National Minimum Wage (Amendment) (No. 2) Regulations 2010
Baroness Wilcox
That the Grand Committee do report to the House that it has considered the National Minimum Wage (Amendment) (No. 2) Regulations 2010.
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox)
My Lords, I am pleased today to present these regulations to the Committee. The regulations before us provide that, where an employer makes money payments for travelling expenses that are eligible for tax relief, these payments do not count towards the national minimum wage. They address the problems we have identified with what are commonly called travel and subsistence schemes, operated by some employment businesses that involve low-paid workers. I will briefly outline how these schemes work and why we are tightening their rules.
Traditionally, employment businesses have engaged workers under agency contracts. In this situation, the worker is not an employee of the employment business. As a result, each assignment with a client is, for tax legislation purposes, considered to be the worker’s permanent place of employment. Increasingly, however, some employment businesses are engaging workers under an employment contract, rather than under an agency contract. These contracts are also sometimes referred to as “overarching contracts of employment” because they link, or claim to link, a series of different assignments into one overarching employment with the employment business. One of the consequences of this approach is that, for the purposes of tax legislation, each assignment with a client is considered to be the worker’s temporary place of employment.
This distinction between a temporary and permanent place of employment is an important one. Since 1998, workers travelling from home to a temporary workplace have been eligible for tax relief on their travel expenses, which includes associated subsistence costs. Travel from home to a permanent workplace, on the other hand, does not qualify for tax relief. Therefore, by engaging workers under employment contracts, employment businesses are able to use travel and subsistence schemes to reduce the amount of tax and national insurance contributions that the worker pays and the amount of national insurance contributions that the employer pays.
Travel and subsistence schemes operate through an arrangement known as salary sacrifice. Under it, an employee contractually agrees to give up part of their taxable income in exchange for something else that is either non-taxable or taxable at a lower rate. In this case, the employee receives travel—and usually subsistence—expenses. These expenses are free of tax and national insurance contributions because they relate to travel to a temporary workplace. Payments of expenses for travel from home to these temporary workplaces and associated subsistence count as pay under national minimum wage rules. Therefore, as long as the taxable pay and the expenses paid by the employer are equal to or greater than the minimum wage, the employer is compliant for minimum wage purposes. The worker benefits from these arrangements as they receive a slightly higher take-home pay than they would otherwise have done. The employer also benefits, as the amount of salary on which they have to pay the employer’s national insurance contributions is decreased. In many cases, the expenses that the employer pays to the worker are less than the salary that the worker has surrendered.
The Government consider that there are several problems with the use of travel and subsistence schemes for workers on the national minimum wage. The first is about preserving the integrity of the minimum wage as a wage floor. As I am sure noble Lords are aware, the coalition Government are committed to the minimum wage because we recognise the protection it gives to low-income workers and the incentive to work that it provides. For the minimum wage regime to be effective, employers must be able to demonstrate easily that they have met their legal obligations.
Workers need to know what they are entitled to, which is particularly important given the vulnerability of those with whom we are concerned today. Allowing some salary sacrifices to count towards the minimum wage where others, such as childcare vouchers, do not unduly complicates the regime. There is evidence that the employer gains far more from these schemes than the worker, and that the majority of workers do not understand how the schemes work. The Government consider this to be a form of exploitation of low-paid workers.
A number of adverse consequences flow from the participation of low-paid workers in such schemes. The amount that a worker pays in national insurance contributions potentially affects their entitlement to certain benefits. For low-paid workers in travel and subsistence schemes, the most significant impact is on the basic and additional state pension. If they participate in the schemes, the pay that is liable for national insurance contributions is reduced, thereby increasing the number of weeks that they must work and pay national insurance contributions to secure the qualifying earnings for the state pension. It thus increases the risk of the worker not meeting the eligibility criteria for contributory benefits.
In addition, businesses not using travel and subsistence schemes can find themselves at a competitive disadvantage to those which do. Businesses using such schemes can undercut them on price or general profit margins, which would not be possible without the tax and national insurance contribution benefits available.
Some businesses have told us that they do not wish to implement travel and subsistence schemes for employees because they consider them to be exploitative and morally wrong. For some, this is an ethical matter. They believe that such schemes might be against low-paid workers’ long-term interests, that workers do not properly understand how the schemes work and that some schemes do not, in reality, give workers the employment rights associated with an employment contract. For others, the implementation costs mean they are cost-effective only where a large number of workers is involved. As a result, smaller businesses are less able to use such schemes.
There are further issues of fairness. Artificially reducing the pay liable for tax and national insurance contributions means that a low-paid worker in a travel scheme becomes entitled to an higher level of certain benefits, such as tax credits, than a low-paid worker who is paid the same amount but not through a travel scheme. We do not believe that this is right. Nor do we consider it right that the burden of financing benefits should be passed from the employer and the worker to the general taxpayer.
For the reasons that I have set out, the Government consider that payments of travel and associated subsistence expenses relating to travel from home to a temporary workplace should not count as pay for minimum wage purposes. The draft regulations before us today will preserve the integrity of the minimum wage. They will reduce the risk of reducing low-paid workers’ entitlement to certain social security benefits. They will ensure a level playing field for those businesses unwilling or unable to use such schemes. They will remove the unfairness in the present situation. I beg to move.
Lord Cotter
I thank the Minister. I declare an interest as having been a member of the committee on the national minimum wage in the other place. I was very pleased to play a part in seeing that legislation through. We sat on one occasion for what I think was the longest-ever sitting in Parliament—close to 24 hours—going overnight to consider the Bill. While many others spoke all the time, I spoke only occasionally. I promise not to speak for 24 hours today, which I am sure is a great relief to everybody. That includes me, because I would run out of steam.
Suffice to say, I thank the Minister once again for the explanation and for drawing out the intention of this measure to preserve the minimum wage, preserve its integrity and ensure that the workforce is not exploited in any way. The regulations are being put before Parliament for approval and I see no reason not to approve their implementation today. In terms of impact, I was glad that small businesses were also mentioned in the regulations. On that basis, I thank the Minister and hope that this goes forward successfully.
Lord Myners
My Lords, I declare an interest as a former chairman of the Low Pay Commission. I am grateful to the Minister for her clear explanation of the regulations. I welcome the simplification that is being suggested and I am delighted to be reminded again of the coalition Government’s commitment to the national minimum wage.
I have four questions relating to the regulations. Would I be correct in understanding that an employee currently receiving precisely the adult national minimum wage who was also receiving assistance for transport to work would, as a result of this regulation, effectively have a lower benefit as a consequence of employment?
Secondly, I was somewhat surprised to see the explanation in paragraph 7.3 of the Explanatory Memorandum that,
“only around 90,000 low paid workers”,
will be affected. The figure of 90,000 seems to be quite large. What percentage is that of the total number of employees estimated to be earning the national minimum wage? I suspect that the use of the word “only” may be misleading.
I would also like to know a little more about the impact of the judicial review explained at paragraph 8.2 and what impact that might have on the timing of the implementation of these revised regulations. Finally, perhaps the Minister can explain paragraph 10.1 of the Explanatory Memorandum, which makes no sense to me at all.
While officials in the Box prepare the answers, I will do the Minister the courtesy of talking on another subject so that they can prepare their notes. I know how much anxiety can be prompted when you look around and they are filing their nails and not writing a note for you.
I have four general points on the national minimum wage. I was delighted to hear the Minister reiterate her commitment to the minimum wage in a Question to the House last week in connection with internship. Am I correct in understanding that her clear statement that there would be no change in the way in which the minimum wage operates reflects the fact that we continue to believe that the RPI is the appropriate index for inflation that should be used when assessing whether the minimum wage represents an increase or decrease in real income?
Secondly, can the Low Pay Commission be asked to look at the accommodation allowance, which has not kept pace with the cost of accommodation and is falling behind in terms of value?
Thirdly, the Low Pay Commission should also give its attention to piece work. For example, hotel service operatives—or chambermaids as we used to call them—are sometimes assumed to be able to complete four bedrooms an hour for the purposes of earning the minimum wage. There is a lot of evidence that the rate of productivity assumed is altogether too high. Therefore, the minimum wage is being breached in both spirit and purpose.
Finally, can the Minister confirm that, as part of the coalition Government’s commitment to the minimum wage, there will be no diminution in the resource available for compliance and enforcement? The word “fairness” was used earlier. The national minimum wage has to be fair both to employees and to employers who comply. When employers in the vicinity do not comply, that means a disadvantage for businesses which meet their legal obligations. I came across many examples of firms which did not comply. Resource was already very stretched in terms of monitoring compliance and enforcement. If the Government were in any way to reduce the resource made available for these functions, that would undermine the national minimum wage, which I believe the Institute for Government recently listed as one of the top 10 achievements of recent Governments. I think it is fair to say that the national minimum wage has had universal support from all political parties, and commitment to compliance, monitoring and enforcement is critical.
I think that I have now allowed sufficient time for those in the Box to perform their duties. I support the proposed regulations.
Lord Jones
Perhaps I will give them a little more time. I thank the Minister for her exposition at the onset. I am very glad to follow my noble friend Lord Myners, who on these matters has a very distinguished track record. The Committee may well learn from his expertise.
I welcome the details given, which were detailed enough. I support the regulations and would not be able to contribute without praising the minimum wage legislation overall. It was a very great social advance in Britain. It has been hugely beneficial to my own country of Wales and perhaps also particularly to sparsely populated areas across Britain—those, for example, which are dependent on tourism, the hospitality industry and aspects of agriculture and forestry for employment. It is a huge advance for many ordinary people in our nation.
Like the noble Lord, Lord Cotter, in another place I observed the clamour, controversy and opposition when the Blair Administration brought forward the minimum wage legislation. It was almost unbelievable. The opposition was strong and, looking back, there was much sound and fury. I am glad that I was able to support that legislation and use my vote in the other place. I, for one, am very proud that the minimum wage is on the statute book and I am grateful for the information that the Minister has given us today.
Lord Young of Norwood Green
My Lords, I, too, welcome the statutory instrument before us, which proposes to make a change so that payments by an employer for travel expenses to a temporary workplace which are eligible for tax relief will not count as pay for national minimum wage purposes. I certainly endorse the comments made by my noble friend Lord Jones, and I shall come later to the tour de force and analysis from my noble friend Lord Myners.
It is right to remind ourselves that the national minimum wage was introduced by the Labour Government in 1999 in spite of all manner of scaremongering. I remember talk from some sections of the right-wing press of 2 million jobs being at risk, and of course the legislation was opposed by the Conservative Party at the time, so we welcome the conversion, although I would not call it a pauline conversion. When it was introduced, the minimum wage raised pay for more than 2 million people. Thereafter, the Labour Government ensured that there were regular above-inflation increases so that, in the first 10 years of its existence, the national minimum wage rose by 59 per cent. Those increases raised the living standards of the lowest paid and helped to close the gap between men’s and women’s pay. We should not forget those fundamental changes that took place.
I certainly endorse the point that my noble friend Lord Myners made about the importance of compliance and enforcement. It took us a while before HMRC and the employment agency services group got around to ensuring that they prosecuted those people who failed to pay the minimum wage. I would welcome some reassurance on that. I very much hope that the coalition parties will continue our policy—to endorse again a point made by my noble friend Lord Myners—of increasing the national minimum wage at or above the level of inflation. I also hope that there is no intention on the coalition’s part to allow the national minimum wage to wither on the vine. I express those fears because we have already seen the coalition Government decide to use the consumer prices index instead of the retail prices index to calculate rises in pensions and benefits, which will gradually erode pensioners’ income.
How does the use of such a scheme affect the workers? I pay tribute to the helpful analysis of the Merits of Statutory Instruments Committee, which gave us a useful assessment of the effect on workers and their take-home pay. Just as important is what it will mean for them in future entitlements. If the money that one takes home equates to the minimum wage and is made up partly of wages and partly of an amount for travel, the actual wage is rather less than the minimum wage. In cases that Her Majesty’s Revenue and Customs has seen, workers who are paid the national minimum wage and who use a travel and subsistence scheme can find that as much as 40 per cent of their wages are paid as travel and subsistence expenses.
In making up our mind about whether we should support the proposed instrument, one of the things that certainly influenced us was that the Low Pay Commission, the Equality and Human Rights Commission and the Gangmasters Licensing Authority all endorsed it, as the Minister said. Over the past five years the HMRC compliance teams have interviewed an estimated 400 to 500 workers, the majority of whom were paid at or near the minimum wage. Virtually none of them understood in any meaningful way the contractual terms of their engagement. The possibility of exploitation is a real worry.
The access to earnings-related contributory benefits, which is based on a worker attaining the qualifying earnings factor, can therefore be affected. The effect of participating in travel and subsistence schemes is to reduce the amount of a worker’s pay on which national insurance contributions are paid, depending on how many weeks they are unable to work for, and puts at risk their ability to achieve the qualifying earnings factor. That is most likely to affect eligibility for both basic and additional state pension.
I understand from the impact assessment that the schemes we are discussing are likely to involve some 90,000 out of a possible 1 million people. I would like some confirmation of that. It endorses another point that my noble friend Lord Myners made. The change proposed in the legislation could have a negative impact on some workers who are currently in such travel and subsistence schemes because only part of the amount that a worker takes home is pay, and gross pay is assessed for tax purposes. Some workers, because they receive less pay, may be entitled to more working tax credit. Under the regulations, some people could find that they are entitled to less working tax credit because more of their take-home money will be pay. However, such individuals have until now had an advantage over other workers with similar levels of income who are not in such schemes. This legislation will end the unfairness that travel and subsistence schemes create. We endorse the point that the Minister made: workers who participate in them artificially benefit from enhanced eligibility for tax credits, compared to other workers who do not or cannot participate.
What steps will the Government take to ensure that any workers whose eligibility for working tax credit will be affected are properly informed about the change? That is important. We know that tax credits have been a huge boost to those on low incomes and have been recognised as helping to reduce the gap between rich and poor. I am sure that I am not the only Peer who has had to deal with people whose circumstances have changed and where workers are then faced with a clawback, where they must pay back an overpayment of tax credit. I stress that we want to know what the Government will do to ensure that anyone affected by the measure is kept fully informed and does not end up, months down the line, in a situation of being asked to pay back money that they simply do not have.
That said, we support the motivation behind this statutory instrument because we believe that it will prevent exploitation and ensure that the contributory benefit position of temporary workers paid at or near the national minimum wage is not prejudiced by the reduction of earnings liable to pass on national insurance contributions. We also support it because the intention is to ensure that employment businesses and umbrella companies do not gain an unfair competitive advantage through the use of travel and subsistence schemes for temporary workers. I, too, look forward to the answers to the issues raised by my noble friend Lord Myners.
Baroness Wilcox
My Lords, I am grateful to all noble Lords who have participated in the debate. I believe that the regulations raise important issues of principle about the minimum wage and the rights of workers and employers, so it is essential that we give them very careful consideration. I was therefore happy to hear the comments today and to hear some supporting views, which is always nice. I really had not taken it on board that my noble friend Lord Cotter had been a member of the national minimum wage committee in another place. Hearing that he sat for 24 hours, our Chief Whip would, no doubt, remind us that other people in other places sit longer than we do. However, it was a wonderful piece of work and it has been supported over the years.
The noble Lord, Lord Myners, asked several questions and I think that I can answer a goodly few. On the first, we recognise that workers participating in travel and subsistence schemes may see a small reduction in their take-home pay as a result of the changes in the regulations. However, our experience is that the direct cash benefit to the worker is minimal in comparison to the direct cash benefit to the employment business. We consider it wrong in principle that profits should be made by employers from low-paid workers through the application of salary sacrifice schemes. There is evidence that significant numbers of low-paid workers do not understand the way in which these schemes work. Indeed, the noble Lord, Lord Young, pointed that out in his remarks.
The regulations will remove the risk that, by participating in travel schemes, low-paid workers will not be able to meet the requirements for entitlements to earnings-related benefits, in particular the basic and additional state pension. Again, I pick up on something that the noble Lord, Lord Young, said: let us make sure that everybody knows and understands what is happening to them because they are already complaining that they do not at the minute. We must be very sure that what we do makes that clearer.
On the second question from the noble Lord, Lord Myners, about a percentage of temporary workers as opposed to workers on the national minimum wage, we estimate that approximately 1 million workers are earning that national minimum wage so 90,000 is, for interest, roughly 10 per cent of that total. His third question was on why we have not waited until the result of the judicial review to put forward the regulations. We consider that the judicial review application has no merit and we are strongly defending ourselves against it. There are good reasons for the Government to make these regulations and we are confident that the court will agree with us. We therefore see no reason to delay the regulations until the result of the judicial review is known.
On the noble Lord’s fourth question, it says here that there is an error in paragraph 10.1 of the memorandum, for which we apologise. We thank the noble Lord, Lord Myners, very much for bringing it to our attention. Yes, jolly good. On enforcement compliance, this Government are firmly committed to the national minimum wage and to effective risk-based enforcement. Enforcement is essential in ensuring a level playing field for legitimate businesses and in protecting workers who are at risk of abuse by those who refuse to play by the rules. BIS has published a strategy for national minimum wage compliance. It focuses on how the compliance and enforcement landscape should look over the next three to five years and recognises that our approach must continue to be based on intelligence and data. In the context of reduced budgets we will need to prioritise, but we are clear that underpayment is not an option. The strategy will help us to make informed choices to ensure that we have the right tools for the job and that resources are focused where they are most effective.
The noble Lord, Lord Jones, also talked about his time in the other place. He spoke with Welsh passion about the national minimum wage. It was very nice to hear him and good to have his support for the work going forward. I hope that we do not disappoint him.
The noble Lord, Lord Young, talked of the beneficial effects of the previous Government’s work in this area and of closing the gap between men and women’s pay. To that, I would say, “Yes, but we are not there yet”. We will keep trying to improve on the previous Government’s work. The noble Lord also paid tribute to the excellent work of the Merits Committee. I agree with that, as I am sure would all other noble Lords.
I was asked whether we would make sure that people were properly informed of the changes. Yes, we certainly will. I was asked also whether workers will face a claw-back of overpaid tax credits at the end of the year as a result of their pay being adjusted. No, they will not. For tax credits to be adjusted downwards for 2010-11, there would need to be a substantially greater increase in taxable pay for 2010-11 than will arise from the proposed amendment to the regulations.
There were one or two other questions which the noble Lord, Lord Myners, very kindly put to me as I was waiting for the answers to the first ones. I am not sure that I am able to answer them all at the moment; if that is the case, I shall write to him.
Lord Myners
I congratulate the Minister on doing a superb job in answering the questions. Many members of the coalition Government would do well to study the skill, openness and sincerity with which she attempts to answer questions and, indeed, succeeds in doing so.
I have only one question to ask at this point; it is fortunate that we have a Minister from the Department of Business with us to answer it. Which is the right rate of inflation? The Government are using CPI for changing benefits and pensions, but they are using RPI for increasing the payments that students make in connection with university education. Both decisions come from the same department of state. Can the Minister put my mind at ease and tell me which is the relevant index to be used for the purpose of determining fair value for people on low incomes or of paying for their education?
Baroness Wilcox
I think that the noble Lord, Lord Myners, will understand the answer that I can give him. The Government will consider the recommendations of the Low Pay Commission when deciding on the appropriate rates for the national minimum wage.
Lord Myners
That is a very good answer to a question that I did not ask but I am happy to leave it at that.
Lord Young of Norwood Green
That was exactly the point that I was coming to. When the Minister said that she would “consider”, did that mean that she is not committed to accepting the recommendations of the Low Pay Commission? Are the Government prepared to accept its recommendations, as previous Governments have done?
Baroness Wilcox
I am told that this Government never commit—at least, not at this moment—so I think that I just have to say that we are considering the Low Pay Commission’s recommendations.
Lord Myners
This Government may never commit. They pledge, but we know what the pledges are worth. However, it is right to point out that the Low Pay Commission’s recommendations on hourly rates have never been rejected by government. I sincerely hope that this Government will respect the commission’s independence, integrity, foresight and professionalism and not lightly even contemplate rejecting its recommendations.
Baroness Wilcox
I am sorry, my Lords. I was being flippant and was somewhat thrown by the question, which is a little wide of the regulations that I am introducing today. Yes, of course, we shall be listening very carefully to the Low Pay Commission. We shall remember its independence and integrity, which we will honour. If there are no further questions that anyone wishes to put at the moment, I commend the regulations to the Committee.