Small Business, Enterprise and Employment Bill

Baroness Morgan of Huyton Excerpts

Wednesday 11th March 2015 Lords Chamber

[Baroness Neville-Rolfe]

My Lords, I am grateful to the noble Lord, Lord Mitchell, for giving us the opportunity to come back to the important subject of interns, to my noble friend Lady O’Cathain for her helpful and insightful comments, and to my noble friend Lord Storey for reminding us that this is a complex subject. I will begin by answering his first question. Obviously, I would be entirely happy to meet him to talk through this issue. I do not think it is possible—as I will come to explain—to do anything in this Bill, but that does not mean that we should not be exchanging comments, knowledge and evidence on this very important area, which I am also passionate about.

I think we all agreed in Committee that we wanted to encourage internships and that they should be fair, open and transparent in order to encourage candidates from a wide variety of backgrounds. The flexibility of our labour market is a great source of pride, as we discussed earlier. Of the growth of 2 million jobs in this Parliament, nine out of 10 were employees and nearly eight out of 10 were full-time jobs, so there are a lot of opportunities for young people, the unskilled and the long-term unemployed. Youth unemployment fell in the past year by 188,000, so that is good news.

Obviously in any part of the labour market, not just internships, we have to take action where there is any exploitation of individual workers. The use of internships is relatively new in the UK labour market. There is a lot more practice elsewhere, especially in the United States, and there is no definition of internship in our legislation. Individuals undertaking an internship will be workers, employees, or volunteers, depending on the reality of their employment relationship, and not their job title or what an employer decides should be set out in a contract.

Where the intern is an employee or a worker, they are entitled to at least the national minimum wage from day one and all other rights attached to their employment status. The Government are very clear that employing unpaid interns as workers to avoid paying the national minimum wage is illegal. Through tougher enforcement measures, such as increasing the maximum penalty fourfold, and naming and shaming employers, we have shown that we will crack down on employers who break that law. The Bill will also ensure that the maximum penalty is calculated on a per-worker, rather than per-notice, basis, as we discussed in Committee. We have also increased HMRC’s enforcement budget from £8 million to £9.2 million and we will increase the enforcement budget by a further £3 million in 2015-16.

[Baroness Morgan of Huyton (Lab)]

While I recognise that it cannot be done now in the Bill, it would be helpful to investigate the difference between work experience and internships. All of us are absolutely committed to work experience; the noble Baroness, Lady O’Cathain, and I have discussed this on several committees recently. Work experience cannot go on for ever; it cannot go on for week after week or month after month. There is a real difference. We need to encourage work experience, but that is, in essence, very different from the sorts of internships one comes across. One talks to people who are on their third unpaid internship and are clearly working. They can reach the age of 25 or 26 before they get paid employment. That is in particular sectors of the economy. Collectively, around the House, I think we are anxious to make sure, in encouraging social mobility, that we differentiate properly between work experience and internships.

[Baroness Neville-Rolfe]

I thank the noble Baroness for her intervention. She is absolutely right: we need to think about work experience and internships. I will come on to mention the work we are doing. We should certainly look at both aspects.

Before I finish on enforcement—this is an important point and I was asked about it in Committee—in this financial year alone HMRC has identified more than £41,000-worth of arrears for 21 interns who were underpaid the national minimum wage, so enforcement is taking place in this area.

One of the issues that we believe may make some interns uncertain is determining their employment status, which is obviously an essential precursor to understanding what their rights are and whether they are entitled to the national minimum wage. Determining an individual’s employment status can be difficult, as the noble Baroness showed so clearly. There is no one single test to determine whether a contract of employment exists and therefore whether an individual is an employee. We understand that, at times, this is very confusing. It affects various employers, but it also affects interns. Therefore, my right honourable friend in the other place the Secretary of State announced a review in October of employment status to consider these issues. The review will conclude soon.

I understand the concerns raised about pay and social mobility. Some young people probably do not know about opportunities or have access to internships that already exist. That is why the Government fund the Graduate Talent Pool to ensure that all young people have access to internships. That service is on GOV.UK. It is free to employers and graduates, and provides information on all aspects of internships. I am sure that we can do more, but I think it is good that we have done that. We want to encourage social mobility in particular and the Government’s Social Mobility Business Compact, which was launched in 2011, gets employers to commit to fair and open work experience and paid internship opportunities. I know from personal experience that many employers provide such internships and not just for the privileged few. We need to encourage that and keep it going.

My noble friend Lady O’Cathain mentioned career advice. We have recently committed new resources to career advice. That is an interesting addition to the debate.

I turn to the amendment. Internships are not formally defined and therefore the Government do not collect reliable information on a consistent basis that would allow the robust provision of data sought in the amendment. The Government have undertaken research on wider issues that may relate to internships, such as social mobility. We need to be properly informed of the issues around internships to ensure that policy is set appropriately to maximise flexibility and prevent exploitation.

As part of our employment status review, the Government are gathering information through consultation with stakeholders to understand both the current position of groups in the labour market and whether future changes are appropriate. This includes internships and will no doubt provide useful information and data for future discussions.

In summary, I understand and share some of the concerns raised in this debate. We take exploitation of interns very seriously and we already try to act through national minimum wage enforcement to prevent exploitation. Other employment measures in the Bill, such as changing the penalty regime, will of course be helpful. There must be more that the Government can do—that is why we have undertaken a review of employment status—but I hope that the noble Lord will support what the Government are doing and will be content to withdraw his amendment.

Personal Service Companies (Select Committee Report)

Baroness Morgan of Huyton Excerpts

Tuesday 17th June 2014 Lords Chamber

[Baroness Morgan of Huyton (Lab)]

My Lords, I, too, served as a member of this committee, and I confess that this was not an area about which I knew a great deal at the start. So I, too, pay tribute to the able chairmanship of the noble Baroness, Lady Noakes, who focused our attention for a short and concentrated period on the key issues and allowed us to understand the serious concerns that noble Lords have heard about and, I hope, to produce some practical recommendations. As other members of the committee have said, these recommendations have, sadly, not been taken seriously so far by the Government. I hope that we will hear more this evening. I also pay tribute to the team who worked with us.

It became clear during the course of our work that there has been a massive explosion in the number of personal service companies over the past 10 years or so, although there is no definitive number of them or an explanation of why this has happened. There is a somewhat fuzzy definition, because the personal service company is not defined in law: rather, its definition is understood and some of what we were trying to pin down was elusive.

There is a whole new industry, a sort of job creation in action, around servicing IR35 and personal service companies. There are companies and advisers on the details of tax: they produce publications, they do marketing, they run member bodies and campaign bodies seeking reform, and so on. There has been an absolute explosion. Beyond the fact that that presumably provides some jobs to some people, it only underlined our concern about the confusion in this area of taxation.

It was disappointing—in fact, incomprehensible—that evidence from HMRC was inconsistent and that HMT refused even to contribute at either ministerial or official level. Their explanations were unconvincing at best, and I hope that we hear a better reason from the Minister about the failure to appear and contribute. There appeared to be a general lack of rigour and focus by HMRC on the functioning and validity of personal service companies or on the overall functioning of IR35. There seemed to be insufficient resources focusing on compliance, and a lack of clarity about whether HMRC was really trying to enforce compliance or whether it was just trying to do a bit of deterrent work around the edges.

In fact, during the investigation we found a decreasing number of compliance investigations, which we felt sent a signal in itself. Bizarrely, as we have heard, HMRC asked questions, for example on the personal tax return SA100, that are not compulsory. We have been told that there is going to be a review of this in the Government’s response. I hope tonight that we feel it will be a worthwhile review that leads to change rather than just a review. Probably many of us have been part of reviews of that sort in the past.

It is clear that in some industries—we had strong evidence from the oil and gas industry in particular—the use of personal service companies is really extensive and is considered useful and understandable. Contracts in those areas were time-limited and specialist. It served those industries well to encourage the use of personal service companies. In other industries and sectors it is fair to say that it was less clear. We struggled to persuade some businesses to give evidence at all, particularly in the financial services and banking sectors, where I think it is fair to say that people wished to stay somewhat in the shadows and not appear before us. We received a lot of generic evidence, for example from the CBI and the LGA, but when we pursued details they immediately told us that they could not represent those details in detail. All they could do was talk in generalities. Their individual members on the whole chose not to appear before us.

What was apparent in the evidence we received was that highly skilled workers—often highly paid—were capable of seeking, paying for and receiving the necessary advice about the advantages and disadvantages of personal service companies. Whatever the shortage of information, lack of clarity and low-level obscurity of the issues surrounding IR35 and the use of personal service companies, it seemed clear through the evidence we received that those at the top end of the income scale were at least in control of their own destinies and made decisions accordingly. In many cases, it was the individuals rather than those hiring them who were insistent that they wanted to operate via personal service companies.

In very sharp contrast, it seemed to us, were those at the other end of the skill and income level. Collectively we were surprised and shocked by the evidence we received that showed the widespread use of personal service companies across a range of poorly paid jobs, including healthcare workers and cleaners but many others too. This was confirmed by HMRC, which said that personal service companies now exist across all income ranges and all key sectors. The warm words used to explain the widespread use of personal service companies, umbrella companies and agencies emphasised the importance to UK plc of the flexible workforce.

Obviously the specifics vary depending on the vehicle used. For individuals using a personal service company, the drawbacks include lack of holiday pay, sick pay, maternity pay and a package of rights. Workplace pensions would not be offered.

Umbrella companies are obviously different, as there is a contract of employment. There are rights and entitlements, but these are usually less than for a conventional employment arrangement. There are also additional dangers for the individual. For example, they can be encouraged to make inflated tax-deductible expenses, for which they would be personally liable if investigated and found to be in error. Gaps in national insurance records and employers’ national insurance being deducted from gross were also cited, together with charging of fees that were automatically debited from the individual.

We also heard about the working of agencies that offered workers through various routes, including personal service companies. Often the agencies worked alongside umbrella companies as well to deliver flexible workers—or, perhaps more accurately, workers whom the employer wanted to be on flexible contracts. It is clear that workers in this low-paid flexible workforce generally had lower entitlements overall than those in permanent employment.

Crucially, we were concerned about the awareness by individuals of their rights and benefits or reduced packages. We also received evidence that the pressure to conform to the non-traditional form of employment was mainly from employment agencies. The Low Incomes Tax Reform Group talked about the specific targeting of migrant workers at the most exploitative end of the market. Workers were aware of what they had signed up to only when they tried to access benefits or exercise rights to which they thought they were entitled. Put simply, many low-paid workers think they are working for the company that runs their place of work. Why would they not?

There is much heralding of the UK’s flexible labour market, especially when compared to other countries in the EU. We know that much of that is true. There are workers at the lower end of the income scale who are perfectly happy to work in a flexible package because it suits them for a time, particularly when connected to family patterns. However, we should not be proud of people being pressured into flexible working and non-traditional employment contracts without realising what is happening to them. The Government must do more to inform and to expose. The abuse of flexible working damages the overall reputation of this broad policy approach.

The Government can decide to include issues in the annual remit of the Low Pay Commission. They might be reluctant to do so, but it seems essential that this whole issue is looked at calmly and comprehensively. Hotlines and publications will not suffice; I for one felt the Government’s response tended to err towards hotlines and publications. I hope tonight that we will hear a commitment to look seriously at taking this to the Low Pay Commission.

In summary, it seemed to us that there were two worlds. The higher paid tend to choose to use personal service companies, know what they are and why they are doing so, and seek the necessary advice and professional help. There are questions for HMRC and wider government and society about whether enough is done to ensure that there is necessarily tax compliance for these people. The other world tends to be low paid and often relatively poorly educated, not aware of the repercussions of their employment status and indeed may be not even aware of that status. They are pushed into non-traditional employment contracts rather than opting for them. Again, government action is needed but of a very different form. These are people who are working hard but, bluntly, not being treated fairly. They need better protection. I hope that we will hear tonight a more positive reply from the Government than we have heard so far.