains, but they have not told you who the chains are.
David Norgrove
That is right. There has been more than one TV programme that has explored this.
Chair
I do not see everything that is on TV, so I must have missed it. Goodness me. We will speak very severely to the staff about that; obviously, they have not been watching enough television to be able to tell us what company was named on the TV programme. Nobody here has been watching television; we are all glued to our desks.
David Norgrove
We are all equally ignorant about it.
Graeme Morrice
I think the report mentions a hotel in Edinburgh that was named and shamed, so we can read that. Going back to the figures you gave for hairdressing apprentices, for 2012 the percentage of non-compliance was nearly 70%, which is a big increase on 2011, when it was nearly 50%. Why would that be the case in hairdressing in particular?
David Norgrove
Hairdressing is a tricky business, because it is thousands of small businesses with no large chains, so they are all individual employers. They came under pressure during the recession and the downturn; people have to have their hair cut, but they have it cut less often, so there is a lot of economic pressure. They would say that the minimum wage has gone up steadily, and they have not been able to put up their prices. That is no excuse for not paying the minimum wage, but that is the kind of answer they give. For example, people stop being employed and have to rent a chair in a hairdresser. Traditionally, apprentices—young people—sweep the floors for a couple of years before they start learning the trade, and when the price goes up they get sacked in some places. There are some good employers but also some pretty bad ones out there. There is a whole host of reasons, but economic pressure is part of it.
Graeme Morrice
My hairdresser in Broxburn put up his price by 50p. As you can see, it is clearly still value for money.
Jim McGovern
When were you last there?
Graeme Morrice
Three weeks ago. I take it there is no excuse that they do not know the law of the land and the rates of pay for apprentices.
David Norgrove
Some would say they do not know. I think there is an issue. It does not explain much of the problem. It explains the difference between hairdressers and other people, but there is definitely a problem of awareness, and the structure of the apprentice rate is reasonably complicated. It is not rocket science, but getting it into people’s heads has been a challenge.
Graeme Morrice
Ignorance of the law is no defence. I am sorry if I am poaching someone else’s questions, but what effort is made by the powers that be to ensure that people such as hairdressers, accepting the fact that a lot of them are just small private businesses, are aware of their obligations under the law?
David Norgrove
We would say as a commission, not enough. The amount of publicity for changes in the structure of the rates and the new rates has been reduced. The BIS website used to put this stuff out, but the amount of material has been cut back drastically since going on to GOV.UK. What is on GOV.UK is very clear, but it is pretty basic and is not publicised enough.
Mike Crockart
I want to ask a question on the statistics about where the minimum wage jobs are. You mentioned internships. Unpaid internships are an area I have been particularly interested in. Do you have any idea of the numbers of unpaid internships, and whether that skews the statistics? The sectors that seem to be most engaged in unpaid internships are fashion, culture, journalism, media and marketing, where there is a greater preponderance in London and the south-east. Is that potentially skewing the figures?
David Norgrove
I do not think so, because they would not be picked up in the survey.
Mike Crockart
That is my point. Is the absence of them skewing the figures to make them lower?
David Norgrove
But they are higher in England.
Mike Crockart
Exactly.
David Norgrove
It depends on which number it is. It does not affect the 0.6% to 0.8% I talked about, because they would probably be excluded from both the numerator and the denominator, but if we were measuring it accurately, the 0.6% would then go up. If they were cast as being employed in the survey, the 0.6% would go up. If that is the thrust of your question, I agree.
Lindsay Roy
To use a Scottish phrase, if you didn’t know then, ye ken now. Whose responsibility is it to provide basic information to employers about the national minimum wage?
David Norgrove
It is a responsibility of BIS.
Lindsay Roy
What dialogue have you had with them about improving their efficiency and effectiveness?
David Norgrove
Of communication?
Lindsay Roy
Yes.
David Norgrove
We regularly urge that more material be made available to employers. We have had complaints from employers’ organisations that, for example, the calculator they used to have on the website to help them calculate the minimum wage has disappeared; details of piecework calculations and those kinds of things have been reduced. Gradually, we are getting it back on to the website, but it is taking quite a lot of effort.
Lindsay Roy
What response have you had from BIS?
David Norgrove
In principle, I think BIS is supportive but it is a matter for the whole of Government; it is a matter for the control of GOV.UK.
Lindsay Roy
I think that in principle we are all supportive, but what about in practice?
David Norgrove
In practice they do, but it is not entirely in their hands.
Lindsay Roy
In whose hands is it?
David Norgrove
Those who are responsible for GOV.UK; they control the information that goes on to the website. I think it is the Cabinet Office.
Lindsay Roy
Is that not an issue between Government Departments?
David Norgrove
Yes.
Lindsay Roy
Has pressure been put on the Cabinet Office to deal with it?
David Norgrove
Yes.
Lindsay Roy
To what effect?
David Norgrove
I have written to the Cabinet Office about it, too. We are making progress, but I would like to see more.
Lindsay Roy
It is something that I will raise in another Committee.
Chair
Would you be able to send us copies of the correspondence you have sent to BIS and the Cabinet Office about that?
David Norgrove
Yes.
Lindsay Roy
Can I move on to social care? It seems to be quite a big sector in this respect—HMRC estimate that about 200,000 people may be below the minimum wage. Are you aware of that?
David Norgrove
I am not familiar with the 200,000 number.
Lindsay Roy
I think it was a configuration from an estimate of 30 non-compliant firms and 3,260 employees. It seems to be a very big sector.
David Norgrove
It sounds to me like a pretty odd thing to do—to extrapolate from a small sample of firms where you have found a problem and say that you would find the same proportion of non-compliance if you looked across the whole sector.
Lindsay Roy
That is one of the biggest problems, is it not? We do not have an accurate estimate at all.
David Norgrove
Yes. It is like non-payment of tax; it is a very difficult thing to estimate.
Lindsay Roy
It is purely notional.
David Norgrove
You do what you can through surveys and talking to people, but putting numbers on it is very hard.
Lindsay Roy
Do you agree that doing what we can at the moment is not good enough?
David Norgrove
You can only do what you can.
Lindsay Roy
You can make it a higher priority.
David Norgrove
Even if you make it a priority, it is a struggle to know what you do. I do not know how in practice anybody could go out there and establish what the rate of non‑compliance is across the country. Apart from anything else, very often employees do not want to say they are not being paid the minimum wage. If they are worried about their jobs, they will not tell you.
Lindsay Roy
Is it an insoluble problem?
David Norgrove
If you could establish accurately the hours everybody worked and you looked at their PAYE records, you could get to it, but you would have to do it for every employee in the country and you would have to be sure that what you were being told about the number of hours they worked was accurate. Very often it is not accurate. With all the will in the world, I do not know how you do it.
Lindsay Roy
Is this a defeatist approach, that there is nothing we can do about it?
David Norgrove
No; it is just saying that having confidence about a number is probably impossible.
Lindsay Roy
We should expect confidence from the Government in terms of national statistics.
David Norgrove
But confidence about a number on something that is illegal is inherently very difficult.
Lindsay Roy
I understand that. We are told there is a high rate of non-compliance in the social care sector. They tend to be bigger employers than the hairdressing business, for example.
David Norgrove
Yes.
Lindsay Roy
What are the Government doing to tackle that?
David Norgrove
We have raised this with Government a number of times. Government have published guidance for local authorities. In England at any rate, they are now consulting about statutory guidance for care providers. I think it is a function of two things. It is partly down to local authorities’ commissioning practices, which are not always very efficient. We went to one area where the local authority had let contracts to far too many firms for the size of the area, so the contract was really too small for it to be economic. They had not planned which firm was going to be where, so you ended up with care workers criss-crossing the area very expensively and inefficiently. The other thing is that too many local authorities are letting contracts at rates that do not allow the minimum wage to be paid. That does not excuse the firm accepting a contract that does not allow the minimum wage to be paid, but the economic pressure is very substantial in quite a lot of areas.
Lindsay Roy
Where you have found local authorities not complying with the legislation, what has been done about it?
David Norgrove
We cannot say that that authority is not complying with the legislation. All we know is that those care providers are telling us that they are under great economic pressure. It is for HMRC to take action.
Lindsay Roy
What has been done to investigate that?
David Norgrove
HMRC have made the social care sector a priority in terms of investigation.
Lindsay Roy
Why has a separate piece of legislation been proposed in relation to social care that applies to the national minimum wage across the board?
David Norgrove
I think social care is a devolved matter for Scotland, so the statutory consultation applies only to England.
Lindsay Roy
“Statutory” and “guidance” do not sit well together, do they? If it is statutory, it has to happen.
David Norgrove
You are getting into an area about the relationship between central Government and local authorities that is beyond me. It is not something I am familiar with.
Lindsay Roy
Is it something you have challenged?
David Norgrove
That I would challenge? No. I am sure that it has been carefully thought about by the Department of Health. It is not something for me.
Chair
You are too modest. I would have thought that, if something was clearly an identified difficulty, you could be making a recommendation about it.
David Norgrove
We have made recommendations to Government about social care. If the question is whether Government can force local authorities to pay more to social care providers, yes, of course they can. What we have recommended is that local authorities should be expected to put on their websites how they calculate the true cost of the social care being provided, so that people can see that the national minimum wage has been fully taken into account in setting the rates.
Lindsay Roy
Are you saying that is not happening at the moment?
David Norgrove
It is not happening at the moment.
Lindsay Roy
You have urged that it should happen.
David Norgrove
Yes, and we are going to urge again that it should happen in response to the consultation that is going on at the moment.
Lindsay Roy
Why do you think there are so many complaints about non-payment of the national minimum wage in social care?
David Norgrove
For the reasons I have given. Social care providers are under a lot of pressure from what is paid by local authorities, and too many of them are responding by not paying the minimum wage.
Lindsay Roy
Is there an issue around travel?
David Norgrove
Yes, but it is not just travel. There is travel time and there are payments for uniforms and training and one or two other things.
Lindsay Roy
Are they legitimate reasons?
David Norgrove
No. They should not be deducted from the minimum wage, and people should be paid for their travel time as a matter of legislation.
Lindsay Roy
What kind of link have you found between non‑payment of the national minimum wage and zero-hours contracts?
David Norgrove
There is some evidence that firms with zero-hours contracts are more likely not to pay the minimum wage. I think we were one of the first to raise the issue of zero-hours contracts in one of our reports a few years ago, and we have raised it in every report since. It is a real concern.
Lindsay Roy
Have you evidence of a local authority not funding it appropriately to pay the national minimum wage?
David Norgrove
When we are told the rates at which local authorities are letting contracts, it is clear from some of those rates that it would be well-nigh impossible for the people who accept the contracts to pay the national minimum wage.
Lindsay Roy
Why is nothing being done about it?
David Norgrove
That is where HMRC’s role comes in. They have to find evidence that the national minimum wage is not being paid and follow it up.
Lindsay Roy
They have found that in 30 businesses involved in social care provision.
David Norgrove
The hit rate in social care has gone up steadily.
Lindsay Roy
With care providers, but not local authorities. How many local authorities have they found in default?
David Norgrove
The local authority is not breaking the law.
Chair
I am not sure I entirely followed your point that there was not, but there should be, a requirement for local authorities to put on their websites the way in which they had constructed the tender level—the financial level—that they were paying. Did I understand that properly?
David Norgrove
Yes.
Chair
You are saying they should have a formula; it should be clear and spelled out on their website, so that anybody looking at it would be able to identify whether or not there was a framework that allowed the national minimum wage to be paid.
David Norgrove
Yes.
Chair
Would that not cut across commercial confidentiality? Is that not an argument that would be raised against it?
David Norgrove
It might be, but Government have recommended that local authorities should take proper account of the cost of providing social care in letting tenders, whereas the evidence is that very often local authorities are just letting tenders where they put it out and give the contract to the lowest bidder. In those circumstances, given the pressures, it causes ever more unrealistic bids. We have been told more than once that local authorities have said, “You can bid anything you like provided it is less than x,” and x, clearly, is too little for the minimum wage to be paid. Several local authorities have been taken to judicial review about that, but it has not stopped the process elsewhere.
Chair
We are the Scottish Affairs Select Committee. You cover the whole of the UK, and I wondered whether or not the legislative framework was any different in Scotland, or is there anything we ought to be aware of relating particularly to Scotland?
David Norgrove
It is a devolved matter. It occurred to me in preparing for this meeting that we have not raised this with the Scottish Administration. I am sure they are aware of it, because it is in our reports, and the evidence seems to be that there is as much of a problem in Scotland as there is in England and Wales.
Chair
Why have you not raised it with the Scottish Government?
David Norgrove
We probably should have done.
Chair
That is just an oversight.
David Norgrove
Yes.
Pamela Nash
Are you now intending to contact the Scottish Government?
David Norgrove
I think that would be a good idea.
Jim McGovern
I just want it to be put on record that, if I understand this correctly, some local authorities are deliberately giving contracts knowing that the employers are crooked.
David Norgrove
No, I think that is overstating it. I think they look at their books and say to themselves, “This is the demand we foresee for social care next year. We’ve had cuts. Therefore, we have to cut the rates we pay providers. All we can afford is x.” They say, “You can bid whatever you like provided it is less than x.”
Jim McGovern
But they are knowingly giving contracts to companies that they realise are not complying with the law.
David Norgrove
I have not come across any evidence of that.
Jim McGovern
I think you have just said that.
David Norgrove
I did not quite say that.
Jim McGovern
It is a race to the bottom, isn’t it?
David Norgrove
There are certainly areas where you get the sense that there has been a race to the bottom. I would not want to accuse anybody of deliberately behaving illegally.
Jim McGovern
How would you put it? Are they turning a blind eye to it?
David Norgrove
It is more that they all want to convince themselves that what they are doing is right, I suspect. It is the rock and a hard place problem. What they truly believe when they’re lying in bed at 3 o’clock in the morning I would not want to predict.
Tim Butcher
Social care is a very complex issue. A lot of local authorities let contracts for 15 or 30-minute visits. Those contracts are let for that visit—the time it takes to look after that person. The local authority does not really take into account where the carer has come from; the visit could be from a home in one part of a local authority to one in another part of the local authority, or it could be next door. If it is next door, there is no travel time and, therefore, the contract is probably perfectly fine, but if the next care visit is on the other side of town and it takes an hour to get there, that is when there are problems. In terms of the local authority letting the contract to the care provider, they are paying £9, £10 or £11 an hour—far more than the minimum wage—and they think that is fine, but once you start allowing for uniforms, travel expenses and travel time it comes close to whether or not the minimum wage is being paid. That is where the complexity is, and where there is a difference between what local authorities do and what care providers do, because it is the care providers who are responsible for making sure their employees are paid above the minimum wage.
Jim McGovern
When it comes to care provision the local authority does not care; it is just whatever is the cheapest.
Tim Butcher
They have their own commissioning policies.
Chair
Mr Norgrove, I confess that I am having difficulty in following some of your evidence. I thought you were saying to us earlier that you wanted the local authority to publish the basis on which it constructed the tenders it sought, because at the moment some of the contracts it is letting do not allow for the payment of the minimum wage.
David Norgrove
They are too low to realistically pay the minimum wage.
Chair
In that case, the local authority must know that and must understand that the people who get these contracts cannot possibly meet the national minimum wage. Therefore it is complicit.
David Norgrove
I suspect that people kid themselves, don’t they? People kid themselves about a lot of things.
Chair
But these are not stupid people. I have met a lot of people in local authorities that I might not like, but they are not stupid.
David Norgrove
They are not stupid, but they themselves are under huge economic pressure to deliver more with less.
Chair
I understand that. That explains why they do it, but it does not establish that they do not know. As Lindsay said, they ken fine and they’re prepared to condone it, because they do not see that they have any alternative. I understand that and I sympathise with that position, but the fact is, is it not, that they are wilfully letting contracts that they know cannot be fulfilled without breaking the minimum wage legislation?
David Norgrove
I would not be at all surprised if they say to the provider, “Can you pay the minimum wage on this rate?” and if the provider wants the contract, the provider will say, “Yes, I can pay the minimum wage.”
Chair
If you are not stupid, you know they are lying.
David Norgrove
Yes, but, once they have been told, they have every incentive to cover themselves.
Chair
They have covered their behinds, or any other part of their anatomy that they wish to have covered, and maybe they get it in writing. I understand that, but they know that the guy who said that to them is not telling the truth.
David Norgrove
In their heart of hearts, I suspect some do.
Chair
That is helpful.
Graeme Morrice
I would be very disappointed if local authorities were acting in that way. The bottom line is that they have a duty of care, and in terms of awarding contracts it is not just about the lowest price; it is about best value, which also looks at aspects of quality. They need to do a full evaluation of that. Do you have any examples of local authorities that have been made aware of contracts they issued to companies where it has been found, or evidence has been brought to the local authority’s attention, that the national minimum wage has not been implemented, and therefore they have withdrawn the contract?
David Norgrove
I am afraid I do not know. I have not come across those cases. We work at a more macro level, and typically do not get involved in individual cases like that. The Committee’s questions are pushing at an open door. We have been very concerned about this for the last three or four years. I have written a number of letters about it to the Department of Health and others. I think we have had some effect in raising it up the Government’s agenda. It is a real concern, and it was one of the things in our last evidence to the Government. The pressures on social care are one of the reasons constraining faster growth of the minimum wage.
Chair
To be fair, we understand that you are not the bad guys in this, but you are here. Therefore, it is reasonable for us to press these points with you.
David Norgrove
I am not disagreeing with that. That’s fine.
Tim Butcher
Although we have not got evidence of companies being non‑compliant, we have evidence of companies pulling out of the market. For example, Sue Ryder pulled out of the market for residential care last year because it said it could not pay the minimum wage at the fees offered. There are companies that are taking a stand by coming out of the market.
Graeme Morrice
That is useful.
David Norgrove
Chair, did you miss the name?
Tim Butcher
It is the charity Sue Ryder.
Chair
The staff are telling me that they got it. That is what they are there for.
David Norgrove
We had a box in our last report which set out the detail of that.
Chair
Thanks.
Jim McGovern
I served an apprenticeship in the construction industry, and I can well remember my first week as an apprentice. I was told that the wage was £7.80 and somebody else told me that it should be £11.90. I took it up with the employer—obviously, I was a rabble-rouser from day one—and it turned out that it was £11.90 and they had to pay me that. Way back in the mid-1970s, apprentices’ wages were negotiated and agreed, so how can construction industry employers abuse apprentices by paying them under the national minimum wage?
David Norgrove
People are desperate for jobs in some areas, and some employers would claim after the event that they did not know the rules. Sometimes the rate being paid appears to add up to a sensible weekly amount but the hours are being under-declared, so people are working more hours than are being declared on the pay forms and are being paid below the real rate.
Jim McGovern
I am not quite sure I follow that. Say, for example, that the average working week in the construction industry is 37 hours and an apprentice works 37 hours. Could they be paid under the national minimum wage?
David Norgrove
If they are being paid the rate, no; that would be fine. The trouble is when they work 40 hours and are paid for 37 hours.
Jim McGovern
Presumably, that is illegal.
David Norgrove
That is illegal, but that is the sort of thing that happens.
Jim McGovern
You advise the Government. What are the Government doing about it?
David Norgrove
That is why we encourage proper expenditure and support for HMRC’s efforts to enforce the minimum wage.
Jim McGovern
It is not working completely at the moment.
David Norgrove
No, but it never will. The question is, how can we make it work better? HMRC’s efforts—perhaps we will come on to this—have improved, but I am sure there is more to be done.
Jim McGovern
In terms of apprenticeships, there seems to be some sort of system out there whereby you do your first year of apprenticeship and the next year you repeat the first year of apprenticeship and get the same wage. When I was an apprentice you did a four-year apprenticeship and your wage went up every year. There now seems to be some sort of system where you do a year and in what should be your second year you go back to the first-year rate. Is that legal?
David Norgrove
Not as I would see it. If you are on the minimum, after the first year, and once you hit 18, you go on to your age-related rate. You should be on the age-related rate after the first year.
Jim McGovern
You mean at 18.
David Norgrove
Yes.
Tim Butcher
Up to the age of 19. There is an apprentice rate that is the same potentially for all three years of your apprenticeship, but it is a minimum apprentice rate. Employers can pay more if they want to.
David Norgrove
And mostly they do.
Tim Butcher
Mostly they do.
Jim McGovern
But they should not be allowed to pay less.
Tim Butcher
It is not allowed to be less.
Jim McGovern
But some are.
David Norgrove
Some are paying below the rate, and compliance for apprentices has been particularly difficult.
Tim Butcher
The problem with compliance with apprentice rates is that traditionally apprentices are paid per week. Under the law, the hours in training off work—the hours at college—should also be paid at the hourly rate. That is where some of the underpayment is occurring. Say you have four days at work. The employer pays you for those four days; he does not pay you for the day you are at college, but he should, because that is the law.
Jim McGovern
Is that a loophole that should be closed?
Tim Butcher
It is for apprentices to highlight that to HMRC. If their employers are not paying them, HMRC can prosecute employers who are breaking the law.
Jim McGovern
I had to go to college when I was an apprentice and I got my day’s wages. It was paid leave for training. Presumably, that is what should happen.
David Norgrove
Yes.
Tim Butcher
That is what should happen.
Jim McGovern
In many cases it is not happening.
Tim Butcher
That is not always what is happening in practice.
David Norgrove
The last survey showed that, on average, depending on which rate you took at the time—the survey was done just at the time the rate was changing—between 25% and 40% of apprentices were not being paid the appropriate rate.
Jim McGovern
That is something you and your organisation are trying to address.
David Norgrove
There is another survey this year. I do not think it includes Scotland—I think Scotland declined to take part on apprentice pay. We will look at whether or not that first survey was accurate. In the meanwhile, we recommended to the Government that because compliance was so low the apprentice rate should not go up. There was no point in increasing the apprentice rate when so many people were not observing it. In fact, it went up by 1% that year. Alongside that, we recommended, and the Government accepted the recommendation, that there should be much more effort put into enforcing the rate for apprentices, together with greater publicity around the apprentice rate. That has been happening; HMRC have been giving that area priority. It remains to be seen from the survey whether that is having any effect.
Jim McGovern
There was so little compliance that it did not seem worth while pursuing it.
David Norgrove
No; compliance was definitely worth pursuing. Compliance is absolutely critical.
Jim McGovern
But there was no point in looking for an increase because there was so little compliance.
David Norgrove
We took the view that it was a bit like motorway driving. The analogy begins to break down, but compliance was so low that it was better to get the compliance rate up and the breaking of the law down before we increased the rate further.
Jim McGovern
So everybody suffered.
David Norgrove
Not everybody; it would be a tiny number of people, but adding to the problem was not the right thing to do at that stage.
Jim McGovern
I am interested in what you said about Scotland not wanting to participate. This is the Scottish Affairs Select Committee. Could you provide some sort of evidence as to why Scotland said they did not want to participate?
David Norgrove
I do not know why they said that. Scotland did not take part in the last survey either. We wanted to have a nationwide survey, but Scotland declined to be part of it.
Jim McGovern
Is this the Scottish Government?
David Norgrove
Yes.
Jim McGovern
Do you have some sort of evidence that you can provide to the Committee to confirm that?
Chair
We will get the staff to pursue that with you to clarify who said what to whom.
David Norgrove
This year it is going to be a UK-wide survey without seeking the authority of Scotland.
Tim Butcher
It has not been done yet; it is still in the process of being done.
David Norgrove
I see, so there is no decision for this year yet.
Chair
But last year’s survey was a UK-wide one without Scotland participating.
Tim Butcher
Northern Ireland did not participate either.
Chair
They had the opportunity to opt out. Did the Scottish Government give any reason?
Tim Butcher
They had the opportunity to opt in. Because it’s devolved, the trouble lies in getting access to apprentices; only the devolved Governments have the names, colleges and contact details for those apprentices.
Chair
Did they give any feedback as to why they were not participating?
Tim Butcher
The feedback from Scotland was budgetary reasons.
Chair
Can I come back to the point that surprised Jim? It surprises me as well. You seemed to be saying that, because so many people were breaking the law and not paying the apprenticeship rate, you decided to go along with that and not increase the rate. Did I hear that correctly?
David Norgrove
You did hear that correctly, and, with hindsight, I am not sure we were right. It might have been better to have recommended a very modest increase for the small number of people who would be affected by it, but to focus on compliance.
Chair
Surely, while there is a degree of overlap, compliance and the rate that should be established, taking account of objective reality, are not mutually dependent.
David Norgrove
As I say, probably we were wrong.
Chair
Can I come back to the question of whether or not the system of payment for apprentices is just too complicated? It is a constant dilemma. On the Committee of Public Accounts there was a constant issue about the extent to which you simplify and have a bit of rough justice, but people can understand the system, or to what extent you make the system much more complex and elaborate to try to take account of every eventuality. We tended to be much more strongly in favour of simplicity because it was comprehensible, even though, yes, there was an element of rough justice. Have you not considered that in terms of the apprentice rate and so on, and therefore the possibility of just abolishing the first-year rate and making it a standard apprenticeship payment across the board so that people know where they stand?
David Norgrove
The dilemma is between the level of the rate and making it simple, as I think you are saying. If you made it one rate, either you would disadvantage the people who would otherwise have gone on to the age-related rate, which is higher, or you would raise the rate for apprentices quite substantially higher than it is now. You have a choice between simplifying at a high level or at a low level. In either case you have disadvantages. The disadvantage of the lower rate is a loss to people; the disadvantage of the higher rate is that you may price people out of apprenticeships. We have been asked to look at it again this year, and we will do that.
Chair
Going back to the point about complexity and the argument that employers do not understand the rate and are not paying it, there is less justification for not paying it if they are less likely to be able to fall back on the argument, “It was so complicated I couldn’t understand it.”
David Norgrove
That is true.
Mike Crockart
Is this not just a throwback to a much more traditional view of apprenticeships? Sixteen to 18-year-olds are staying at home; they have fewer costs, and they are going to college one day a week and being paid for that. An awful lot of apprenticeships now simply do not fall into that model. I have taken on an apprentice in my office. She is 20; she has a kid, and she is living away from home. All the training is being done in the office, so there is no time away. Is it not the case that the world has moved on, and we need a structure that fits what apprenticeships look like now rather than what they looked like 30 or 40 years ago?
David Norgrove
I am not sure about the implication of what you are saying. Most apprentices are paid a lot more than the apprentice rate.
Mike Crockart
That was going to be my next question, so let us deal with it now. In most paying work, what is the difficulty in putting up the rate?
David Norgrove
Because there are areas where people were paid a lot less than even the apprentice rate now—for example, hairdressing, where we were persuaded that a substantial increase in that rate would lead to quite a large loss of opportunity. The question is whether that still applies.
Mike Crockart
It is in a small area of apprenticeships, so you skew the system to deal with it.
David Norgrove
That is the essence of the minimum wage. The minimum wage objective is to be as high as it can without costing people their jobs. We would be in the position of saying that 20,000 jobs was a price worth paying for x increase in the minimum wage. That is not the way our objective is set up.
Mike Crockart
What about the original question about the structure of apprenticeship rates, and whether it now matches the reality of what apprenticeships are actually like for most people?
David Norgrove
We have been asked to look at that this year, and whether we can simplify the rate. I think it comes down to what the effect of a simpler higher rate would be on the supply of apprenticeships in lower-paying areas.
Tim Butcher
There is no problem with demand from students to take up apprenticeships; the problem is in employers supplying apprenticeships. It is a supply-side problem, not a demand-side problem. We suggest that the wages are not too low. In international comparisons, apprentice pay is much higher in the UK than in Germany, Austria and Switzerland.
Mike Crockart
You could argue that if it was a linear relationship where pay was the only variable, but that is not the situation. There could be lots of different reasons why people are not increasing the supply. Therefore, it does not mean that just because there is a lack of supply the pay rate is set at the right level.
Tim Butcher
No, but it is indicative. If the pay rate was too low, you would not have an oversupply of young people wanting to be apprentices; they would fall out of the market and not demand it.
Mike Crockart
It is not quite as simple as that.
Chair
I think this is astonishing. I have been in schools in my constituency where substantial numbers of young girls want to go into hairdressing. As much as anything else, it displays a poverty of ambition, lack of alternative opportunities and a lack of understanding in the home about what those young girls could otherwise be doing. They are prepared to take almost anything. They do not have an understanding of it, because the alternative to hairdressing may be stacking shelves and they see hairdressing as a bit more desirable than that. They have no perception, and have not been educated into the perception, of what else could be out there for them. Effectively, what you seem to be saying is that because youngsters are prepared to take it at that low rate that is okay.
Jim McGovern
I get the impression you are saying it might be bad, but it is not as bad as it could be.
Tim Butcher
Before the apprentice rate was introduced, apprentices were paid £80 a week, which is £2 an hour. The apprentice rate is now £2.68 an hour. That has happened in the last three or four years.
Jim McGovern
It is not a massive increase, is it?
Tim Butcher
Compared with what it was, it is a very large increase, and a much faster one than everyone else has had.
Jim McGovern
You are saying it is bad, but it is not as bad as it might be.
Tim Butcher
It is a faster increase than anyone else has had in the UK labour market in the last four or five years.
Chair
From £2 to £2.68.
Tim Butcher
Yes. It is a minimum wage. It is not the going rate; it is not what apprentices should be paid. It is the minimum they should be paid; it is the guaranteed bottom floor of what they should be paid. Obviously, we would encourage employers to pay more.
Chair
You yourself have just said it is not what they should be paid. Those were your exact words—it is not what they should be paid. If there is a rate that they should be paid, why not make that the minimum rate?
David Norgrove
The answer is that you have to look at what employers would then be willing to pay. As you said yourself, Chair, if the only thing that is available to these people—it is a terrible thing that it is—is going off to be apprentices in hairdressing, and you put up the minimum wage for apprentices beyond the point that hairdressers can afford, they won’t even have that.
Jim McGovern
We would call that the Conservative argument against the national minimum wage, which is “Lose jobs.”
David Norgrove
But there are points at which it will cost jobs. It is always a difficult judgment to know when that point is likely to be reached. We have to make that judgment. I certainly think that to put up the apprentice rate to, say, the adult rate would have a dramatic effect on the supply of apprenticeships in areas like hairdressing.
Chair
The ultimate test is, would you be happy if a child of yours was working in hairdressing for £2.68?
David Norgrove
Absolutely not, but I am lucky enough not to live in one of the areas where that is the only opportunity available.
Chair
That is right, and the people I represent are not in that position. That is why we feel quite strongly about it.
David Norgrove
I feel strongly about it too. It is not something we want to see.
Chair
You are in a better position to do something about it pretty quickly compared with ourselves.
David Norgrove
The question we have to address, and I ask you to consider, is would a substantial increase in that rate cost people the opportunity to have even those low-paid jobs?
Chair
Indeed.
Pamela Nash
I agree with you. I speak to businesses in my constituency all the time who would like to take on more apprentices and cannot afford it. They supplement it; they might be providing lunch and help with travel. I do agree with the point you are making, but I have to say, Mr Butcher, that that is different from the point you made—that the figures show there is not a problem because they are still getting those numbers of apprentices. It is not just about numbers; it is also about who is applying. A young woman with child care responsibilities might be stopped by that. Whereas the numbers are there, we need to look deeper: who is applying for apprenticeships and how do you widen access? I appreciate that is not just for the Low Pay Commission; it is about looking at Government policy, but I would certainly expect the Low Pay Commission to be arguing the point as well. It is not just about the numbers who are applying; it is about who is applying and about the young people that it is most difficult to reach.
Tim Butcher
I totally agree. It also depends on Government policies towards apprenticeships and whether any help is given to employers. The more help that is given to employers, the more they would be able to pay higher wages.
Pamela Nash
Definitely.
Graeme Morrice
On the problem of non-compliance with the national minimum wage, we have looked at certain sectors, such as hospitality, hairdressing, social care and apprentices, but are there any other sectors of the economy or other groups of people, particularly in Scotland, that we have not discussed where you have concerns in relation to non-compliance?
David Norgrove
Could you read that list of areas again?
Graeme Morrice
We have covered hospitality, hairdressing, social care and apprenticeships. Are there any others you would add to that list about which you would have particular concerns with regard to non-compliance, looking particularly at the Scottish situation?
Tim Butcher
On our visits to Scotland, where we would have most concerns, although we do not have definitive proof that there is non-compliance, would be in areas like fish processing, where you have large numbers of migrant workers, for example Filipinos and Portuguese in some of the coastal areas of Scotland; and generally in agriculture and horticulture, where you have large numbers of migrant seasonal workers. If they are not being paid the minimum wage, normally they have gone back home before they can go through the machinery to get redress. If their employer is found to be non-compliant and they have already gone back to their country of origin, because they were here for only a short time doing seasonal work, there is no way that HMRC can contact them and give them any back pay to take them up to the minimum wage, so they are open to exploitation.
Graeme Morrice
I can understand that migrant workers could be a particular problem. I have experienced that as well. Are you detecting much of a black market in terms of labour or migrant workers working on the side? I know that is outwith this issue.
David Norgrove
There have certainly been examples of that kind of thing.
Graeme Morrice
You find that where some companies may not be complying, there is a degree of black market activity as well.
David Norgrove
HMRC would say that where they find evidence of non-payment of the minimum wage, there is a tendency for that to be associated with all sorts of other things like non-payment of income tax, not observing health and safety legislation, employing illegal migrant workers and so on. It is very important, and they are now doing this, to visit and raid premises with other agencies.
Graeme Morrice
Do you think the Government’s campaign of targeted enforcement has been successful in the whole area of non-compliance? We touched on this earlier. Is it working, or not?
David Norgrove
We encouraged HMRC a couple of years ago to move from their purely reactive process to one that is much more risk-based. That seems to have contributed to a rising hit rate. What we really cannot grapple with is what is happening to the scale of the problem. There is some small evidence that with the downturn the scale of non‑compliance may have increased a bit, but it is very hard to judge, so you need to make more effort.
Graeme Morrice
I suppose it is a combination of education and enforcement. We touched earlier on information and assistance being provided particularly to smaller private concerns with regard to their obligations. I think you suggested that maybe the Government were not doing enough in that area. What more do you think the Government could be doing to assist in that area?
David Norgrove
The reductions in expenditure on communication have definitely led to less material going out to employers about the minimum wage, alongside other things. Expenditure on that could be helpful, together with more information—
Graeme Morrice
I am sorry to interrupt. Why? Has there been a reduction in budgets? Is it just part of the cutbacks?
David Norgrove
It is part of the general reductions in expenditure on communication.
Graeme Morrice
You were going on to say something.
David Norgrove
There could be more information on the websites.
Chair
I confess that I struggle with this a bit. Leaving aside the question of apprentices, having a national minimum wage and paying it is not rocket science. In a sense I find it very difficult to believe that an employer does not understand that there is a national minimum wage and cannot, with the minimum amount of effort, find out what it is. The idea that the nanny state has to tell them all the time what their legal duty is and, if the Government do not tell them, that is okay and in some way it excuses them from not paying it does not seem to be sustainable.
David Norgrove
It does not excuse them from not paying it, but there are two things. First, when the structure changes, as it did with the introduction of the apprentice rate, with less publicity it takes quite a long time for that to get round the 1.3 million enterprises that we have in the UK. Secondly, there is a very large turnover in those enterprises. HMRC will have the accurate numbers, but from my memory of a few years ago, about 400,000 of them go out of business and are replaced every year. At the bottom end, there is a huge rate of death and creation of new businesses.
Chair
I find it almost unbelievable that people start up these businesses and do not understand that a national minimum wage exists. I find it very difficult to believe that, first, there is virtually anybody in the country who is not aware of that, and, secondly, that they cannot, relatively straightforwardly, find out what it is—leaving aside the question of apprentices; I understand the complexities there. The idea that the onus is on Government to inform business of these things seems to me to be removing responsibility from where it should lie, which is with the employers themselves.
David Norgrove
You can argue that. I think the evidence from business associations is that they feel a lack of information about these things.
Chair
Is that not simply an excuse?
David Norgrove
For some of them it is an excuse, but I think for others it is not. If you are a small business person struggling to stay afloat with lots and lots of different things to cope with every day and it is not put under your nose, you probably do not try to find out.
Chair
All I can say is that you are a very generous-spirited chap.
Graeme Morrice
Are you saying that some people are not aware of the fact that under the law they have to pay the national minimum wage, or is it about the various rates?
David Norgrove
It is more about the rates—the changing of the rates, the introduction of the apprentice rate, how piece rates are calculated and that kind of thing.
Graeme Morrice
What they need to do about that.
David Norgrove
Yes, but among the other things they have to ask about, they do not always do that. Maybe I am being too sympathetic. Ignorance of the law is no excuse and they should be paying it. They should be trying to find out, but sometimes, if you do not tell them, they don’t.
Mike Crockart
Your argument is that they should be able to find that out.
David Norgrove
On GOV.UK.
Mike Crockart
Can I pin you down into saying what is missing there? The 2014 rate is not there yet; that has not been updated, but I was just searching for the minimum wage, and all the calculators you talked about are there. You have the national minimum wage calculator for employers and for employees; there is stuff about interns and apprenticeships.
David Norgrove
There is a lot more.