APPENDIX 9
Memorandum by The Federation of Small
Businesses (FSB)
1. The Federation of Small Businesses is
the UK's leading non-party political lobbying group for UK small
businesses existing to promote and protect the interests of all
who own and/or manage their own businesses. With over 185,000
members, the FSB is also the largest organisation representing
small and medium sized businesses in the UK. The FSB's membership
employs 1.25 million workers.
THE CONTRIBUTION
LABOUR MARKET
FLEXIBILITY MAKES
TO THE
UK ECONOMY
2. The UK small and medium enterprise (SME)
sector is of key importance to the UK economy. There are 3.8 million
small businesses in the UK employing over 50% of the UK's private
sector workforce. Over 97% of firms in the UK employ less than
20 people. Small firms contribute over 50% to the UK GDP which
in equates to £500 billion in monetary terms[75].
3. The SME sector is responsible for 64%
of all commercial innovations and large companies look to small
niche businesses for research and development and supplies. The
UK economy depends upon a fruitful partnership between large and
small businesses. Indeed, small businesses produce large economies.
4. The UK has one of the most flexible labour
markets in the EU, which has enabled the UK to be one of only
three countries to exceed all three of the EU 2010 employment
targets already[76].
As a consequence it is no coincidence that the UK has one of the
healthiest economies in the EU, which, is strongly supported by
the small business sector.
5. In the last five years, the UK was one
of the few advanced economies that came close to matching the
economic performance achieved by the United States. The UK's growth
rate of GDP per capita outpaced other European countries like
Germany, France, Italy, and Sweden, and lagged only somewhat behind
Australia, the United States, and the Netherlands. Only Ireland,
Finland, and a number of European and Asian middle-income countries
outpaced it significantly. [77]
6. The UK currently has one of the highest
levels of labour force utilisation in the OECD. The UK lies ahead
of the Continental European countries although behind only Japan
and the United States. The UK has a lower unemployment rate than
many peer countries, and working hours per employee in the UK
again fall between US and Continental European levels. Labour
productivity is often seen as the sole measure of economic performance.
The success in integrating a larger share of the potential workforce
into the economy is an important economic and social achievement
which, the UK deserves credit for. However, there is no room for
complacency because this is due in part to the substantial increase
in employment in the public administrative sector.
7. Flexibility of the labour market determines
the speed and ability of business to adapt to economic change.
This is particularly necessary within the SME sector, which, by
comparison to big business do not tend to have the same financial
resources to weather significant economic changes and thereby
rely on the labour market mechanism to maintain their profitability.
8. The UK economy has largely been able
to endure the global downturn of the last three years better than
peer countries because of this flexibility in the labour market.
This is has been helped by the comparatively benign conditions
which allow self employed and small (1-2 person) companies to
start up. A major and important exception is the IR35 scheme.
This reduces the ability of small businesses to compete with larger
ones, and new businesses to compete with established ones. The
flexibility which is the main advantage for small businesses is
lost and some are strangled by this measure. A loss or reduction
in labour market flexibility would have a significant impact in
our ability to prosper in difficult market situations.
Whether the current degree of flexibility is appropriate
or desirable, and, if no, what measures the Government should
take?
9. UK business has seen significant changes
to employment law in recent years. Almost all these impose restriction
on the freedom of contract and thus reduce flexibility. They have
led, to a greater or lesser extent, to greatly increased paperwork,
to wider jurisdiction of Tribunals, to more applications to Tribunals,
to rising awards by Tribunals and thus to apprehension of trouble
when considering to increase the staff of a small business. Small
businesses have struggled to keep up with new and changing legislation.
The difficulties have been demonstrated by the increase of approximately
40,000 applications to Tribunals since 1997 and a three-fold increase
since the early 1990s[78].
The consequence is a massive use by our members of our employment
law helpline. We attach the figures for in April 2004 (Annex A).
It can be seen that a total of 5,186 questions were raised in
that month and of these a whopping 1993 were concerned with actual
or potential termination of employment problems. By breaking down
the subject matter of calls received we are able to demonstrate
the width of enquiry and those areas of regulation which give
rise to the greatest problems.
10. The typical UK small business consists
of an owner/manager (who generally works very long hours) who
employs a few staff[79].
The resources of such businesses are generally focussed on meeting
customer demand in the most efficient and cost-effective way.
Expenditure for additional, administrative and support staff is
not something small businesses can afford. These tasks inevitably
fall upon the owner/manager to undertake when not servicing customer
demand thereby extending the hours worked. Hence small business
owner/managers have struggled somewhat to cope with the changes
to employment law. Employees in such businesses generally add
benefit by their flexibility in relation to hours and duties undertaken.
11. Whilst the SME sector has adapted to
take on the changes to employment legislation it is clear that
they have reached saturation point in regard to the amount of
employment law that they can take on board. A recent survey of
FSB membership demonstrated that the number of businesses to provide
all their staff with a contract of employment was only 40%. They
must of course provide terms and conditions. A further 12% offer
contracts of employment to some of their staff[80].
This backs up anecdotal evidence which, suggests that a large
number of small businesses consider employment law a daunting
prospect which they prefer to avoid by not taking on extra permanent
staff.
12. New forms of legislation such as the
dispute resolution regulations will cause significant difficulties
for small businesses, which, are likely to get caught out on matters
of procedural error rather than actual wrong doing. Whilst we
welcome the objective of the regulations we are unconvinced that
they will address the objective and due to their overwhelming
complexity may indeed lead to further complications at tribunal.
We consider that Government must do all in its power to educate
employers and employees on the new regulations and procedures.
By contrast the SME sector have coped with the flexible working
regulations that came into force in April 2003 under the Employment
Act. These regulations reflect the current flexible practices
that exist in most small businesses. We consider these regulations
to have been well written granting fairness and flexibility to
both the employer and employee respectively.
13. The FSB considers that claims for unfair
dismissal set at one year are tolerable. We would not, however,
like to see this qualifying period reduced.
14. In regard to the recent review of the
Working Time Directive and the opt out from the 48 hour working
week, small businesses need flexibility of the labour market to
enable them to cope with the peaks and troughs experienced within
the business cycle. For this reason the SME sector has welcomed
the 48 hour opt out and the flexibility it gives business in enabling
it to operate efficiently. Whilst extending the reference period
from the current 17 weeks to 52 weeks would enable businesses
to cope with the cyclical demands, we consider that this is still
insufficient to enable business to operate effectively and meet
the competitiveness goals as set out in the Lisbon agenda. Extra
paperwork would be required of small businesses who choose to
opt-out but nevertheless have to keep a record of employee hours
over a year's reference period.
15. No evidence has as yet been provided
as to the negative health effects of the opt-out on UK workers
compared to continental employees not working under the opt-out.
The Commission and European Parliament view has been strongly
influenced by the Barnard report which surprisingly did not consult
with the Federation of Small Businesses or any other specific
small business representative. No such report was commissioned
in any other member state. The communication from the Commission
has also been influenced by the social dialogue in which the FSB
is not represented. A more appropriate way to give full effect
to the second recital of the Directive would be to have a small
employer exemption for employers with less than 20 employees,
with a right for such employees to opt in to the 48-hour working
week.
16. Similarly our members would not wish
to see the Agency Workers Directive implemented in a form that
granted equal pay and conditions to temporary workers after 6
weeks. Whilst most businesses pay temporary staff the same or
more than equivalent permanent staff they object to the unnecessary
administrative complexity of offering the same benefits such as
pensions etc. and it is this factor that will deter them from
using temporary agency workers. The directive as originally drafted
would be a highly damaging for flexibility but the amendments
made by the European Parliament are satisfactory.
17. Small businesses generally offer more
flexible working arrangements than big business because of the
more informal atmosphere within a small business. It is for this
reason that the SME sector has found the formalising of employment
relations administratively burdensome. Rather than highlight specific
pieces of legislation that have been particularly onerous on SMEs
it is more accurate to say that the main obstacle has been the
sheer amount and complexity of employment legislation. A recent
FSB survey found that 60% of members were dissatisfied with the
complexity of legislation, 59% with the volume, 46% with the rate
of change, 55% with compliance costs and 54% with the interpretation
of legislation[81].
These figures refer to legislation as a whole.
18. The FSB feels that no additional employment
regulations are necessary bearing in mind the huge volume of forthcoming
employment laws already in the pipe line which are shortly due
to come into affect namely:
(a) Part III of the DDA 1995, removing the
small business exemption (effective 1.10.04).
(b) The new statutory disciplinary procedures
(effective 1.10.04).
(c) The new tribunal practice and procedure
regulations (effective 1.10.04).
(d) The information and consultation directive
(effective 2005) which, will in due course apply to medium sized
business.
(e) Age discrimination legislation (effective
Dec 2006).
The government has already committed itself
to implementing these regulations and without more, these will
be a huge burden on SMEs. We very strongly feel that no further
legislation is necessary.
19. The FSB considers that the way in which
EU Directives concerning employment law come into force is most
unsatisfactory. It originates in the so-called Social Dialogue
in which the FSB is unrepresented. It is geared to the views and
conditions of large businesses, to internationals and public sector
trade unions. It frequently gives dispensations to collective
agreements, which small businesses cannot take advantage of. Large
businesses and public sector employers have substantial human
resource departments which give them an increasing competitive
advantage. The impact on small businesses, despite the efforts
of the FSB and other small business organisations, is usually
ignored. Although the UK probably has the most flexible labour
market in the EU, it has other global competitors who are more
so. UK flexibility is inevitably reducing under the weight of
legislation. Although much of this comes from the EU, Whitehall
has a cultural tradition of gold-plating when transposing EU directives.
20. In conclusion, the flexibility of the
UK labour market is one of our most important assets. Where practicable
flexibility should be increased. The current degree is not appropriate
because:
(a) The legislation is too complex to administer.
A major review should be undertaken in order to examine how it
can be simplified.
(b) The legislation is geared to large, frequently
international businesses and public sector bodies. Inadequate
consideration is given to its effect on small businesses and their
employees in the private sector. Small business exemptions should
be applied where the legislation is inappropriate either to the
mischief at which it is aimed or the needs of employers and employees
alike.
(c) The legislation changes too often. There
is hardly a pause without a new or amended regulation, causing
unproductive time wasting in understanding it, avoidable costs
in implementing it, and mountains of paper and paperwork. All
of which is demonstrated by the use made of our legal helpline.
Annex
FSB CALL REPORT PERIOD FROM: 01/04/2004 to
30/04/2004
| Category: | Calls:
|
| Employment | |
| Age discrimination | 4 |
| Care standards issues | 5 |
| Children & Young Persons | 15
|
| Constructive dismissal | 66
|
| Contracts of Employment | 986
|
| Data protection | 13 |
| Directors | 8 |
| Disability discrimination | 83
|
| Disciplinary action | 1,258
|
| Dismissal | 282 |
| Employers liability | 55 |
| Employment status | 180 |
| Equal Pay | 3 |
| ET claims and procedures | 125
|
| Fixed term contracts | 3 |
| Flexible working | 17 |
| General | 32 |
| Grievances | 96 |
| Health & Safety | 48 |
| Holiday queries | 181 |
| Immigration and work permits | 18
|
| Incapacity | 266 |
| Information and consultation | 6
|
| Lay-offs | 12 |
| Left message | 239 |
| Maternity | 107 |
| Minimum Wage | 28 |
| Mobility | 1 |
| New Legislation | 9 |
| Non-employment | 88 |
| Parental leave and family | 17
|
| Part-time workers | 8 |
| Paternity and adoption leave | 11
|
| Pensions | 6 |
| Performance reviews | 31 |
| Race discrimination | 3 |
| Recruitment | 8 |
| Redundancy | 407 |
| References | 14 |
| Restrictive covenants | 16 |
| Retirement | 10 |
| Sex discrimination | 22 |
| SSP | 110 |
| Tax query | 13 |
| Temporary and agency workers | 3
|
| Trade Unions | 2 |
| TUPE | 102 |
| Unfair dismissal | 58 |
| Wages claims | 45 |
| Working Time Regulations | 44
|
| Wrongful dismissal | 22 |
| Totals: Employment | 5,186
|
| |
75
Small Business Service. Back
76
OECD Report. Back
77
UK Competitiveness: Moving to the next stage. Professor M Porter
and Christain H M Ketels. May 2003. Back
78
Employment Tribunal Service. Back
79
Survey of the FSB membership demonstrated that the majority of
members (57%) employ between one and four full-time staff. "Lifting
the Barriers to Growth" 2004. Back
80
Federation of Small Businesses, "Lifting the Barriers to
Growth" 2004. Back
81
Federation of Small Businesses, "Lifting the Barriers to
Growth in UK Small Businesses, 2004". Back
| 
