National Minimum Wage (Amendment) (No. 2) Regulations 2010

Lord Cotter Excerpts

Wednesday 8th December 2010 Grand Committee

[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.