Small Business, Enterprise and Employment Bill
The Committee consisted of the following Members:
Fergus Reid, Committee Clerk
† attended the Committee
Iain Birrell, Employment Rights Manager, Thompsons Solicitors
Mike Cherry, National Policy Chairman, Federation of Small Businesses
Katja Hall, Deputy Director General, Confederation of British Industry
Alexander Jackman, Head of Policy, Forum of Private Business
Philip King, Chief Executive, Institute of Credit Management
Mike Spicer, Director of Research, British Chambers of Commerce
James Sproule, Chief Economist and Director of Policy, Institute of Directors
We will consider the programme motion as on the amendment paper; a motion to allow us to deliberate in private about our questions in advance of the oral evidence sessions; and a motion to enable the reporting of written evidence for publication. Given the time available, I hope that we can agree the matters formally, without debate.
(1) the Committee shall (in addition to its first meeting at 8.55 am on Tuesday 14 October) meet—
(a) at 2.00 pm on Tuesday 14 October;
(b) at 11.30 am and 2.00 pm on Thursday 16 October;
(c) at 8.55 am and 2.00 pm on Tuesday 21 October;
(d) at 11.30 am and 2.00 pm on Thursday 23 October;
(e) at 8.55 am and 2.00 pm on Tuesday 28 October;
(f) at 11.30 am and 2.00 pm on Thursday 30 October;
(g) at 8.55 am and 2.00 pm on Tuesday 4 November;
(h) at 11.30 am and 2.00 pm on Thursday 6 November;
(2) the Committee shall hear oral evidence in accordance with the following Table:
(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clauses 1 to 35; Schedule 1; Clauses 36 to 66; Schedule 2; Clauses 67 to 70; Schedule 3; Clauses 71 to 73; Schedule 4; Clauses 74 to 82; Schedule 5; Clauses 83 to 85; Schedule 6; Clauses 86 to 99; Schedule 7; Clause 100; Schedule 8; Clauses 101 to 121; Schedule 9; Clauses 122 to 132; Schedule 10; Clauses 133 to 149; new Clauses; new Schedules; remaining proceedings on the Bill;
(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 6 November. —(Jo Swinson.)
Examination of Witnesses
Q 2 Toby Perkins (Chesterfield) (Lab): I am particularly interested initially in hearing from Mike and Mike on the subject of late payments. Mike Cherry, you said in your comments on the Bill that it was the view of the FSB that
Mike Cherry: First and foremost, as I am sure you are all aware from what we have said, late payment is a huge problem for many small businesses and especially for micro-businesses. In a modern economy we believe that 30 days should be more than sufficient to settle payments and Government suppliers should be signed up to be compliant with the prompt payment code. That is where we have seen initiatives fail inasmuch as they have not enabled the culture change that we feel is needed to occur. So you have a prompt payment code that nobody seems to abide by or, if they do, they abuse it. You have the supply chain initiative which people are extending their payment terms against.
In 2008 £18 billion was owed to small and micro-businesses and that figure has now gone up to something like £46 billion. So you can see that the whole agenda is moving in favour of the large companies who are increasing their margins. They are using small businesses as their banks to the detriment of small businesses, particularly as we come out of the recession, when cash flow will be even more important for those businesses as they continue to try to grow their business and create more jobs. We believe the Bill goes some way towards that, but one of the things that we on the panel are probably all agreed on is that we need to change the culture. We also need to show those who are exemplars as significant beneficiaries to their supply chains who value their supply chains and pay promptly. That is one way that we can stimulate some change here.
Mike Cherry: We would certainly like to see a mandatory prompt payment code for larger firms included in the Bill to encourage a more rapid cultural change with regard to late payment. We support the measures included in the Bill which allow the Secretary of State to force a business to provide an explanation if a payment is late. Current reporting requirements only produce a snapshot of a company’s payment terms at that particular moment. More needs to be done in this area but the provisions in the Bill start to address some of those problems.
Mike Spicer: Our position is essentially the same as the FSB’s. The last time that we went out to our full membership on this issue was about two years ago. We have not gone out to them since. Things may have changed. Some of the issues that we tested back then related to who were the worst offenders. As Mike said, the large private sector companies tend to be worst here. In terms of what can make a difference, apart from what we have said so far, we have always said that there should be a better system of reward for good behaviour as well as a punitive system for bad behaviour. There is always room for example as well as punishment. We should like to see further measures taken forward in that respect.
Q 5 Toby Perkins: It may be helpful to hear from James and Katja. We have heard small businesses saying how significant an issue this is for them. What would your bodies think about the prompt payment code being mandatory and this moving beyond being something that we hope businesses will take positive steps on?
Katja Hall: Our view and the view of our members is that late payment is a huge problem for the UK economy and it stands at some £30 billion. We have got ourselves into a situation in which it has too often become the norm to pay late or to extend contract terms. Ultimately, we need to change that by changing the culture. We should consider how to nurture supply chains in the round. Large companies should be looking at how to strengthen and grow their supply chains, part of which includes paying on time. It is important to have some flexibility on payment terms. The complexity of contracts will vary and what is suitable for a retailer might not be appropriate for a defence company, but payment terms should be stuck to once agreed.
The best way of getting culture change is through transparency. Ultimately, companies will need to want to do this. Partly, if I am honest, this is about ensuring that it is not just seen as an issue for the finance director and that it is something that the company must consider as a whole and should be discussed at board level, because it is about corporate responsibility. For that reason, we think that the measures to promote transparency around publishing payment terms on a comply-or-explain basis would be the most effective way forward.
Q 6 Toby Perkins: We have had the EU late payment directive and the prompt payment code, but they have not taken us to where we want to be on late payment, so is there anything in the Bill that will make the seismic shift from where we are to where we want to be?
Katja Hall: I think the Bill will help and, ultimately, greater transparency in publishing payment terms is an important step. I support both of my fellow panellists’ views that we should also be doing more to reward or recognise companies that are taking the matter seriously and are taking action to ensure that they pay on time.
I am quite keen to look at how we could improve monitoring of the code. I am not convinced that we should give it statutory backing, because ultimately businesses need to take a leadership role on the issue. There are some similarities to what we have seen on diversity in recent years, where business has taken a view that something is not acceptable. It affects all of us. It actually affects a lot of our large firms as well as small firms. We all need to take action to address it.
Oliver Colvile (Plymouth, Sutton and Devonport) (Con): First, I should declare an interest in that I am a member of the Federation of Small Businesses and still have an interest in a small communications company, although I do no work for it at all.
When I was running my small business, one issue was that I would not want to upset my clients too much, because that would end up with them taking their business elsewhere. First, how can we try to get over that? By the time that you start using the law and everything like that, the relationship will have broken down in no uncertain terms. Secondly, why do you think that large businesses are not quite so willing to pay their bills in due time? Is it because they set out to do it or is it because they think that they can use the money better without giving it to the small business?
Katja Hall: I think that your first point is really important. Ultimately, what we want are good relationships between companies within the supply chain. Anything that makes the relationship confrontational or antagonistic is not in anybody’s interest and will not work in the long term. This is about everybody realising that the UK benefits from strong, healthy supply chains. Prompt payment is part of that. It is not the only part, but it is important.
On your second point, it is a mixture of things. Sometimes, it is about large firms needing to ensure that they deal with payment promptly, including whether they have the systems and processes in place for actually just physically logging and paying bills. There is also an issue that probably developed during the recession when finance departments were being cautious, sticking closely to payment terms and certainly not paying earlier than they needed to. We need to change that culture. Paying on time and not having excessively long payment terms needs to become the norm.
Mike Cherry: I think we need to go far further in some ways, because with current interest rate levels it quite clearly does not make sense to be using small businesses to bankroll large businesses in the way that is happening. We also need to make quite clear just what prompt payment means. Toby mentioned the EU directive that came into force back in March 2013. It comes back to the whole problem around enforcement. You have
I believe we need to go much further than we have. We need a mandatory code in the Bill. To address some of the problems that we often hear about of small businesses being equally bad about late payment as larger businesses, there is a case for looking at staggering it over a certain period, as has happened in the past with various issues around Her Majesty’s Revenue and Customs and taxation. That is perhaps one way of bringing in a mandatory and statutory code that would get the culture to change. Unless something enables the prompt payment code to have real teeth, I do not feel that we will change the culture overnight. That is what actually needs to happen to get the money that is owed to small businesses into their bank accounts, and not held back by their larger customers.
Q 7 The Minister for Business and Enterprise (Matthew Hancock): On the point about the prompt payment code, I am interested to understand why, when we went out for consultation, including on that option, the FSB’s response was not to have mandatory payment terms, but you now are calling for a mandatory prompt payment code. We went out to consultation with all of the options and the Bill broadly reflects the response of all business groups to those options as they were laid out.
Mike Cherry: Minister, I will address that with two points. First and foremost, at that time I believe we had not had the Bacs figures, which have shown—if my figures are correct—that the figure has increased since last year from £33 billion to £46 billion. That shows that abuse of the supply chain is happening and nobody is taking notice of being signed up to the prompt payment code. If you look at the numbers of the FTSE 100, 250 or 350 that are signed up to it and then those that abide by it, again, it is not sufficient at this moment in time. We have therefore always said that, ultimately, if a mandate was required we would be calling for that. Unless we can change this fairly quickly, we believe a mandatory code may have to be brought in.
Mike Spicer: When we conducted our survey on late payments two years ago we published a paper alongside it, which I am happy to resubmit to the Committee. From memory, we made a number of recommendations in that. One related to giving the prompt payment code more teeth, which is what is being proposed here. On the other, when we are talking about culture change, part of that is to say, “Look, it is good business practice with your supply chain to have clear payment terms and stick to them.” My feeling, and the feeling of our members, is that there could be some kind of kitemark scheme, for instance, where if you meet a certain standard that perhaps goes beyond the mandatory, that is something you could publicise. Perhaps it is a bad analogy to say that it is analogous to the Investors in People scheme, but it would be something like that, which would be visible to those companies that were looking to do business with others. Although that might not be the whole picture it would be welcome and could be part of the mix.
Q 9 Mr Wright: Are there particular sectors that are good in terms of having good, efficient relationships with their suppliers and good, effective prompt payment? Are there sectors that are particularly bad, which might go to 120 or 180 days? Is there a sector-by-sector approach to solving late payments as well? That is to all the witnesses.
Mike Spicer: Briefly, I am not aware from the data that we have that there are particular sectors that are worse than others, although other panellists may have a different view. What I can tell you is that when we tested this a number of years ago, the vast majority of the several thousand businesses that were included in that survey had experienced late payment at some point and were dissatisfied with the payment terms that they got on occasions. Given that our membership is extremely broad-based and we see it across our membership, my sense is that this is widespread. It is not that it is particularly concentrated in one industry and not occurring anywhere else.
Katja Hall: I agree with that; I think it happens across lots of sectors. We need to be careful, though, to distinguish between commercially agreed payment terms, which might be commonly 30 days for one company in one sector and, for good reasons, 60 days in another, and the issue of late payment, which is ultimately a more serious problem. We need to be careful not to interfere in commercial relationships where they work well for both parties.
Q 10 Ian Murray (Edinburgh South) (Lab): Good morning, everyone. I have two questions. The first, which is probably to Mike Cherry, is about the impact on small businesses. Many small businesses use payment terms as a form of cash flow, so if this was not a whole-industry solution, what kind of impact could the rules have on them? The second question is about the impact of invoice financing. Could that mechanism make the problem worse, or is there the potential to find a better solution across all sectors?
Mike Cherry: On the question of payment terms, if something mandatory was to be brought in, staggering would answer that question. On invoice financing, that is a very interesting initiative and you are seeing some other players coming into that market space. It is not suitable for all businesses and I do not believe that it should be treated as the norm when what we want is for payment to be made promptly into the bank so that the business has the money, not the customer.
If I can come back on the question of sectoral issues, our membership is very broad and I think there are some issues in particular sectors—we know the construction industry has a particular problem in certain areas—but also the idea that businesses have to pay up front to be on a supplier list, when that does not guarantee business or retrospective discounts, is an issue that needs to be addressed.
James Sproule: May I come in on invoice financing? We think that this is an exciting new area and that it will be growing. I think it has potential, along with other newer methods of lending, and one of the frustrations that a lot of business people have felt across the country as a whole has been with the finance system in general over the past few years. The way in which companies need finance regularly comes in the top half-dozen concerns of the members of the Institute of Directors, which I think is unsurprising to everyone in this room.
On the whole issue of late payments, we do not wish to make prompt payment mandatory. The committee that has been set up, which the IOD supports, is a very good first step and the publishing of perennial late payers is a good idea. In invoice financing, those people would find steeper discounts and their suppliers would reflect that price back on them and say, “You’re a bad payer.”
I have worked for companies where, to be perfectly frank, it is a nightmare to get any invoice paid and I know that, if I get it out in 60 days, that is only because I did an enormous amount of leaning on the treasury department to pay anything. That is frustrating for me as someone who wants to be a good supplier, but there is a lot of internal bureaucracy, particularly in these larger companies, which is problematic.
Q 11 Toby Perkins: On invoice financing, that is businesses paying a premium to get money that they were owed anyway, which seems like a solution that has developed because we never solved the problem. Surely what we should be promoting is a positive solution.
James Sproule: It is absolutely a problem if it allows companies to manage their cash flow better. Of course, you could turn the invoice into invoice financing long before it was due. As Katja was saying, you may have a bill that is on 60-day or 90-day payment and you decide to turn it into invoice financing after 15 days. That could be completely within the contract, but you have decided that you would rather have the cash up front and you are using the invoice as collateral to advance the cash flow for your own purposes. So you have signed a bill and nobody is paying late at all; it is just allowing the company the flexibility.
Q 12 Nicola Blackwood (Oxford West and Abingdon) (Con): My understanding, Mr Cherry, from small businesses in my constituency is that their major problem is that they simply do not want to make use of their current breach of contract powers to take on a big business for late payment because they do not want to lose that client, supplier, contract or whatever. I am not sure how a mandatory prompt payment code would change that as small businesses would still not want to whistleblow on big businesses because they still would not want to lose that relationship. Surely the transparency proposals change that dynamic as the small businesses will not have to do the whistleblowing because the transparency will just be there for them. What do you think about that?
Mike Cherry: I think if you have adequate transparency and reporting then that goes some way to dealing with the issue of making it more visible. However, it will not, I believe, solve the problem of ensuring that the money is paid promptly rather than being able to add interest or just knowing that that particular company is likely to pay you late.
Nicola Blackwood: Not if they are not coming forward. Can I take you back to access to finance? I want to know what your views are on some of the other measures in the Bill, especially the proposals to bring forward the release of non-financial VAT registration. I think that is intended to increase the availability of trade credit for smaller and newer businesses. Obviously, they sometimes struggle to get access to finance because they do not have a credit history and so on. Does the FSB welcome that?
Mike Cherry: We do. We welcome the measures that impose a duty on designated banks and credit reference agencies to provide specified information about their small and medium-sized businesses. The sharing of some of the VAT information that HMRC holds is to be welcomed because credit scoring is one of the areas that is, we feel, still opaque and not as transparent as it needs to be. Making more information available—as long as who is and who is not able to have it and the information that is or is not supplied is properly monitored—is absolutely key to this. That should indeed help access to finance by making it easier for people to see the credit scoring, how a business is actually judged to be performing on its terms and everything else that it has to deal with, so we welcome those provisions in the Bill.
Nicola Blackwood: It is very encouraging. I have heard that we would be leaders in the EU on that; we should all welcome that. What do the other representatives think about the access to financing and the cheque imaging reforms in the Bill?
Katja Hall: We support the access to finance and the credit sharing for two reasons. First, we think it will ultimately lead to better decisions because finance providers will be able to have more information at their disposal on which to base their decisions. Secondly, obviously, it will improve access to finance for small and medium-sized enterprises so we welcome the Government’s approach on the access to finance proposals.
Mike Spicer: I would echo what Mike and Katja have said. At the moment we have a highly concentrated business banking sector. We have five really large players and a very long tail of small players. One of the reasons why that situation has persisted over the years is the incredibly high barriers to entry that there are. One of those barriers to entry is access to information in a way that allows smaller players to play a bigger role in the market. This is one way that we can help to address that through legislation, so we applaud it and support it.
James Sproule: I agree with the things that have been said inasmuch as I think there are the beginnings of quite serious new players coming into the market and that is going to be welcomed by all businesses. A much greater range of financing options is to be applauded. Things such as credit scoring and so on being more readily available simply aids that and I think will aid business.
Oliver Colvile: May I also express my thanks to you for coming and giving evidence to us? Have any of you changed your mind on the issue of prompt payment? Have you moved at all since you began to think about all this?
Katja Hall: I do not know whether we have changed our minds, but I have to say that the more we have talked to companies, the more we have realised what a big issue this is. What surprised me is that it is not only a very big issue for small firms, but it is a big issue for some of our large members too. I think this is a much bigger problem than perhaps we had realised, and also it is an issue that is perhaps not only related to the recession. That is why I think that the proposals in the Bill to increase transparency are important.
James Sproule: As somebody said before, it started because in a recession, clearly what you do is to string everything out as much as you can because it helps your cash flow. You are probably having your own invoices strung out as well, so there is a knock-on, domino effect. As time has gone on, people have not tightened up their payment procedures because they still find that it is advantageous to them. Obviously, we would all agree that small companies are particularly vulnerable to that type of behaviour and find it particularly difficult to deal with.
Q 13 Mark Garnier (Wyre Forest) (Con): Mike Cherry, clause 33 of the Bill looks at public sector procurement and requirements on the public sector to make it fairer for tier 1 suppliers. What it does not necessarily do is to pass on those payment policies further down the supply chain. Do you think that the Bill misses an opportunity here?
Mike Cherry: I think that the Bill misses a huge opportunity there, because when tier 1 suppliers are paid promptly, that should be reflected all the way through their supply chain. Wakefield council uses a very good clause in its procurement contracts to suppliers, and I think that that is something that should be looked at. The replication of such a clause could be encouraged right across the public sector. The public sector can almost lead by example, if I may phrase it in such a way, in making sure that its supply chains adhere to prompt payment by inserting that clause, or a similar one. Doing so would certainly show that the Government mean to have some teeth behind this, by making sure that that happens right across the whole public sector—not just central Government but local authorities, the NHS, the MOD and others.
Q 14 Mark Garnier: Do you not feel, though, that central Government can mandate everybody to do all sorts of things, but what you are talking about is where local authorities and local procurement organisations, such as the MOD, can actually put this in their contracts
Mike Cherry: Yes, I think that they should be encouraged. Part of the problem is that they do not often share good practice, or what works well, sufficiently or quickly enough, and trying to make sure that organisations such as the Local Government Association can assist with that would be a really beneficial step forward. When you look at the aggregation that sometimes happens in the public sector on procurement contracts, you miss a trick, because you do not extract the value that I believe small businesses can bring to a supply contract; you look only at the pure and simple cost, which often has an unintended consequence or additional cost further down the line.
Q 15 Mark Garnier: Katja Hall, do you see any practical problems with mandating a series of individual people in the supply chain to follow—rather like a train going out of Euston, everybody has to do the same thing?
Katja Hall: I agree that the public sector should be leading by example. I guess I question the extent to which legislation is the solution here. I think that legislation has a role to play, but ultimately this is about culture change and about trust. It is about large firms, whether they are tier 1 contractors or other large firms, recognising their broader responsibilities to their supply chains. We have got to change the culture, and I believe that the most effective way to change the culture is through transparency.
Q 16 Mr Wright: May I ask two questions on this? Clause 33 will bring forward regulation in respect of public sector procurement. Should those regulations explicitly state that the Government should ensure the kitemark of good prompt payment, and if that is not demonstrated, you cannot bid for Government contracts, whether centrally or locally? Should it be as blunt as that?
Katja Hall: I think our members would—if that is what the Government want to do, that is up to Government. We just need to be clear about what the implications are more broadly. We need to be clear on what we want contracts to cover and what we want them to specify. In principle, public procurement can be an important lever, but I am not sure it is a legislative solution that is needed.
Mike Spicer: I would agree with the principle. Anyone who has direct experience of public procurement could tell you that all sorts of things are asked for in any public procurement process, either at the pre-qualification stage or in the final stages. Those things range from environmental credentials to social riders, potentially, in this day and age. I do not see why prompt payment could not be one of those things. As Katja says, there could be some transitional issues in implementing that in reality, particularly when we are talking about a context where we are moving more and more into a world of large framework contracts, where the cat’s cradle of suppliers gets more and more complex by the year. I do not want to say that there is a legislative lever that you could pull in this case, because we would prefer to go back to our members on that, given that there are a number of ways that that could go.
Q 17 Sheryll Murray (South East Cornwall) (Con): Following on from that, one of the biggest concerns expressed by local businesses and my constituents is over-regulation. The Government have been clear in their commitment to cut red tape. The Bill enshrines in law the statutory deregulation target to be reviewed each year. Will your members welcome that? If we start with Mr Cherry, then the rest can answer.
Mike Cherry: I think we very much welcome what is in the Bill, because clearly the overall burden of regulation is mixed. There is some evidence that the net burden is still growing, but perhaps slightly more slowly than it has done, so we welcome the initiative of one in, two out that the Government have introduced in the past two or three years. The FSB’s last member survey clearly highlighted that the overall regulatory burden remains high. Two thirds of respondents said that there was far too much regulation, and some 40% said that the cost has gone up considerably. We still see that very much as being a problem area.
Q 20 Chris White (Warwick and Leamington) (Con): One of the most important parts of the Bill is its reference to zero-hours contracts. Mike Cherry, the FSB has said that there may be a limited number of cases where an exclusivity clause might be justified. Can you give some examples of where that would be the case?
Mike Cherry: Yes. It is important to put this in context. Only 7% or 8% of our members use zero-hours contracts. Their use is not widespread across small and medium-sized businesses. Where it works for both the employer and the employee, there is a case to be made for allowing the contracts to happen, so a code on zero-hours contracts is an important step forward. What you will find is that where there has been abuse—that is probably what has led to this issue being in the Bill—it is more widespread in the public sector and in large businesses than in the small business sector.
Q 21 Andrew Griffiths (Burton) (Con): It is good to welcome a fellow Burtonian to the Committee. Mike, it is good to see you here. I have a question for you on the regulation of pubs, which is an issue that has been of concern to Parliament for 10 years. We have discussed it on a number of occasions, but this is the first time in 10 years that a Government have introduced regulation in this area. Do you broadly welcome the introduction of the statutory code and the pubs code adjudicator?
Mike Cherry: The simple answer to your question, Andrew, is yes, we very much welcome the introduction of the statutory code and the adjudicator. As you know from our written submission, we have reservations about whether the adjudicator will have sufficient powers and whether there should be a free-of-tie option in the
Mike Cherry: I think what is in the Bill is a process-driven option that will allow the tenant to take issues to the adjudicator, but we have some concerns about whether it will actually work in practice. It very much depends on who the adjudicator is and how they deliver on the intention behind the Bill.
Q 23 Andrew Griffiths: So the devil is in the detail, but you broadly welcome the idea that tenants will have access to the statutory code, which will give them rights, and the ability to take concerns to the adjudicator. You mention the free-of-tie option, but do you believe regulation in that area should be based on the behaviour of the companies concerned or on the structure of the business model?
Q 24 Andrew Griffiths: By that I mean, do you think we should regulate on how each individual tenant is treated by the pubco that they have a contract with, or do you think we should be looking to fundamentally change the formula of the modal and intervene in the market in a radical way?
Mike Cherry: It is clear—the independent evidence that we did in 2013 highlighted this—that for too long tenants have not had a fair deal from the larger pubcos. Therefore, I suggest it is the structural model that has to be changed, rather than the individual.
Finally, have you seen the report compiled by London Economics on behalf of the Department for Business, Innovation and Skills, which suggests that a free-of-tie option would lead to the closure of 1,400 pubs and the loss of 7,000 jobs? Do you have a comment on that report?
Mike Cherry: I have a question about that report. Over time we have seen so many publicans forced out of business by the way the pubcos have damaged them. That, rather than the report, is behind this issue.
Q 26 Nicola Blackwood: I want to come back to the issue of over-regulation and the deregulation target, because we heard Mr Cherry’s views but we did not hear the views of the rest of the panel. I wanted to hear what the panel thinks about the deregulation measures in the Bill.
Katja Hall: We support and welcome them. Ultimately, the whole Bill is about encouraging growth in small and medium-sized firms. Deregulation is an important part of that, and so is the enforcement of legislation—we support strong enforcement of things such as the minimum wage—prompt payment and access to finance.
Mike Spicer: I think having a statutory target such as this is something we would support, but I would add a few things to it. It really does matter how the target is designed. At the beginning of this Parliament, we started with a one in, one out policy, and there were significant challenges about how that operated in practice. In particular, it could, in a sense, be gamed if you had deregulatory measures in one Department, for instance, and regulatory measures in another. There was not necessarily a whole-Government approach when it was first introduced. Now we are in the world of a one in, two out policy, which addresses some of those issues, but there are still things that are in scope and things that are out of scope.
When we talk to our members, one of the big concerns around regulatory burden these days is tax administration, and that is currently out of scope of the one in, two out target. We would urge that we look at that closely again to make sure the right things are within scope of the target. In principle, the idea of legislating for a target like this is something we could support, but I do not think we could just leave it there; we have to look closely at how it is implemented.
Q 31 Toby Perkins: I apologise for the fact that we are hopping around slightly, but I want to take us back to the pub companies issue, Mike. The proposal in the Bill is that a tenant who feels they have an unfair deal should have the right to request that a surveyor, following Royal Institution of Chartered Surveyors guidelines, tell them, “Here’s what you would have won if you were on a free-of-tie basis.” That would be for information’s sake, and they would not be able actually to move to that free-of-tie basis. That seems a rather complicated way of offering a guarantee that you will be no worse off than you would be if you were free of tie, and there is no enforcement method. Can you think of any industry where a similar thing actually works successfully? Do you have any confidence that this will provide the fairness that everyone thinks we so desperately need in the industry?
Mike Cherry: I think we have made it very plain that we do not think this goes far enough. It is an interesting idea to have a parallel rent review, but how it is delivered and what it means in practice to the tenant is the question behind this that we all need an answer on when this actually comes into being.
Q 32 Toby Perkins: Absolutely. Throughout the debate about pub companies, there has been a real desire among people on all sides of the question to ensure that unnecessary bureaucratic or compliance requirements are not placed on small family brewers, which have never been seen as the cause of these issues. As proposed at the moment, the code would introduce considerable compliance requirements on quite small family brewers. Do you think the balance between what is in the enhanced code and what is in the statutory code is right?
James Sproule: Yes, please. Absolutely. We certainly recognise that the target is a good one, and we fully support it. The problem of cutting red tape is difficult for all Governments, whatever party is in power at the time. I am slightly struck that some people who are suggesting that we have a statutory late payments code want, at the same time, to cut red tape. I think there may be a tension there that has not been fully explored.
I leave you with one quick anecdote. I went over to the Google campus recently. I was talking to people there and to all their entrepreneurs. I said, “How do you deal with employment legislation?” Their reply was, “Well, it’s very simple. If you’re the kind of person who wants to pay attention to employment legislation, you’re not the kind of person who wants to work here.” That was simple: they just ignored it. I was slightly shocked. I thought, “This all works until something goes wrong.” At the same time, it is an interesting view as to how one of the more entrepreneurial ends of the UK economy views a lot of the legislation.
James Sproule: I would support the tribunal changes that have come through in the last few years to stop nuisance tribunals. I have first-hand experience with that type of thing, so I think those have been very positive steps.
Q 36 Anne Marie Morris (Newton Abbot) (Con): A lot of the Bill is technical. It makes a number of minor amendments to try to ensure that we get fair play. Part 7 specifically addresses transparency in companies. It includes a number of technical amendments, but the one that struck me—I wondered whether you felt it might or might not give rise to problems—is clause 76, which changes the Companies Acts so that all company directors have to be natural persons. There is a get-out-of-jail clause, which says that there is not a prohibition against the holding of office of director by a natural person as a corporation sole or otherwise by virtue of office. Do you feel that that will be difficult? Is it a technical change that you welcome? As we are in this area of
James Sproule: Okay. This is probably within the part of the Bill that caused the IOD most discussion. We took a lot of evidence and talked to a lot of people about it. While our view is clear, it is one that is on the preponderance of evidence, not one that is particularly clear-cut. In general, the transparency and the desirability for transparency is what eventually pushed our position, and therefore we welcome the view that it should be a natural person.
There was a significant minority of people who said that this has potential for driving away inward investment in the UK, that we are never going to get a level playing field internationally, particularly with places like Delaware, which is not going to adopt this type of legislation. Within the UK broadly, places like Guernsey were significantly concerned about this sort of thing. That said, on balance we are still in favour of having a natural person. We do want someone to be accountable.
There was some debate as to whether somebody could be a director who would be under the instruction of somebody else. That is not my understanding; my understanding is that if you are a director you are responsible and you cannot say, “But I was being told by somebody else.” That does not matter at all. You are the director; you are responsible; it is on your shoulders. We had a lot of debate and came down firmly in favour of this as a good idea.
Mike Spicer: We do not have a view on that specific clause. If I may, I shall turn to the one about the register of people with significant control, which is in the same area of the Bill. That, too, caused some interesting conversations internally. On balance, we support it. The key thing about transparency is that when we engage our members on that topic, it is clear that most of them feel quite strongly that they are transparent already, and if other businesses are not being transparent, they should be.
The only rider I would add is that if you are asking companies themselves to produce registers like this, it has to be designed in a way that minimises any regulatory burden, for the same reason that James mentioned earlier, which is that we can all support the idea of trying to minimise and bring down the regulatory burden on business, but these sorts of tensions do crop up when we have clauses like this. We need to be really careful about how it is implemented.
Katja Hall: We do not have feedback on the specific clauses, but in principle we back the establishment of a beneficial ownership register. I think that is good and enhances the UK’s reputation as a good place to do business, so we support it. There is some detail we need to get right, but broadly we are encouraged by where we are at the moment in those discussions. There is an issue about the UK being ahead of the game and it is important that we persuade other countries to follow the UK and to make their registers public.
Mike Cherry: We obviously do not have any statistics on this. It is not an issue that our members bring to us. Greater transparency is something that we would always
Q 38 The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jo Swinson): On this clause and some of the later ones, we will obviously scrutinise the detail to ensure we get that right. Katja alluded to the overarching theme of trust and transparency, but I would like to probe further and ask the other members of the panel about it. How important do you think the UK’s reputation and leadership on corporate trust and transparency are, and what benefits can they deliver for our economy?
Katja Hall: That is very important. We want to be seen as a good place to do business and we want to encourage investment. I think we start from a position of strength. We already have good corporate governance; we should remember that and be proud of where we are already, but we should be looking at what more can be done. A beneficial ownership register is something we could support, and we also support the provision on disqualification.
Mike Spicer: On transparency, we can turn the question around and say, “What happens if you don’t have transparency? Where does that lead you?” If we look across the economic landscape, our members have certainly complained in the past about a lack of transparency in areas such as access to finance. We have already talked about payments and the opacity that can sometimes surround them. That is where it gets you if firm action is not taken to embed transparency. I think that is why our members instinctively tend to support measures intended to promote transparency. However, we have to be careful about how we implement that and ensure that, if there is a burden—for instance, if they are required to produce something for themselves—that is done in partnership with the business community.
James Sproule: I want to make two very quick points. One of our great advantages as an economy is that we are probably the most globalised economy in the world. An enormous amount of that globalisation comes down to trust—trust in our legal system, trust in our companies and in the transparency within them, whether they are listed on the London Stock Exchange or are privately held. That is recognised around the world as an enormous advantage and one that we should certainly not squander.
On the beneficial ownership register, I would caution that, although it may be a good idea, let’s not kid ourselves that it is the be-all and end-all. It will be updated once a year and a fair number of people said in our consultations, “It’s going to be out of date within minutes of being published.” I do not think it will be out of date quite as fast as that, but one should not think it will be a final document which tells you about the ownership of companies. It gives a snapshot at one point, and it may well change quite significantly over the course of the year.
Mike Spicer: I mentioned in my previous answer that one issue with the design of the one in, two out target is that it does not cover tax administration. That is an area in which our members increasingly talk about there being a burden—because, I suspect, there has been action in other areas and they are becoming less of an issue. Should local authorities and other public bodies be taking a lead in prompt payment of public procurement? Yes, they should. In fairness to them, when we carried out our survey a number of years ago, the public sector was seen to be a better performer in terms of prompt payment compared with large private sector companies. The issue was not so much late payment or even the payment terms; it was that they were perceived to be harder to engage with when there was a problem than their private sector partners, so I would put a slightly different emphasis on it. Of course, there are a number of measures in the Bill that strengthen some of the moves towards consistency in public sector procurement, and we support those.
Mike Spicer: Yes, I do. Some of them do it already, though they are not mandated to. That is a valid thing but, as I say, our evidence suggests that local authorities are not particularly bad performers in the area of prompt payment; it is that they can sometimes be less easy to resolve issues with when they occur. Simply publishing the performance would, in itself, give you the full picture of the experience of businesses.
Q 41 Chris White: Just picking up that point from Mike Spicer, it is a very interesting comment that rather than “late payment”, we convert that into “less easy to resolve issues with”. That seems to be a new phrase that we might pick up outside this Committee.
To go back to my previous question, the words reputation and leadership have been mentioned a number of times this morning. I would be grateful to hear the panel’s views on support for the exclusivity terms unenforceable in zero-hours contracts.
Katja Hall: We support the ban on exclusivity contracts. We think that the UK’s flexible labour market is a strength—that is one of the reasons that we have much lower levels of unemployment than much of Europe—but we should not condone abusive arrangements. We do not think exclusivity contracts are acceptable and therefore we support the proposal in the Bill. We also support the proposal to strengthen enforcement of the minimum wage. We think that is very important. We should have effective enforcement of employment rights.
Mike Cherry: We support the exclusivity proposals as outlined in the Bill. As I said in my comments on the previous question on this issue, there have been cases, particularly for small businesses, where we believe it has been beneficial, both for the employer and the employee. The Bill will deal with the issue—and quite rightly so—as far as the larger businesses are concerned and in the public sector, which, as I said, is where I believe the abuse has happened in the past. As Katja said, we support fully the enforcement of the national minimum wage because it is quite clear from our members that the problem puts good businesses at a disadvantage compared with those who do not abide by the law.
Mike Spicer: We also support the ban on exclusivity arrangements in zero-hours contracts. This is something that we put to our membership very recently, in quarter three of this year, as part of our economic survey. One point to stress—I think Katja may have stressed it earlier—is that we are not talking about a very large number of businesses. Within our membership, only 11% report using any kind of zero-hours contract, and of them, much less than a fifth say that there would be any kind of negative impact from this clause. So it is something that we can support. The principle is a worthy one. We need to have a flexible labour market—we all understand that—but it has to be fair to people on both sides of the contract. This is a good balance.
As Katja said, on enforcing the national minimum wage, again, it is impossible to sit here and say that you favour people breaking the law. The people who lose out from that, as well as the workers, are businesses who play by the rules. There is definitely a strong sense in our membership that where you have companies that transgress and are found out, they ought to be punished. If there are ways that we can sharpen up the deterrent effect, that is something that we should do.
James Sproule: I echo the sentiment across the Committee. A lot of the commentary around zero-hours contracts was at times an objection to the whole concept. I think that is mistaken. It is part of a very flexible labour market, which the UK has benefited from. Our unemployment peaked at about 8.4% in the great recession. If you had told me as an economist the depth of the recession we were going into, I would have thought that our unemployment would creep towards 14% or 15%. So, thousands of people kept their jobs—maybe not the number of hours they wanted, maybe not the conditions they wanted—but they kept income and that is a very good thing. Exclusivity is clearly one small element of the total that was egregious and I think it has been addressed effectively.
Q 42 Chris White: Thank you. I am pleased to hear your various organisations’ support for this step. If I could come back to Mike Cherry—you said, if I heard correctly, that the public sector is one of the worst offenders in this area. Do you have any examples of any bodies or local authorities that are particularly bad in this?
Q 43 Ian Murray: May I refer the Committee to my entry in the Register of Members’ Financial Interests, before I ask this question on directors? I have three unremunerated directorships recorded there. This question
James Sproule: First, I declare an interest. The IOD undertakes an enormous amount of professional development and training. In my response, I wanted to make it clear that we have a potential conflict of interest.
The whole idea that people should be able to redeem themselves is a good one. If people, having made a mistake, are willing to undergo further training and learn from it, this is something that should be pushed forward. I am afraid I do not have any examples of what types of courses might be most appropriate for that. The reason we put the recommendation in was the general idea that we want to encourage people to be entrepreneurs.
One of the constant differences cited between the United States and Europe in general is that the United States is much more forgiving of having made mistakes as an entrepreneur and they therefore have a much better degree of entrepreneurialism. There is more evidence for that in the US than we have here in Europe.
“Our one concern is that centralisation of standards and practices must not be used as a stepping stone to further the centralisation of buyer demands into large, nationwide frameworks. In practice these work against SMEs by favouring companies with broad national capability.”
In this respect, Mike Cherry, are your members telling you that one of the outcomes of this Bill would be to make it more difficult for small businesses to gain access to tender for public procurement contracts?
Mike Cherry: That is not our understanding of the Bill, or the way in which we would interpret it. You have the draft regulation around pre-procurement coming in in 2015, which will also help towards that issue. So that is not our understanding of the clauses in the Bill.
Mike Spicer: Just to be clear, we strongly support the measures on public procurement in the Bill. We were saying that it has been the experience of our members over the past few years that, in an increasing number of places, initially in the devolved nations, but increasingly in England where you have co-procurement by councils, that they were finding it harder to bid for contracts that at one point in time were largely local.
We would have liked to see in the Bill, as a way of mitigating some of that trend, measures to make it easier for small companies to come together as consortia. We certainly support the principle that some measures like Contracts Finder make it easier to access opportunities. However, to be able to compete effectively for those as a small business, being able to come together as consortia is one really important step that we have to look at taking.
Jo Swinson: I will move on to some of the measures on employment later in the Bill, particularly around employment tribunals and some of the challenges for the users of employment tribunals. First, would you
Mike Cherry: On the employment tribunals, frequent delays do cost our members, but I think that this needs to be put into context. A very small percentage of our members are damaged by tribunals, which is good news; but I am thinking about the frequent postponement of tribunals—because it is not always necessarily just the cost of having to attend a tribunal and then, obviously, if it finds against the business, the subsequent fine or payment issues that it may impose. It is the time that small businesses are having to go through in preparing and processes. A postponement has a huge and damaging impact on the business. Often it is just one person who has to deal with all of this for small and micro-businesses.
What you have got at the moment is something that was probably never intended, although most of us suspected it would happen when the tribunal system was first set up—that it would become such a process-driven, legalistic body, which was never the intention. It was supposed to be a fairly quick way to resolve issues between the employer and the employee. I think we have gone well beyond that intention, to the detriment of any small or micro-business that falls foul, often inadvertently, of this issue.
I think where you have got a persistent business that refuses to abide by the law, we would say that they should have the full weight of the law thrown against them, because they are, obviously, as I mentioned earlier, disadvantaging those businesses that do try to comply. I think there is a difference between helping a business that wants to comply to comply, and those who just will not. Those who will not should have the full impact of any fine imposed and enforced properly. I think where it does cause a business that has inadvertently strayed into this area a problem, then perhaps they should have the right to appeal, which is in the Bill, and I fully support that.
Katja Hall: Yes, employers who knowingly break the law should feel the full force of it. So, yes, awards should be paid in full. We support the proposal on penalties; we think that could encourage paying of the award in the first place, but it probably needs to go hand in hand with just tougher enforcement, full stop. I think I am right that the statistics show that around 37% of respondents who did not pay the award cited insolvency, but half of those, then, had started to trade under a different name, so there clearly is an issue here that needs to be addressed.
We also support the measures around limiting the number of postponements. I think our overall view, though, is that these steps are welcome and they are a step in the right direction. Ultimately we want to see a tribunal system that is less legalistic, and we feel that, as part of that, administration for the system should lie with BIS, not with the Ministry of Justice. Our members
Q 45 Jo Swinson: Just on a point of clarity, Katja, you said that businesses that have knowingly broken the law should pay their fines and be held to account; presumably you think that even if that happens unknowingly with some kind of employment law—the national minimum wage has not been paid, and so on—businesses should have to take responsibility for getting it right.
James Sproule: One final point: the more legalistic our members have found these issues the more likelihood there is of reaching a settlement beforehand, and the more times people reach settlement the more people are tempted to use the tribunal system as an abuse, in an abusive manner. So a greater degree of clarity, a greater degree of rapid, fair decision making on this would be extremely welcome.
Q 46 Andrew Griffiths: This is just a very quick response to Mike Spicer; Mike, you mentioned consortia and the difficulties in forming them. Could you just give us an example of where that is happening and why it is happening? Why is it difficult to form a consortium to bid for the contracts?
Mike Spicer: There are a number of reasons, but one of the main reasons is the inability to demonstrate a shared financial history. You may have a number of companies that in themselves have had a long history of providing to the public sector locally. You can imagine, for instance, a number of, say, landscaping firms that provide services to schools. A very large contract comes up that covers the whole county, for instance, or something like that.
The Chair: Order. I am afraid that brings us to the end of the time allotted for the Committee to ask you questions. I thank you very much, on behalf of the Committee, for the evidence that you have provided.
Examination of Witnesses
Iain Birrell: Yes, Mr Chairman. Good morning, everybody. My name is Iain Birrell. I am a partner at Thompsons Solicitors. For the better part of a decade I was the regional head of employment for the north.
Q 49 Ian Murray: Hi, Iain. Good morning to you and thank you for giving evidence this morning. I shall go through your evidence, if that is the easiest way to structure this in terms of the order in which its subject matter appears in the Bill, and examine some issues that you raise.
On whistleblowing, you say that you cautiously welcome the provisions in the Bill but you have concerns about definitions of disclosure of information. Will you tell the Committee why you are cautious about the provisions in the Bill and what could possibly be done to strengthen them?
Iain Birrell: Certainly. All the studies in relation to whistleblowing indicate that people are more likely to blow the whistle if they feel that they are in a secure environment. So we would cautiously welcome this as an attempt to create that secure environment.
The publication of reports could seek to promote that safe environment, by making it clear that an organisation, or various organisations, are taking matters seriously and are pursuing and investigating them. There is a risk that the contrary may be proven by somebody looking at those reports and considering that, actually, there is a lot going on in that organisation that would worry them.
In relation to the definition of disclosures of information, I think it is important to be very clear as to what is being proposed to go into the report. The definition of whistleblowing at the moment is actually quite a tricky one. My experience over the years is that there has been a wide range of attempts to bring issues within the whistleblowing definition, only some of which have been successful. That inevitably means that some reports of whistleblowing are not actually reports of whistleblowing at all and others indeed are. So if one of these reports reflects simply reported matters, that would give one view of what is going on in a particular sector or organisation. If it is a report of matters which have been investigated and found to be actual, genuine instances of whistleblowing, showing public wrongdoing, that would produce a different type of report. Both kinds of report will give different impressions. That is why I urge caution.
Q 50 Ian Murray: May I take you on to employment tribunals and the failure to pay sums? There was significant debate during the passage of the Enterprise and Regulatory Reform Bill, about two years ago, about the number of employment tribunal awards that are not paid. Most of that was, of course, to do with insolvency, but some was to do with just not paying. The biggest concern about bringing in fines for non-payment was about whether that gets allocated to the Government’s own books before the person who needs to be granted the award is paid. You seem to raise that in your response as well. This will obviously help, to a certain extent, in terms of
Iain Birrell: I think that the clause as drafted is silent on a few key issues. We would absolutely welcome any attempts to ensure that outstanding employment tribunal awards are made. The system that introduces the penalty system certainly, in our view, would encourage some employers to make those payments and hopefully to do so in a more timely manner, so that is something that we welcome.
There is an issue in relation to the reasons for non-payment. Insolvency certainly is one. The difficulty with insolvency is that if you are insolvent, you are not paying not because you are just being mean-minded about it, but because you do not have the money. In relation to those circumstances, the concern that I raised in the document that was submitted was that if you simply add to the overall debt pool, there is less in the way of distributable funds to go round at the end of the day. The imposition of a penalty in those circumstances could be counter-productive to ensuring that an individual gets their money.
The research of 2013 discovered that 32% of respondents refuse to pay the award simply because they do not want to pay the award, for whatever reason. Hopefully these provisions would assist with that, but one question mark does remain about the way they are drafted. What happens in circumstances in which the employer pays the penalty over to the Crown, but still refuses to pay the individual claimant themselves? We have come across circumstances like that, in which employers have basically said, “Over my dead body.” The current draft of the legislation does not say what happens in those circumstances. It does not indicate whose responsibility it is to carry on enforcing in those circumstances. The definition of the outstanding debt says that the debt is still outstanding, but if the Crown has got its share, it really has no interest in pursuing it any further, so there is a question mark over whether it would continue to apply pressure for the main award to be paid.
Iain Birrell: If the purpose of these measures is to try to ensure that a person who has been made an award receives it, and bearing in mind that they will have been made an award because a judicial body has found that they were wronged and are therefore owed an award, I see no good reason why that should not take priority in terms of the two sums that are taken forward. If the purpose of the penalty is to produce that payment, logically that payment needs to be the one that is paid first.
Iain Birrell: Certainly. First, in relation to postponements, it is important to bear it in mind that there are postponements and there are postponements. The tribunals and the employment judges who operate them are subject to the overriding objective—the overriding objective permeates everything—which is to do justice, to do things fairly. That means that when you receive a postponement application, it needs to be considered on its merits.
When you look at what comes up as a postponement application, you see that they vary. Some are very much what the Bill appears to be targeting—people are simply not ready when they should be and they make an application because they are simply not ready to go. Very often that is last minute, and experience suggests that it can be simply because someone has done absolutely nothing in the intervening period, or it can be that they have been running themselves ragged but have simply got a period of time that is not realistic to the task in hand. At other times postponements can come up because someone has fallen ill, and in those circumstances they occur.
A couple of years ago, and around that sort of area, we had a rash of postponements that were caused by the employment tribunals themselves. They were double-booking rooms because they had more hearings to book than they had rooms to book them in, and we would find ourselves with last-minute postponements initiated by the employment tribunals. Now that the volume of cases going through the employment tribunals has reduced, that is not an issue any more.
Q 54 Ian Murray: That is incredibly useful; thank you. Could I finish off with zero-hours contracts? You will have heard the previous evidence panel suggesting that the Bill’s provisions on exclusivity in zero-hours contracts were welcomed. You call it a missed opportunity. Will you unpack for the Committee what else could be in there to ensure that this is not a missed opportunity?
Iain Birrell: The provisions in the Bill at the moment deal with exclusivity and that is great. I can see no justification for exclusivity in a zero-hours contract; there are other ways of achieving that. However, a feature of the zero-hours contract which is key to the way it operates is that it provides a complete lack of certainty in a situation in which there are no employment rights. It can lead to an enormous abuse of that situation. The standard justification for zero-hours contracts is that they are necessary in order to address short-term needs. The standard argument is that when a colleague rings in sick in the morning you need someone to cover; it is that sort of situation. However, in reality many zero-hours contracts are not used in that way at all.
The Chartered Institute of Personnel and Development research of last November noted that 83% of staff on zero-hours contracts have been engaged for longer than six months and 65% have been engaged for two years or
Iain Birrell: Certainly. As I understand the provisions, the definition of the relevant sum—the debt owed and sought to be recovered by these provisions—does not cover any costs award that has been made by the employment tribunal. That seems to me to be a very odd omission. In the employment tribunal, costs do not follow the event as they do in the courts system. In the courts system, if you win you can expect the other side to be ordered to pay your costs. In the employment tribunal, however, costs are very much more of a sanction in the sense that you have done something wrong, pursued a case improperly or argued it improperly or in a way which has been vexatious or a nuisance to the tribunal. It is therefore very much a pejorative thing.
To obtain a cost award is very rare in employment tribunals. The last set of statistics I saw suggested that only about 0.05% of cases ended up with a cost award in favour of the claimant and the figure is not that dissimilar for respondent cost awards. It seems to me inadequate, therefore, that a definition should not include a costs award. It has been an adjudication of a judicial body which considers it to be appropriate, it has been awarded and you have gone to the effort of arguing that at some cost—because there is always a cost involved in arguing a costs award; it is often a separate hearing—so it is difficult to see why that should not also be included as part of the definition of the debt which would be subject to the penalty regime.
Q 56 Andy McDonald (Middlesbrough) (Lab): I declare an interest as a former employee of Thompsons. Going back to the issue of the penalty, it is set at 50% of the sum owed, with a minimum of £100 and a maximum of £5,000. Is that maximum of £5,000 going to impact sufficiently when a higher award is made? Secondly, given the introduction of tribunal fees and the remarks you have made about costs generally, is there any merit in introducing a cost recovery scheme into the tribunal system and making costs follow the event? Finally, on the issue of the penalty being paid to the state, as I read it, at the end of the line, once the penalty is imposed along with whatever other sanctions the tribunal may make, that debt just sits in the lap of the claiming party to recover. There is no secretariat or system to enforce it, so have we got that right, in that the penalty is paid to the state rather than the claimant? Is that the right approach?
Iain Birrell: Gosh! Let us go through those in turn, then. First, is the £5,000 severe enough? I think in some circumstances, it will be. In terms of the figures for the average unfair dismissal award, the average is about £5,000 itself, so half of that is nowhere near the £5,000. I think that statistic predates the recent change, bringing down the maximum unfair dismissal to be capped at a year’s salary. Currently, the average year’s salary is about £26,000 for the average UK worker.
Where it will have difficulties in causing an impact could be in some of the discrimination awards. Discrimination awards are uncapped and they can be higher. They include, obviously, the injury to feelings awards, which are awarded according to a set of guidelines known as the Vento guidelines. They can run from as little as £500 or £600 all the way up to £25,000. That is quite a large range. The top end of that is quite unusual; it is for the very severe and persistent campaigns of discrimination, but nevertheless, they do exist.
In discrimination awards, you can also have lost earnings, and those can be very high. To give you an example, I ran a case a few years ago—we had a sex discrimination case against a local authority. The chief executive had ended up having a vendetta against this individual. That is basically what the tribunal found and we ended up securing half a million pounds for this individual on the basis of full career loss, because not only had he got rid of her from the authority, but he had made sure that she could not get a job anywhere else, so there was career-long loss. We also got a costs award of £125,000. In those circumstances, a £5,000 slap on the wrist is not going to make a hill of beans’ difference.
The other concern that I would have about the £5,000 impact is in relation to multiple awards. When I talk about a multiple award, I mean where we are running a claim for lots of individuals. We see them quite a lot. Thompsons is a union firm. We often deal with mass organised claims and with consultation claims. They are your typical large claims, but you also see other large litigation, such as that being run for the airline pilots or for equal pay. In those, you can have hundreds and sometimes thousands of individuals. At the moment, the Bill’s provisions allow for regulations to be made to treat all those individual awards, so if I run a case for 500 people and each of those gets an award of £1,000, for instance, that is £500,000. The Bill currently allows for regulations to treat that as one outstanding debt and not 500 outstanding debts, and for one penalty to apply to that. In those circumstances, that would not be a very effective incentive to get that paid within an appropriate time frame. I hope that answers that part of the question.
In relation to the cost recovery scheme, I think the question was whether we would want to move towards a system where costs follow the event in the employment tribunals. No, I do not think so, is the answer to that one. As much as it has become complicated—I think the earlier evidence session indicated that it has become very complicated and complex—it is nevertheless run on the basis that it is an environment where people can go to seek justice in circumstances where very often they are at their lowest financial ebb. Most of the people who have gone to an employment tribunal have just lost their jobs, for instance. They are worrying how to pay the mortgage or the rent next, or how to put foodeb;normal;j on the table. If they are deterred from
Iain Birrell: The fees up front are already a big deterrent. We saw in the period when fees came in, but before the ACAS early conciliation came in—so there was no overlay effect there—a very significant drop in claims being brought, and that was down to fees. If there was a cost regime in employment tribunals, that would have an even more substantial effect in that regard as well. I think that would be the firm’s position on the cost-following-the-event scheme.
Iain Birrell: Yes. There were two other parts to that. On the penalty to the state, this is an unclear part of the Bill. When considering it, I was also considering the other penalty that came in recently under the Enterprise and Regulatory Reform Act 2013. There are provisions for a penalty in there when the employer’s behaviour—you will have to forgive me, I cannot remember the exact phrase, but it is basically bad behaviour—exacerbated the problem. In those circumstances, again, the penalty goes to the state, but it is down to the individual claimant to make the application for that penalty in the first place. I cannot see any enforcement provisions to recover that, other than the claimant doing it, when there is no real reason for it to do that. I worry that a similar situation is being set up in the current drafting of the Bill, meaning that the claimant needs to make the running. I do not see a point in the Bill where the state steps in and says, “Right, we’ve got it now. We will run with this and press it forward until we are both paid.” The way I read it at the moment is that it implies that the running is still with the claimant, and not only have they not been paid and must enforce their own award, but they must also try to enforce the Government’s award.
Q 59 Toby Perkins: On the employment tribunal, I wonder whether you have any statistical analysis of the impact of what has already happened, and potentially the lesson that might teach us about what might happen in the future in terms of the number of people who go to tribunals now. Do you have any analysis of how many cases went through tribunals previously, how many go through now and what the success rate has been?
Iain Birrell: Thompsons does not keep that information. What I can tell you is that those statistics are generally collated by the MOJ. What we have seen and the chronology of it is that fees came in and then there was a period of several months before the ACAS early conciliation came in. We are only just coming into the period when statistics are coming out in relation to the latter of those two events, so the statistics we have at the moment are purely in relation to the impact of the fees. Overall, claims lodged with the employment tribunals dropped by something like 79%, a very high level. Within that, various claims dropped off more than others, so we saw discrimination claims dropping off far more than wages claims, for example, and breakdowns have been done that demonstrate that.
In terms of what has happened, the drop in numbers has been significant. At the moment, that seems to be just in the figures that deal with the impact of the fees, and the figures for the impact of the fees plus early conciliation are due to come out.
Q 60 Toby Perkins: The likelihood is that the amount an employee will get from a tribunal will be linked to how much they were paid, so I would imagine that, putting words in your mouth, people on relatively low incomes will be much less likely to pursue a case because the financial disincentive will be much greater. So you had a huge drop-off and what it potentially means—I am interested in your view, so I will try to turn this into a question—is that people on low incomes are effectively much less likely to have access to justice in this regard. For people who are pursuing a case because they have lost a £200,000 job, the fees are probably less of a disincentive, so the employment tribunal will become a rich man’s game. What was intended to get rid of frivolous claims actually sweeps out a whole raft of people who will never be able to seek employment tribunal justice, does it not?
Iain Birrell: Does it not? Well, Thompsons is a firm that acts for trade unions. One of the responses to the introduction of the fees in the employment tribunals has been to ensure that the fees do not present a problem for trade union members. Given that Thompsons deals with such people, we have not seen a particular drop-off caused by that. We represent hundreds and thousands of tribunal claimants every year. At most of the employment tribunal venues around the country, you will probably see a Thompsons representative on any given day, because we have that sort of presence. That is not blowing our own trumpet. That leads me to think that when you look at the rest of the drop—the 70-odd% drop—you are looking at the people who do not have that backing and are indeed put off by the fees. There is a big disincentive. Yes, that is causing a lot of people not to go to an employment tribunal.
For the very high wage earners, tribunals were always slightly tricky. If you were looking at an unfair dismissal situation, your claim was always capped, anyway. It was capped at about £12,000 when I started doing employment law. It went up to £70,000-plus. It is now down and is capped at a year’s wage. That is a disincentive as well. The problem is getting access to the forum.
Iain Birrell: I don’t know. It is not an area of the law that I have any professional dealings or experience with. In my experience of fines and penalties generally, as a matter of course they are not imposed at the maximum levels. They are imposed at a much lower level. I am not really able to comment on how much tinkering around with the top limit will affect what I would anticipate to be the bulk of fines levied at a lower level.
Q 62 Mark Garnier: May I come back to zero-hours contracts? I want to follow on from Mr Murray’s questions, in answer to which you very kindly unpacked your thinking. You welcome some measures, but feel that there are missed opportunities more generally. You
Q 63 Mark Garnier: I don’t want to push you too hard. Obviously, it is difficult for you if you do not have the numbers in front of you, but is it not the case that with things like zero-hours contracts, partly they are responding to workers’ needs and partly to previous legislation and employment laws? It becomes the nature of society to react to constrictions in one place by finding a space to go to. Do you think zero-hours contracts have come as a result of over-tight employment regulation?
Iain Birrell: I would be cautious to confuse cause with effect on that one. I think the research demonstrates that there are people who like to be able to pick and choose what they are doing. The research that I can recall indicates that quite a lot of the people in these circumstances were students who were able to fit it in around what they needed to do on a day-to-day basis. Often, there were retired individuals as well—
Examination of Witnesses
Q 65 Toby Perkins: I will start with clause 3 and late payments. We heard earlier from many of the business representative bodies that, in their eyes, the issue of late payments is escalating and has not been resolved by measures such as the EU late payment directive or the prompt payment code. Mr King, you say that the Bill ducks the issue of unfair payment terms. Could you expand on that?
Philip King: That was a response to a specific issue in the Government’s response to the consultation on building a more responsible payment culture at the turn of the year. It was specifically around two issues: first, the definition of “grossly unfair”, which is difficult to put your finger on—whether it is a particular length of terms or whatever—and, secondly and more importantly, the failure to transpose paragraphs 4 and 5 of article 7 of the directive, which provide for the opportunity for business representative bodies to bring an action against a business that imposes unfair payment terms. That, as far as I understand, has yet to be transposed, so this is a missed opportunity.
Q 66 Toby Perkins: Alex, your organisation has spoken a great deal about the issue. Could you take us through why you think the existing tools have not lead to an improvement in the situation with regard to late payments? Do you think that the Bill will take us to where we need to be?
Alexander Jackman: To our minds, the biggest issue remaining for small businesses in tackling late payment is anonymity and a fear of putting their heads above the parapet and challenging, using the legislation that is out there, in case they lose future contracts. We are clear that we want to get to a position in which we can somehow maintain the anonymity of a business when challenging, and that is where, for us, article 7 is crucial. Our reading of it places an obligation on the member state to put in place a mechanism that allows a business to maintain anonymity by going through a business organisation such as ourselves, or many others that are out there, to challenge on their behalf what might be seen as grossly unfair. To my mind, that does not yet exist. We want to be able to get to a place where a member of any organisation can go to their representatives to say that they believe that what is happening to them is grossly unfair and then ask their representative to challenge that, in whichever court that might be. We are talking about not challenging a specific contract—the sums involved—but challenging the principle of a change that has been made so that the business would maintain its anonymity.
Although the main measure in the Bill is good, it does not tackle the anonymity issue, and that is something we would like to see the Bill go further with. The specific measure in the Bill about companies putting out their payment times and terms in annual reports is crucial. I will explain very quickly why I feel that is the case. I will not name the company, but around Christmas, a company extended its payment terms from 60 to 75 days. The company is a member of the prompt payment code, and we challenged its status following that extension. I think the justification given for making the extension was that it brought the company in line
Q 67 Toby Perkins: How much confidence would people have in that? There is anecdotal evidence that major supermarket chains have very long payment terms but state that they pay within 27 days. I have spoken to many small businesses that supply those supermarket chains and I cannot understand how the supermarkets can possibly cite that figure. Do you think there is confidence that, under the Bill, what is quoted will mean something to the people who receive those payments?
Alexander Jackman: As long as we are prescriptive about what they are releasing, and as long as the terms and times that they put down are standardised, it will be readily comparable. Hopefully that will address the sort of issue that you are raising.
Philip King: May I interject? Alex is right that if you quote the average payment terms on which a business makes its payments and there is a range of suppliers for things from rent through to window cleaners and wholesale suppliers, you are always going to have a number that, frankly, is not very meaningful. It is important that the Bill’s measures are implemented in such a way that it is not just about a number, because numbers can be massaged at the end of the year—they can be tweaked to say what we want. It is more about the policy and ethics of a business, and there are some good examples out there. Over the weekend, I was looking at some examples on the web of businesses that go much further than anyone else by saying exactly what their policy is, how they treat their suppliers and why that is important. The reporting bit may need to include some absolutes, but it also needs to include some commentary about how businesses treat their suppliers, and why they do so, so that suppliers can have confidence about how they will be handled.
Q 68 Toby Perkins: On where the onus lies, there is widespread agreement that one of the problems at the moment is that small businesses have to pursue big businesses, risking the loss of their contracts and damage to their relationships. Do you see anything in the proposals that remove a small business’s ultimate responsibility to pursue a large business? Is there anything that will change that balance of power in the relationship so that big businesses can be held to account?
Philip King: I guess the simple answer is no. The reality is that there is no silver bullet. There is no one measure that would change this. There was much talk earlier about culture, which we need to change from top to bottom. Let us not forget that it is not always big businesses that treat small businesses badly. That happens across industry, and we need to make sure that, from top to bottom, the culture is changed. In my mind, it is important that these measures complement other things that are happening. Outside the Bill, there are proposals
Alexander Jackman: The Bill has two positives. First, when we are talking about enforcing 30-day payment terms down public sector supply chains, there will be a benefit for small businesses. As far as the private sector is concerned, the Bill does not tackle the anonymity issue. However, getting companies to release their payment times and terms is a tool that we can use on behalf of our members.
Q 70 Nicola Blackwood: Mr Jackman, we have had some debate about the Bill’s proposed reforms to zero-hours contracts. Do you think that the Bill should go further and require that anyone with a flexible-hours contract who keeps it for a certain period should automatically move to a fixed-hours contract?
Alexander Jackman: In the work we have done with our members on this, the only element of zero-hours contracts that came out fairly robustly either way was exclusivity. They were happy to see exclusivity go, as far as small businesses were concerned. In terms of going further, I think the issue is that if you are looking at where zero-hours are overused, I would argue that that is very much in the large business and corporate environment. They are the kinds of business that have robust human resources policies in place that will identify when an employee is getting close to that threshold, and I am in no doubt that some of them will put processes in place to move those people on before they reach the threshold.
In a small business that does not have that HR control, those employees might accidentally fall into being permanent members of staff, when actually all the business wants from them is seasonal support or, for a start-up, expertise on a temporary basis. My problem with zero-hours contracts becoming a more permanent fixture is that I feel it would catch out small businesses that use zero-hours contracts proportionately, while not addressing the major issue, which is their overuse by large companies.
Alexander Jackman: From the polling that we have done of our members, they would not mind losing exclusivity. We looked into a primary employer status, with the idea that an employee would have to work so many hours for their primary employer, but would not be restricted from going to other employers for hours above and beyond that, but I think that would probably just add more complexity to the regulation, and I do not really want to do that to our members.
Q 75 Mark Garnier: That is a relief. Finally, do you think that the Bill’s definition of a zero-hours contract is correct? As a supplementary, do you think that, with the proposals for exclusivity, some less scrupulous employers might try to step around it with another measure?
Alexander Jackman: I have absolutely no doubt that employers would find a way to recruit people on a short-term, flexible basis if zero-hours contracts were removed. However, in terms of whether the definition is correct at the moment, I might defer to an employment solicitor. I am not quite sure.
Q 76 Ian Murray: May I stick to the issue of zero-hours contracts briefly? You mentioned a level playing field in a previous answer. Is this a level playing field issue for business? If you had two comparable hospitality or retail businesses operating in the same sphere—perhaps on the same high street—and one was operating with zero-hours contracts and another was operating with full employment contracts, paying minimum wage and complying with all the necessary regulatory requirements, would that become a level playing field issue? Would businesses that had a majority or all of their staff on zero-hours contracts have an unfair advantage through exploiting exclusivity clauses and the use of over and understaffing? Should we use this as an opportunity to create a level playing field for all businesses?
Alexander Jackman: I would argue that it is at least the business’s decision as to how it wants to be viewed by the employees who work for that business. I might
Q 77 Oliver Colvile: Thank you very much for coming. At one stage in my life, I ended up working on a freelance basis. How can we protect private companies to make sure that they have people who are not going to work for a competitor at the same time as working for them? I am looking at how we can try to ensure that people do not suddenly go and talk to a company’s competitors about other things that are going on in that company.
Alexander Jackman: I think that would just require a drafting of the contract that they had. I hope that businesses that are our members and those of other organisations will get easy advice about how to word their contracts to prevent something like that. As far as I am aware, the Institute of Directors is the body that is speaking out most against the loss of exclusivity, for exactly those reasons, so it might be a question to address to it. Did it give evidence before us? I hope that that question was addressed to the body.
Philip King: Absolutely I do. Creditworthiness and credit assessment are critical to the supply of finance to small businesses in particular. We have seen over a long time period thresholds rising in terms of what defines a small company, a medium company and so on. The removal of the need to report has resulted in a paucity of information being available for suppliers to make decisions. I recognise that the proposal in the Bill is around banks providing information to credit reference agencies to then provide it to other finance providers. We should not forget that trade credit is a bigger provider of finance to business than the banks are, and this does not go as far as allowing the information to feed its way down to trade credit suppliers. However, it will get to the credit reference agencies, informing their decision making and how they score businesses, so ordinary trade credit suppliers will have a stronger view of businesses that are coming to them for credit. If more information is available, more and better decisions are made, which can only be good for the economy and for business generally.
Mark Garnier: Let me give you an example. Somebody could find out a credit reference for a competitor small business. There may be a less than favourable one, and if that information were broadcast among potential customers, it could be an unfortunate use of that data. It might even be an illegal use of data, but the information would be out in the open space.
Philip King: That is true, but in any event, any business can get a credit report on any other business. Depending on the size of the business, it can get company accounts as matters of public information, so the information is out there anyway.
Q 80 Mark Garnier: Under clause 5, the Treasury can extend the remit of the financial regulator—the FCA—to include the enforcement of the provisions. Do you think that is a good measure? Does that satisfy any worries you may have had?
Q 81 Nicola Blackwood: What are your views on invoice financing and cheque imaging? Do you think that these will be positive measures for businesses? Will they improve cash flow and access to finance?
Philip King: I think invoicing and financing are key. This was raised earlier. Any access to finance is important, and anything that restricts that should be curtailed. The removal of the incitement clause and so on is a really good thing. That is a sort of contract clause that tends to restrict things and is actually not there for any good reason, so it is good to get rid of it. In terms of cheque imaging, anything that speeds up the banking process has to be welcomed, and anything that makes that simpler and easier must be good. So, yes, we are very supportive.