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Session 2005 - 06
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Standing Committee Debates

Draft National Minimum Wage (Amendment) Regulations 2006

The Committee consisted of the following Members:

Chairman: Mr. David Amess
Austin, John (Erith and Thamesmead) (Lab)
Bercow, John (Buckingham) (Con)
Blunt, Mr. Crispin (Reigate) (Con)
Burt, Lorely (Solihull) (LD)
Cash, Mr. William (Stone) (Con)
Coffey, Ann (Stockport) (Lab)
Cooper, Rosie (West Lancashire) (Lab)
Davey, Mr. Edward (Kingston and Surbiton) (LD)
Devine, Mr. Jim (Livingston) (Lab)
Djanogly, Mr. Jonathan (Huntingdon) (Con)
Etherington, Bill (Sunderland, North) (Lab)
Fitzpatrick, Jim (Parliamentary Under-Secretary of State for Trade and Industry)
Kirkbride, Miss Julie (Bromsgrove) (Con)
McCabe, Steve (Birmingham, Hall Green) (Lab)
Marsden, Mr. Gordon (Blackpool, South) (Lab)
Milburn, Mr. Alan (Darlington) (Lab)
Waltho, Lynda (Stourbridge) (Lab)
M. Etherton, Committee Clerk
† attended the Committee

First Standing Committee on Delegated Legislation

Monday 3 July 2006

[Mr. David Amess in the Chair]

Draft National Minimum Wage (Amendment) Regulations 2006

4.30 pm
The Parliamentary Under-Secretary of State for Trade and Industry (Jim Fitzpatrick): I beg to move,
That the Committee has considered the draft National Minimum Wage Regulations 1999 (Amendment) Regulations 2006.
I am pleased to present the regulations to the Committee. We are all aware of how much the minimum wage has achieved. It has come a long way since its introduction in 1999 and remains one of the Government’s finest achievements. It is now 20 per cent. higher in real terms and has made a real difference to the lives of hundreds of thousands of low-paid workers, particularly women, who make up two thirds of those who benefit. It is a success because year on year it has protected some of society’s most vulnerable people from exploitative rates of pay, while not damaging the economy.
Each year, the Government set the remit for the Low Pay Commission. In July 2005, we set out the terms of reference as follows: we asked it to consider whether the October 2006 up ratings of the adult and development rates recommended in its 2005 report remained appropriate in the light of economic circumstances, and other factors, and if not, to make any recommendations for change. We asked it also to review the level of the 16 to 17-year-old rate, keeping in mind the position of the youth labour market and the incentives for young people to participate in education and training. We invited it to review the operation of the accommodation offset, and, if appropriate, to make recommendations for any changes needed to the regulations. It was asked also to review the treatment of benefits in kind, including when offered as part of a salary sacrifice arrangement.
The commission reported in March 2006, and the Government announced that we accepted most of the recommendations. Today we are debating the commission’s recommendation to increase the adult and development rates and the minimum wage for16 to 17-year-olds.
It might be helpful if I explain briefly each of the regulations. Regulation 1 provides for the regulations to come into force on 1st October 2006. That will give employers sufficient time in which to prepare and plan for the rate increases which were of course announced by the Government in March. Regulation 2 deals with increases to the minimum wage rates and the accommodation offset. The 2006 increase in the adult rate recommended by the commission equates to an increase of nearly 6 per cent. and will raise the adult rate from £5.05p to £5.35p per hour.
Mr. Jim Devine (Livingston) (Lab): I associate myself with my hon. Friend’s comments on the success of the minimum wage, but there is an anomaly. If a person pays for a meal and leaves the tip with a credit card, the tip is not given to the staff, but used as part of the minimum wage. Could we look at that situation?
Jim Fitzpatrick: My hon. Friend raises a point that I know concerns many hon. and right hon. Members on both sides of the House. Under current minimum wage regulations, cash tips, service charges, gratuities and cover charges not paid through payroll must not be counted when calculating whether a worker has been paid the minimum wage.
Many restaurants operate systems known as “troncs”—the technical term for that to which my hon. Friend referred—in which cash tips are gathered centrally and then allocated out by the head waiter or waitress. In some cases, a tronc is shared out between the workers without the employer being involved. In those cases, the tips would not count towards the minimum wage. However, in some cases, the tronc money is passed to the restaurant and paid out through payroll and in effect used to subsidise the minimum wage. The commission has commented on tips in several reports and has concluded that the current arrangements are working reasonably well and should remain unchanged, but none the less, I take my hon. Friend’s point.
The development rate for workers aged 18 to 21 increases by 4.7 per cent., rising from £4.25 an hour to £4.45 an hour. The commission also recommended a10 per cent. increase in the rate for 16 and 17-year-olds in 2006, from £3 to £3.30, which takes into account the absence of any uprating in October 2005. In arriving at that decision, the commission considered whether the introduction of a rate for 16 and 17-year-olds has encouraged young people out of full-time education or training. It concluded that it has not, and that neither has it damaged their prospects in the labour market.
The rate increases can be supported by economic data. As noted by the Low Pay Commission, employment has
“continued to grow, both in the overall economy and in the low-paying sectors”,
“corporate profitability continued its cyclical improvement.”
In short, the UK labour market remains healthy, with high employment rates, and unemployment remains low. The commission also examined the impact of the minimum wage on the economic forecast and reached the view that the increases are affordable, with which we agree. The latest increases will benefit about1.3 million workers from October 2006. While it supports the rate rises for 2006, the commission concluded that
“the phase in which the Low Pay Commission is committed to increases in the minimum wage above average earnings is over.”
Additionally, it continued that it has
“no presumption that further increases above average earnings are required.”
The accommodation offset will increase from £3.90 a day to £4.15 a day. That will be the amount that can be taken into account when determining whether the minimum wage has been paid in situations in which a worker is provided with accommodation by an employer, and it is in line with the commission’s recommendation.
Regulation 3 contains minor technical provisions. The commission recommended in its report that
“the accommodation offset provisions should continue to apply to all workers housed by their employer in all circumstances,”
and that
“the Government update existing guidance”
and “raise awareness.” It also recommended that
“the Government should implement legislative measures to prevent employers using the device of a separate accommodation company to evade the accommodation offset.”
We agree that the offset should apply in all situations in which employees are housed by their employers. We do not believe that legislative measures are required. Our legislation already covers a wide range of circumstances in which an employer provides accommodation to workers, not just those in which the employer owns the property. We shall issue guidance on when the offset is likely to apply, and we will consult on the clarity of the guidance before we publish it to ensure that it meets the needs of all interested parties including the Low Pay Commission, employers and employees.
We announced last year a new approach called “targeted enforcement”. The purpose was to target publicity and enforcement at key low-paying sectors in turn. As we stressed at the time when we announced the approach, our purpose is to tackle not the great majority of good employers but the minority of bad employers. This year’s sector will be child care nurseries. Her Majesty’s Revenue and Customs enforcement teams have found that one in three nurseries at which they have looked have been paying less than the minimum wage. It is vital that we raise the perception of child care as an attractive career option. As well as taking the action that I am announcing today, the Government are investing and legislating to ensure that child care providers, including those in the private and voluntary sectors, can improve quality and give parents increased choice and confidence. We will therefore work with representative bodies, employers and employees in the nursery sector to identify the main issues, and produce appropriate guidance, which will be followed by an enforcement drive. Such an approach was successfully adopted last year in the hairdressing sector.
4.39 pm
Mr. Jonathan Djanogly (Huntingdon) (Con): I wish to declare my interests as they appear in the Register of Members’ Interests.
I thank the Minister for his explanation of the proposed changes and recent developments concerning the national minimum wage and its enforcement. I note that the uplift in the minimum wage for adult workers represents an increase of 4.1 per cent., compared with the Government’s inflation target of 2.5 per cent. The headline rate of inflation, which is at about 2.9 per cent., remains above the Government’s target rate, as does the retail prices index, which has hovered between 2.7 and 2.9 per cent. since January. Why is the increase in the minimum wage so great at a time when unemployment and inflation are rising and productivity and competitiveness are falling?
The CBI has expressed concern about the impact on the competitiveness of our companies. Speaking on behalf of small businesses, the Federation of Small Businesses has expressed strong concern, not at the principle of the minimum wage, but at the fact that the minimum wage seems to be increasing as a matter of course.
We are concerned that the new high level will have an impact on wage differentials. Have the Government done any research into whether there is a risk that the grades of staff above those who are on the minimum wage might negotiate an increase for themselves on the pretext of maintaining differentials, thus exacerbating the inflationary impact?
4.41 pm
Lorely Burt (Solihull) (LD): I, too, welcome you to the Chair, Mr. Amess. I am grateful to the Minister for elucidating how the measures will work.
I find myself somewhat in agreement with the hon. Member for Huntingdon (Mr. Djanogly), who observed that the minimum wage increase is above the level of inflation and is seven times the Government’s consumer prices index target. It is therefore important that we look at the effects of that rise.
I tend to agree with the Minister that it is important that we raise workers’ standard of living as much as we can. Although we try to address it, the gap between the rich and the poor is tending to grow rather than to diminish. The introduction of the minimum wage has somewhat reduced the pay gap between men and women, but it is still 18 per cent. for full-time workers, so we clearly have quite a lot of work to do on that.
However, it is important that we look at the likely effect of the increase on industry, which is where all our wealth comes from. Employment in the hotel and restaurant sector, which is probably the lowest paid sector, has fallen by 39,000 since the first three quarters of 2005. To take up the point that the hon. Member for Huntingdon made about small businesses, it is important to remember that the effects on them tend to be disproportionate.
I should like to take the Committee back to before the introduction of the minimum wage. Historically, we had wages councils to set minimum rates of pay, but, regrettably, under the previous Conservative Administration, the rates that they set tended to fall behind. The wages councils were not reformed and did not cover those who worked as contract cleaners or security guards. The Labour Government therefore felt that it was important to introduce the minimum wage.
The Liberal Democrats have always supported the idea of minimum pay, but we would have preferred not to take a sledgehammer to crack a nut; we would have preferred sectoral and geographical minimum rates to a one-rate-fits-all approach. Given the living costs in London, the minimum wage there is far below the rate for which anyone should be expected to work. However, in Liverpool and other areas, where wages are traditionally much lower, there is a disproportionate effect on companies and a disproportionate benefit for workers.
To conclude, we support this rise in the minimum wage, but it is a blunt instrument. Rather than using a hammer to crack a nut, we would rather there had been something smaller, like a nutcracker, but better the hammer than no nut at all.
Jim Fitzpatrick: I hope that I can respond to the points made by the hon. Lady and the hon. Gentleman, which were relatively similar in their focus.
Hon. Members will know that the Low Pay Commission represents industry as well as the trade unions, and that it arrives at most of its conclusions by examining evidence, and through consensus. Although the commission found some factors that could be used to argue for a slight reduction in the £5.35 rate, such as slower than expected average earnings growth and economic growth, it also noted that employment has continued to grow in the overall economy. There is no evidence that the minimum wage is significantly damaging employment in the low-pay sectors, but we will ask the commission to monitor that closely.
The latest data shows that total employment grew by more than 270,000 in the year to April 2006, and that there are more people in work than ever before. That is why the commission concluded that, on balance, it should recommend the £5.35 rate, but that there should be no presumption that future rates should increase faster than average earnings, and the Government are happy to accept that view.
The commission found no significant evidence that the minimum wage has damaged employment and the low-pay sectors, and it will continue to monitor that. The UK labour market remains healthy with high employment rates and low unemployment. Having considered the impact of the minimum wage so far on economic forecasts, the commission has reached the view that the increases are affordable. Of course, some individual firms might have difficulties in coping, but previous predictions of job losses have proved wrong.
Our aim, when setting the rates, is to help the low-paid through an increased minimum wage while ensuring that we do not damage their employment prospects by setting it too high. Some 1.3 million of the most vulnerable, lowest-paid workers in our country will benefit as a result of the decisions that we will make today. While the minimum wage has risen broadly in line with average earnings for the first four years, the adult rate increased by about 8 per cent. in 2003-04, which was about double the rate of average earnings. The increases recommended by the Low Pay Commission for October 2005 equated to about 4 per cent., which was broadly in line with average earnings, and nearly 6 per cent. for 2006. Some 900,000 workers benefited last year, and 1.3 million are expected to benefit this October.
I accept the points made by hon. Members: we do need to balance future increases against the outlook for low paying sectors. There would be little point in allowing even higher increases to the minimum wage if it meant that there was a real risk of people losing their jobs. From October, the minimum wage will provide, with working tax credits and other benefits, a guaranteed income of at least £268 a week for families with one child, and a full-time worker equivalent to £7.66 an hour. I commend those increases to the House.
Question put and agreed to.
That the Committee has considered the draft National Minimum Wage Regulations 1999 (Amendment) Regulations 2006.
Committee rose at twelve minutes to Five o’clock.

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