Groups of Workers

Introduction

3.1 As in previous years, we were asked in our terms of reference to consider the impact of the minimum wage on different groups of workers, including different age groups, ethnic minorities, women, people with disabilities and, for the first time, migrant workers. When the minimum wage was first introduced, there were concerns that it would adversely affect the employment prospects of some groups of workers more than others as they were more likely to be low-paid. In our reports we have carefully monitored the position of women, ethnic minority groups and those with work-limiting disabilities. Earlier reports have shown that both their employment prospects and relative earnings have improved in recent years. In this chapter we review the labour market outcomes of these groups of workers. We also consider the labour market prospects of young people and the situation of other groups of workers who, by the nature of their work and its organisation, face particular issues in respect of the operation of the minimum wage.

Women, Ethnic Minorities and People with Work-limiting Disabilities

Women

3.2 A growing number of women have entered the labour market in the last 40 years. Figure 3.1 shows that the employment rate of women has been steadily rising since the 1970s and does not seem to have been affected by the introduction of the minimum wage in April 1999. Although women’s employment rate remains lower than that of men, it has been following the same trend in the last ten years. Likewise, the unemployment rate of both groups have followed a similar pattern. In 2005 and 2006, both men and women experienced a slight rise in unemployment. However, the growth in unemployment has eased in the last year. The female unemployment rate stood at 5.3 per cent in the third quarter of 2007 compared to 4.4 per cent in the same quarter of 2005, while the male unemployment rate increased from 5.3 per cent to 5.8 per cent over the same period.

3.3 Despite their increased participation in the labour market, women remain disproportionately represented in low-paying sectors. According to the Labour Force Survey (LFS), in the third quarter of 2007 55 per cent of employees working in low-paying sectors were female, compared to 57 per cent in Autumn 1998. The incidence of female employees in the low-paid occupations is even more pronounced as they are less likely to hold supervisory or management positions. In the third quarter of 2007, around 67 per cent of employees in these occupations were women with some occupations such as nursery nurses, care assistants, office workers and hairdressers being particularly female-dominated. Women are also much more likely to be working part-time. According to the LFS, in the third quarter of 2007 78 per cent of part-time employees were women. Both these factors, the preponderance of women in low-paid occupations and their high propensity to be working part-time, will have an impact on their earnings. As we saw in Chapter 2, around two-thirds of jobs covered by the October 2007 upratings in the National Minimum Wage were held by women.

Figure 3.1

Working Age Employment and Unemployment Rates by Gender, UK, 1971–2007

Source: ONS LFS working age employment rate (MGSV, MGSW) and working age unemployment rate (YBTJ, YBTK), seasonally adjusted, UK, 1971–1997 and Q1 1998–Q3 2007.

Note: The dashed line indicates a break between data for whole years and quarters.

3.4 We have said in previous reports that there is evidence to demonstrate that the introduction and subsequent upratings of the minimum wage have contributed to a narrowing of the pay gap at the bottom of the earnings distribution. Figure 3.2 shows that in the last ten years, the gender pay gap for full-time employees aged 18 and over has been steadily narrowing at the lower end of the earnings distribution, and up to the 85th percentile, while it marginally increased at the top end of the distribution. The gender pay gap in the middle of the earnings distribution has been narrowing for some time and is therefore to a large extent independent of the influence of the minimum wage. However, the reduction in the pay gap has been most pronounced at the very bottom of the distribution since 1997 (declining from 10.5 per cent in 1998 to 3.8 per cent in 2007 at the fifth percentile) than at the median (down from 16.8 to 11.2 per cent), which suggests that the minimum wage has had a major impact on closing the gender pay gap among the low-paid. Little progress, however, has been made at the upper end of the earnings distribution where the pay gap has widened and the minimum wage has no influence.

Figure 3.2

Gender Pay Gap for Full-time Employees Aged 18 and Over, UK, 1998–2007

Source: LPC estimates based on ASHE without supplementary information, 1998, ASHE with supplementary information, 2004 and ASHE 2007 methodology, 2006–2007, standard weights, UK.
Note: The gender pay gap is the difference between 100 per cent and the ratio of women’s hourly earnings to male hourly earnings.

People with Work-limiting Disabilities

3.5 According to the LFS, 5.3 million people, or up to 16 per cent of the working age population, had work-limiting disabilities in the year to the third quarter of 2007. This group is much less likely to be participating in the labour market than other employees. In the third-quarter of 2007, the inactivity rate of people with work-limiting disabilities was 54.2 per cent compared to 15 per cent among those without such disabilities. Overall, employees with work-limiting disabilities were only slightly more likely to be working in low-paying sectors and occupations than other employees, although their incidence was higher in particular occupations such as cleaning, agriculture and textiles. In these three occupations the latest LFS data show well over one in ten employees with work-limiting disabilities. Research by Rigg (2005) on labour market disadvantage among disabled people found that people with disabilities were significantly more likely to enter low-paid work and significantly less likely to exit low pay than people with no disabilities.

3.6. The employment rate of those with work-limiting disabilities has historically been much lower than for other groups, but has been slowly increasing over the last ten years. In the third quarter of 2007, 40.3 per cent of employees with work-limiting disabilities were employed compared to 37.8 per cent in Autumn 1998, while the employment rate for other employees increased by 0.3 percentage points to 80.7 per cent over the same period. Unemployment for those with disabilities also declined at a much faster rate than for other employees between 1998 and 2004 as illustrated in Figure 3.3. Since 2004, however, unemployment has been increasing slightly more rapidly than for other groups. In the third quarter of 2007, the unemployment rate of those with work-limiting disabilities was 12 per cent compared to 9.8 per cent in the second quarter 2005. This rise in unemployment coincides with a sharp decline in the number of incapacity benefit claimants following moves by the Government to encourage this group back into work through welfare reforms.

Figure 3.3

Working Age Unemployment Rate of People with Work-limiting Disabilities, UK, 1998–2007

Source: LPC estimates based on LFS microdata, seasonal/calendar quarters, not seasonally adjusted, UK, 1998–2007.

Note: The break between Summer 2004 and Q4 2004 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care.

3.7 We reported in our 2007 Report that, since the introduction of the National Minimum Wage, the pay gap between the hourly earnings of employees with a work-limiting disability and those of other workers seems to have narrowed at the lower end of the distribution. Moreover, a higher proportion of workers with work-limiting disabilities continues to benefit from increases in the minimum wage as is illustrated in Figure 3.4. We estimate that, in April 2007, 8.7 per cent of employees with work-limiting disabilities were covered by the October 2007 minimum wage upratings, compared to 5.2 per cent of workers without such disabilities. The proportion of those covered rises to 10.2 per cent when we consider those workers who have both a disability as defined under the Disability Discrimination Act (DDA) and who also have a work-limiting disability.

Figure 3.4

Estimated Coverage of the 2007 Upratings of the National Minimum Wage by Disability for Employees Aged 16 and Over, UK, 2007

Source: ONS estimates based on LFS microdata, not seasonally adjusted, UK, Q2 2007.
Note: Covered employees defined as adults (aged 22 and over) earning less than £5.40, youths (aged 18–21) earning less than £4.50 and 16–17 year olds earning less than £3.32 in April 2007.

Ethnic Minority Groups

3.8 Our terms of reference ask us to monitor the impact of the minimum wage on people from ethnic minorities. The definition of an ethnic minority is not a simple one and no system of classification can be entirely free of arbitrary delineations. In the analysis that follows we have used the LFS self-reported classification of ethnicity as adopted by the 2001 Census1 but we recognise that this does not take into consideration the additional dimension resulting from the recent arrival of migrant workers principally from central and eastern Europe. Migrant workers are considered in a separate section later in this chapter.

3.9 Workers from ethnic minorities are more likely to be working in low-paying sectors than white workers. In the third quarter of 2007, 12.2 per cent of employees working in low-paying occupations were from ethnic minority groups compared to 8.3 per cent in other occupations. In the textiles and security low-paying occupations, around a quarter of the workforce was from a ethnic minority group.

3.10 Employees from ethnic minority groups generally have lower employment rates than white employees but, as shown in Figure 3.5, they have seen an increase in employment at a generally faster pace than that of white employees in recent years. Around 60.7 per cent of ethnic minority employees were employed in the third quarter of 2007 compared with 56.9 per cent in Autumn 1998. In 2007, their employment rate increased by 0.3 percentage points in contrast to white employees who experienced a very small decline in their employment rate from 76.3 to 76.2 per cent. Similarly, although the unemployment rate of ethnic minority workers is higher than that of white workers, it has been declining since the introduction of the minimum wage. However, the recent increase in unemployment was slightly more pronounced among those from ethnic minorities. It rose from 10.2 per cent in the third quarter of 2005 to 11.7 per cent in the fourth quarter of 2006, but has since then reduced to 11.3 per cent in the third quarter of 2007. However, these figures mask significant differences between the various ethnic minority groups and, within these, between men and women. Pakistani and Bangladeshi women have by far the lowest employment rate and the highest unemployment rate among ethnic minority groups, despite improvements in the last ten years.

Figure 3.5

Working Age Employment Rates By Ethnic Group, UK, 1998–2007

Source: LPC estimates based on LFS microdata, seasonal/calendar quarters, four-quarter moving average, UK, 1998–2007.
Notes:
1. The definition of ethnic groups in the LFS changed in Spring 2001 to be consistent with the 2001 Census classifications; thus comparisons between the periods before and after should not be made.

2. The break between Spring 2005 and Q3 2005 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care.

3.11. There is evidence that since the introduction of the minimum wage, the earnings position of ethnic minorities has improved at the lower end of the distribution. The difference between the earnings of ethnic minorities and whites is slightly less than the pay gaps experienced by employees with work-limiting disabilities or women. We estimate that overall 7.7 per cent of employees from minority ethnic groups were covered by the October 2007 upratings in the minimum wage compared to 5.3 per cent of white employees. However, this masks large differences between specific minority ethnic groups as seen in Figure 3.6. Asian/Asian British origin employees or those from other ethnic groups or of mixed origin were more likely to be covered by the upratings in the minimum wage than Black/Black British or Chinese employees. However, Heath and Cheung (2006) found that even after controlling for age, education and other personal characteristics, there were still significant net disadvantages for Black Africans, Black Caribbeans, Pakistanis and Bangladeshis with respect to unemployment, earnings and occupational attainment.

Figure 3.6

Estimated Coverage of the 2007 Upratings of the National Minimum Wage by Ethnic Group for Employees Aged 16 and Over, UK, 2007

Source: ONS estimates based on LFS microdata, not seasonally adjusted, UK, Q2 2007.

Note: Covered employees defined as adults (aged 22 and over) earning less than £5.40, youths (aged 18–21) earning less than £4.50 and 16–17 year olds earning less than £3.32 in April 2007.

Conclusions

3.12 The labour market participation of women, ethnic minority groups and people with work-limiting disabilities has improved in the last ten years. There is no evidence that the minimum wage has had an adverse impact on employment. All three groups, especially women, are more likely to be working in low-paying sectors and occupations and as a result are more likely to have benefited from the upratings in the National Minimum Wage. The minimum wage appears to have helped improve the earnings position of those groups of workers at the lower end of the earnings distribution. It has little effect on inequalities higher up the earnings distribution or those arising from occupational segregation.

Young People and Apprentices

Economic Activity and Participation in Education

3.13 From the outset, the Commission has been concerned that the National Minimum Wage should not provide a disincentive for young people to enter or remain in education. So far there has not been any evidence of a detrimental impact of the minimum wage on young people’s participation in education. Most 16–17 year olds are in full-time education (FTE). The proportion of full-time students was 76.7 per cent in the third quarter of 2007 (Figure 3.7). There is evidence (Battistin et al, 2005) that the introduction of the Education Maintenance Allowance in September 2004 has been an important factor in encouraging more young people to stay in FTE. However, as shown in Figure 3.7, there are signs that the increase in the participation rate among female 16–17 year olds has come to a halt in the last eighteen months, while participation is still rising for 16–17 year old males. At age 18 and over, many young people are still in FTE though participation decreases with age. Around 52.3 per cent of 18 year olds were in FTE in the third quarter of 2007, and participation in FTE fell to 27.2 per cent by the age of 21.

Figure 3.7

Proportion of 16–17 and 18–21 Year Olds in Full-time Education by Gender, UK, 1998–2007

Source: LPC estimates based on LFS microdata, seasonal/calendar quarters, four-quarter moving average, UK, 1998–2007.

Note: The break between Spring 2005 and Q3 2005 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care.

3.14 The labour market prospects of the decreasing number of 16–17 year olds who are not in FTE have been worsening since the end of the 1990s as shown in Figure 3.8. However, in the last year, the decline in employment and increase in inactivity and unemployment have shown signs of reversing. In the third quarter of 2007, the employment rate of 16–17 year olds not in FTE was 52.1 per cent, compared to 49.9 per cent a year ago, while the proportion of inactive 16–17 year olds not in FTE declined by 1.9 percentage points to 24.7 per cent over the same period. The unemployment rate remained stable at around 30.8 per cent.

Figure 3.8

Economic Activity of 16–17 Year Olds Not in Full-time Education, UK, 1998–2007

Source: LPC estimates based on LFS microdata, seasonal/calendar quarters, four-quarter moving average, UK, 1998–2007.

Note: The break between Spring 2005 and Q3 2005 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care.

3.15 Despite this improvement in the labour market position of 16–17 year olds not in FTE, just under half of this group (173,000 people) were either inactive or unemployed in 2007. While it is true that those young people not in FTE could be engaged in some form of part-time education, DfES figures (DfES, 2007) on participation in education and training show that most of the increase in inactive 16–17 year olds has occurred among those not in education or training. Those Not in Education, Employment or Training (NEET) have been of particular concern to the Government in recent years. DfES estimated that 10 per cent of 16–18 year olds were NEET in 2006, an increase of one percentage point since 1998. The increase was more pronounced for men and among 17 and 18 year olds, that is, for young people more likely to be active in the labour market than those who have just left school. The Prince’s Trust (2007) reported that the number of 16–24 year old NEETs had increased by 15 per cent from 1.08 million in 1997 to 1.24 million in 2006. However, there is a considerable degree of churn among NEETs. Research by the Learning And Skills Council (LSC, 2006) found that only one per cent of the 16–18 year-old cohort was NEET throughout the three year period it covered.

3.16 We now turn to consider 18–21 year olds. Figure 3.9 shows that in the third quarter of 2007 over 70 per cent of the 1.87 million 18–21 year olds not in FTE were employed. However, there has been a continuous decline in their employment rate since 2000, accompanied by a steady increase in their inactivity rate and, since 2004, a sharp rise in their unemployment rate. Overall, 554,000 or 32.2 per cent of 18–21 year olds not in FTE were unemployed or inactive, compared to 26.3 per cent in 2000.

3.17 Looking at individual ages, it is the labour market position of 18 year olds, and to a lesser extent that of 19 year olds, which seems to have deteriorated the most. Eighteen year olds not in FTE went from having the lowest inactivity rate of the cohort in 1998 to the highest in 2007. It has been hypothesised that the growing popularity of taking a gap year before entering higher education might be a factor. However, data from the Universities and Colleges Admissions Service show that the proportion of accepted applicants deferring entry to higher education for a year decreased from 7.9 per cent in 2002/2003 to 7.3 per cent in 2006/2007.

Figure 3.9

Economic Activity of 18–21 Year Olds Not in Full-time Education, UK, 1998–2007

Source: LPC estimates based on LFS microdata, seasonal/calendar quarters, four-quarter moving average, UK, 1998–2007.

Note: The break between Spring 2005 and Q3 2005 is a result of a discontinuity in the series as the LFS moved from seasonal to calendar quarters; thus comparisons should be made with care.

3.18 The decline in the labour market position of young people has been general across the UK. The proportion of young people not in FTE aged 16–21 who were in employment fell in almost all regions between 1998 and 2007, unlike those aged 22 and over who saw their employment share increase in all areas of the UK except London. However, by European standards, young people’s labour market position in the UK is relatively strong. According to Eurostat (2007), in the second quarter of 2006, Britain had the fourth highest employment rate overall and also the fourth highest rate for those aged 15–24 among the 27 European countries. However, its position with regard to unemployment was less good.

3.19 Given that employment in the UK has been at record levels, it is difficult to explain why young people have not done better in the labour market. Two significant developments in the labour market in recent years have been the increase in the number of people of pension age becoming economically active and the arrival of predominantly young migrant workers from the European Union accession countries. However, little evidence is available to substantiate the hypothesis that some young people might be substituted by older workers or migrants beyond anecdotal evidence given by some of our stakeholders. Employment vacancies information produced by Connexions Services in 2006 indicated that some employers prefer to recruit migrant workers who were perceived as having more developed interpersonal and technical skills. This is a point that has been frequently made to us during Commission visits, although it is worth noting that the decline of young people in the labour market started before this recent wave of immigration. We intend to continue to engage with other interested stakeholders and to encourage further research in this area so that we can reach a better understanding of the developments in this part of the labour market.

Earnings

3.20 Table 3.1 shows the proportion of jobs held by 16–17 year olds which paid below the 16–17 year old rate, the Youth Development Rate (YDR) and the adult rate applicable in April of the relevant year. In April 2007, 4.1 per cent of jobs held by 16–17 year olds were paying below the 16–17 year olds rate, a small increase from 3.8 per cent in 2006. Overall, the proportion of jobs held by 16–17 year olds at or above the 16–17 year old rate and below the Youth Development Rate increased from 24.5 per cent in 2004 to 27.5 per cent in 2007 while the proportion of jobs paying at or above the Youth Development Rate but below the adult rate remained stable. Of note is the decline in the proportion of jobs held by 16–17 year olds which paid at or above the adult rate, from 42.3 per cent in 2004 to 37 per cent in 2007. Among those, however, there was a sharp increase in the proportion of jobs paid at the adult rate from 3.8 per cent (13,600) in 2006 to 7.3 per cent (28,400) in 2007. In the same period, there were also noticeable peaks in the distribution at £4.00 (although that peak was much smaller than in 2006), £4.50, £4.85 and £5.00.

Table 3.1

Proportion of Jobs Held by 16–17 Year Olds at the National Minimum Wage Rates, UK, 2004–2007

Source: LPC estimates based on ASHE with supplementary information 2004–2006 and ASHE 2007 methodology 2006–2007, low-pay weights, UK.

Note: Direct comparisons between the 2004–2006 and 2006–2007 series should be made with care due to changes in the methodology.

3.21 Table 3.2 shows that there has been a similar decline in the proportion of jobs held by 18–21 year olds which paid at or above the adult rate from 86 per cent in 2004 to 81 per cent in 2007, but with the actual proportion of jobs paying at the adult rate increasing only slightly. Around 2.5 per cent of jobs held by that age group paid below the Youth Development Rate in 2007, a small increase from 2.3 per cent in 2004. There were also two noticeable peaks in the 2007 earnings distribution at £5.50 and £6.00.

Table 3.2

Proportion of Jobs Held by 18–21 Year Olds at the National Minimum Wage Rates, UK, 2004–2007

Source: LPC estimates based on ASHE with supplementary information 2004–2006 and ASHE 2007 methodology 2006–2007, low-pay weights, UK.

Note: Direct comparisons between the 2004–2006 and 2006–2007 series should be made with care due to changes in the methodology.

Age-related Pay

3.22 For the 16–22 age group, there is a clear relationship between age and earnings as illustrated by Table 3.3. In all years shown, gross hourly earnings progressively increase with every year of age. Over the last three years, the lower decile earnings of 18 year olds and 21 year olds have equalled the Youth Development Rate and the adult rate of the minimum wage respectively. The differential in decile earnings between 21 year olds and those aged 22 had considerably reduced in the last three years and to a much greater extent than for 20 year olds. In 2007, the bottom decile earnings of 21 year olds were nearly 100 per cent of those of 22 year olds, compared to 97 per cent in 2005.

Table 3.3

Gross Hourly Earnings for Young People by Age, UK, 2005–2007

Source: LPC estimates based on ASHE with supplementary information, 2005, and ASHE 2007 methodology 2006–2007, standard weights, UK.

Note: Direct comparisons between 2005 and 2006–2007 should be made with care due to changes in the methodology.

3.23 We have seen earlier that there has been a progressive decline in the proportion of 16–21 year olds paid at or above the adult rate of the National Minimum Wage. This increase in the use of age-related pay has been experienced mainly by 16–18 year olds. In April 2007, around 66 per cent of 18 year olds were paid at or above the adult rate, rising to 78 per cent of 19 year olds, 85 per cent of 20 year olds and 90 per cent of 21 year olds.

3.24 Evidence from our consultation and the research we commissioned provides a mixed picture on the use of age-related pay. Income Data Services (IDS, 2007a) have found that there has been a continuing divergence in the use of youth rates, with some companies moving away from age-related pay while others have increased their use of it. This has been most clearly an issue in the retail and fast food sectors. In retail, there has been a continuing trend to lower the age at which the adult rate is paid and a number of retailers have ended the practice of age-related pay completely. Other companies have narrowed the differentials between under–18 rates and pay rates for adults aged 18 and over. By contrast, some have introduced new youth rates to their pay structures. Overall, however, an increasing majority of retailers seem to be paying the adult rate from 18. This is confirmed by data from the Annual Survey of Hours and Earnings (ASHE) which show that 90 per cent of 18–21 years olds working in retail were paid at least the adult rate in April 2007 compared to 83 per cent in 2004. In their written evidence, the British Retail Consortium noted that none of the multiple retailers they surveyed in 2007 were using the Youth Development Rate, compared to 89 per cent not using it in 2006. The proportion of retailers that said they were unlikely to start using the Youth Development Rate also increased from 82 to 100 per cent. It could be that this pattern is more evident among large retailers. In their evidence to the Commission, the Independent Retailers Confederation reported that independent retailers, which tend to be smaller, were finding it increasingly difficult to accommodate increases to the minimum wage particularly in relation to the lower wage bandings. However, the ASHE data show that although micro and small firms are slightly less likely to pay young people at the adult rate than larger firms, the small decline in the use of age-related pay has occurred across firms of all sizes.

3.25 In the fast food sector, IDS found that larger traditional fast food chains have introduced the use of youth rates over the last four to five years, while newer, smaller establishments have pay structures solely based on experience. A similar pattern was observed in pubs. In the hospitality sector, the adult rate is typically paid from the age of 22. ASHE data show that 68 per cent of 18–21 year olds were paid at or above the adult rate in April 2007. According to ASHE, 92 per cent of 18–21 year olds employed in the social care sector were paid at or above the adult rate in April 2007, an increase of 10 per cent since 2004.

3.26 IDS also found, as in previous years, that youth rates were not widely used in the social care sector (a sector where there are restrictions on the use of under 18s in direct caring roles) and that those organisations which differentiated pay by age tended to pay the adult rate from the age of 18. In the nurseries sector, 37 per cent of respondents to the IDS survey said that they used age-related pay, up from just over a third in the previous survey. Of those using age-related pay, 69 per cent said that the threshold was age 22 and 10 per cent said that the threshold was age 21.

3.27 We came across similar issues during our visits across the UK to meet employers and workers, with some employers paying 16–21 year olds above the youth rates and others having age-related pay in their wage structures. During a Commission visit in London, McDonald’s explained that 16–17 year olds were paid above the Youth Rate but that a differential was maintained with 18–21 year olds to reflect the fact that there are some legal restrictions on 16–17 year olds such as the ability to do late shifts.

Stakeholders’ Views

3.28 Respondents to our consultation from trade unions invariably argued that the adult rate of the minimum wage should be paid from the age of 18 rather than from 22. The TUC argued that the existence of lower National Minimum Rates for young workers was inconsistent with the Government’s strategy to ‘make work pay’. It was concerned that low wages would provide a disincentive for 18–21 year olds to seek employment and that inequitable treatment in the work place would have a demoralising effect. Unite reported that there had been no evidence of a decrease in youth employment where youth rates had been abolished through negotiation.

3.29 Trade unions also advocated that the increases in the 16–17 year old rate should be higher than the increase in the adult rate. In its evidence, the TUC noted that the decline in the employment of 16–17 year olds had abated and that there was sufficient headroom in the labour market for an increase in the 16–17 year old rate that outstripped the growth in average earnings. UNISON called for 16–17 year olds to be entitled to the Youth Development Rate with a view to harmonising it with the adult rate over time.

3.30 These views were largely mirrored by youth organisations which consistently called for the abolition of youth rates altogether on the grounds that an age-tiered National Minimum Wage was discriminatory and was inconsistent with other Government policies to tackle prejudice and inequalities. The British Youth Council (BYC) presented the Commission with a petition signed by 600 young people expressing their dissatisfaction with the current minimum wage system and calling for an equal National Minimum Wage. In their evidence, the BYC contended that the reason for higher unemployment among young people without post–16 qualifications was an effect of multiple deprivation factors, including poverty and a low sense of self-esteem and that an equal minimum wage would increase labour market activity for them. The Children’s Rights Alliance for England argued that unequal wage rates for young people posed a serious barrier to young people’s entering and staying in education as low wages pushed many of the youths in full-time education who needed to support themselves to work longer hours and spend less time on their studies.

3.31 In their responses, some employers were more cautious and continued to emphasise the importance of the youth rates. The CBI noted that unemployment among the young remained high and strongly supported maintaining the youth rates to protect the employment prospects of young people. The CBI also argued that the uprating of the adult rate of the National Minimum Wage needed to be modest as many firms paid youths at this rate. This would also allow the youth rates to rise proportionately and help young people maintain their standards of living without affecting firms’ marginal decisions to hire. The Association of Licensed Multiple Retailers (ALMR) argued that the youth rates provided their members with an incentive to provide in-house training rather than simply recruiting employees with existing skills. The Institute of Directors argued that the Commission should bear in mind the impact on employers of the proposed changes to participation in education for under-18s when considering the level of the 16–17 year old rate.

The Role of Youth Rates

3.32 The evidence we have examined in this chapter indicates that young people have continued to do less well in the labour market than older workers, although there have been signs that the decline in employment has abated in the last year for 16–17 year olds not in full-time education and in the last six months for 18–21 year olds not in full-time education. We nevertheless believe that lower National Minimum Wage rates for young people continue to be justified to protect their position in the labour market.

21 Year Olds

3.33 Since our First Report (1998), we have consistently recommended that 21 year olds should be entitled to the adult rate of the National Minimum Wage. Our view has always been that, on balance, the 21st birthday is the appropriate cut-off point for the adult rate and that the employment prospects of 21 year olds does not need to be protected by the Youth Development Rate.

3.34 The Government has consistently rejected our recommendations, urging caution and arguing that the labour market position of 21 year olds was closer to that of 20 year olds than 22 year olds. In their latest economic evidence (BERR, 2007a), the Government argued that the employment rate of 21 year olds not in FTE generally moved more in line with the 19–20 year old rate. We do not agree. Figure 3.10, which is taken from the Government’s own economic evidence to us for this report, clearly shows that 21 year olds not in FTE have not fared as badly in the labour market as 19–20 year olds in recent years and their employment rate is now clearly more aligned to that of 22–23 year olds. In the third quarter of 2007, 73.6 per cent of 21 year olds – excluding those in FTE and graduates – were employed compared to 70.5 per cent of 19–20 year olds and 74.9 per cent of 22–23 year olds. In the same period, the unemployment rate of 21 year olds was 9.7 per cent, closer to the unemployment rate of 22–23 year olds (at 7.8 per cent) than 19–20 year olds (at 13.4 per cent).

Figure 3.10

Comparison of Employment Rate of 21 Year Olds with 19–20 and 22–23 Year Olds, Excluding Full-time Students and Graduates, UK, 1998–2007

Source: Government economic evidence. LFS microdata, seasonal/calendar quarters, four quarter moving average, UK, 1998–2007

Note: Results for Q3 2005 and earlier are calculated from seasonal LFS microdata.

3.35 The evidence on earnings is equally strong and suggests that employers overwhelmingly pay 21 year olds at least the adult rate. Earnings data show that fewer than 10 per cent of jobs (around 52,000) held by 21 year olds were paying below the adult rate of the minimum wage in April 2007. The slight increase in the use of age-related pay which we have observed in the last four years has mainly taken place among 16–19 year olds. Moreover, as shown in Table 3.3, the differential in the decile hourly earnings of 21 and 22 year olds seem to have substantially narrowed over time to the point where the bottom decile hourly earnings of these two age groups were practically the same in April 2007. Thus a move to lower the age at which the adult rate should be paid from 22 to 21 is likely to have little impact on employers. In the evidence we received no stakeholders argued that the cut off point for the adult rate should be maintained at the 22nd birthday.

3.36 We believe that the latest evidence reinforces our view that lowering the entitlement to the adult rate to the age of 21 will not have a detrimental impact on their employment prospects and therefore recommend again that 21 year olds should be entitled to the adult rate of the National Minimum Wage. Should the Government maintain its opposition to this proposal, we would welcome an indication of the exact nature of its opposition and a specification of what would need to change for the Government to adopt a positive approach to this recommendation.

Apprentices

3.37 In our 2006 and 2007 Reports we recommended that the Government invite us to review the minimum wage exemptions for apprentices and report in 2008. We believed a thorough review of the apprenticeship exemptions was necessary to assess how they have worked in practice given the number of developments which have taken place since the minimum wage was introduced and which may have had an impact on apprentices and the use of the exemptions. In particular, we felt it was necessary to understand the impact of the extension of the minimum wage to 16–17 year olds in 2004, changes to the financial support models for trainees, and the opening up of apprenticeships to older workers. We were therefore disappointed that the Government confirmed in this year’s remit that it did not want us to undertake such a review for this report.

3.38 Although we did not seek comment on apprentices this year, a number of stakeholders continued to raise concerns that the apprentice exemptions were being abused by some employers who offered little or low quality training and that low pay had been contributing to high non-completion rates. Several trade unions and other organisations representing workers again called for a review of the treatment of apprentices, with many seeking the removal of the minimum wage exemptions. Some argued that the Government’s proposals to extend the school leaving age and to increase the number of apprenticeship opportunities made a review at this time even more pertinent. The key allegations made were that exploitative rates were being paid to some apprentices and the quality of some training was sub-standard. There was a view that this could discourage young people from undertaking training and could be a significant reason for the high non-completion rate for apprenticeships. Some organisations also highlighted the pay gap between male and female apprentices. The Equal Opportunities Commission registered concern about the negative impact of the apprenticeship exemption on pay, particularly for female apprentices.

3.39 We also received a small number of consultation responses from employer bodies on the topic of apprentices, particularly in relation to the hairdressing sector. The National Hairdressers’ Federation advised that, although there was an increased interest in careers in the industry, most small salons were reluctant to take on trainees, in part due to the £80 per week minimum pay requirement. It suggested that the minimum wage exemption for apprentices should apply for the whole period of training, which in hairdressing might be up to three years.

3.40 Our belief that there is a strong case for a review of the minimum wage treatment of apprentices has been reinforced by the evidence we have received from stakeholders. Moreover, it will be some time before the Government’s proposals in the Education and Training Post-16 Green Paper (which applies to England alone) are implemented while apprenticeship schemes and the minimum wage cover the UK as a whole. We were therefore pleased that the Prime Minister announced in the House of Commons on 28 November 2007 that the Commission would be asked to undertake a review of apprenticeships and we look forward to carrying out this task in the coming year.

Migrant Workers

3.41 This year our remit asked us to report on the effects of the National Minimum Wage on migrant workers. We noted in our 2006 Report the substantial increase in the number of migrant workers in the UK over a number of years. This was particularly pronounced following enlargement of the European Union (EU) on 1 May 2004 and represented the most significant change to the labour market since the introduction of the minimum wage. The two key areas of interest for us regarding migrant workers are the effects they have on unemployment and wage inflation at the lower end of the labour market and the specific issues that arise in respect of minimum wage compliance and enforcement.

3.42 The UK has experienced high levels of both inward and outward migration2 since the mid-1990s, with in-migration rising at a faster rate than out-migration. Migrant workers have been an important element of the UK labour market for many years. While many migrant workers are highly skilled and paid well in excess of the minimum wage, a further group are concentrated at the low skill end of the labour market. It is this group we focus on, and in particular, migrant workers from the eight central and eastern European accession countries (the A8)3. It is workers from these countries who have had an important impact on the lower end of the labour market in recent years and for whom our consultation indicated there is particular concern in respect of the minimum wage. We also consider whether the migrant worker dynamic in the UK has changed further as a result of Romania and Bulgaria (the A2) joining the EU on 1 January 2007.

3.43 There are currently limited and imperfect data to help to understand the number of low-skilled migrant workers in the UK, the sectors in which they work and their country of origin. The ONS is developing a strategy to address this problem which will see modest improvements made to international migration statistics by 2008, although more substantial improvements will not be in place for a number of years. In October 2007, the House of Commons Trade and Industry Committee, in its report on the impact of the new EU Member States on UK business, recommended that the Government gave urgent consideration to how it could improve the information it collected on A8/A2 immigration before the next census in 2011. We welcome and endorse this recommendation and trust that it will be taken forward by the Government. However, at this time we can only draw on the statistics that are available and the information presented to us during our visits throughout the UK and our consultation to form our general understanding of migrant workers.

Migrant Workers from the Central and Eastern European Accession Countries

3.44 Migrant workers from the A8 countries were granted free access to the UK labour market from May 2004, but were required to register under the Worker Registration Scheme (WRS) if employed for a month or more4. The WRS shows that a total of 715,000 applicants from the A8 countries were approved to work in the UK between 1 May 2004 and 30 September 2007 (Border and Immigration Agency et al, 2007d)5. The composition of these workers has been fairly consistent since the scheme began, with the majority (66 per cent) of approved applicants coming from Poland. The vast majority were aged between 18 and 34 and were working full-time (more than 16 hours a week). However, the limitations of the WRS data mean that there continues to be much speculation on the number of A8 workers in the UK at any given time. Some evidence suggests that the number is substantially greater than indicated by the WRS, other evidence suggests it may be lower.

3.45 Workers from the A8 countries were concentrated in the low-paying sectors. Figure 3.11 below shows the top ten occupations in which A8 workers were registered under the WRS, accounting for 70 per cent of all registered. The occupations have remained largely consistent, with just over three-quarters earning6 between £4.50 and £5.99 an hour. This data is consistent with what we have been told during our visits and during consultation with stakeholders over the last couple of years, although we have begun to receive anecdotal evidence to suggest that some migrant workers may now be graduating to better paid jobs that more closely reflect their qualifications.

Figure 3.11

Worker Registration Scheme Applicants by Occupation, UK, 2004–2007

Source: Home Office Accession Monitoring Report A8 Countries, UK, May 2004–June 2007.

Notes:

1. May/June 2004 data not available.

2. Percentages indicate percentage of all workers registered, July 2004–June 2007.

3.46 There has been little change in the geographical distribution of A8 migrant workers since the WRS was introduced. Anglia remains the most popular destination, with 15 per cent of the total who have registered; followed by the Midlands and London, with 13 per cent and 12 per cent of the total respectively. Northern Ireland and Wales continue to attract the fewest A8 workers (4 per cent and 3 per cent of the total respectively).

Workers from Romania and Bulgaria

3.47 Nationals from the A2 countries were not given the same right to access the UK labour market as those from the A8 and their entry to work in the UK is by means of the work permit schemes operated by the Government. Changes to the work permit schemes will give priority to workers from the A2 countries and this will restrict the opportunities for other groups of migrant workers to access the UK labour market. We will monitor the impact of this new group of workers carefully over the coming year.

3.48 Below we look at the impact of migrant workers on the labour market and some specific compliance and enforcement issues that relate to these workers.

Impact on the Labour Market

3.49 In our 2007 Report we concluded that the evidence available indicated that workers from the A8 countries were contributing to the success of the UK economy by filling gaps in the labour market. The evidence also suggested that the increase in A8 workers had not displaced UK nationals in the workplace. This year, there was little evidence to suggest that the position has changed, although there was some limited evidence that A8 workers were being substituted for other groups of migrant workers.

3.50 Other reports on this topic appear to support the view that migrant workers have had little or no negative impact on employment. The Bank of England Quarterly Bulletin (Bank of England, 2007a) found concerns that native workers would be displaced by migrant workers, especially following the accession of new member states in 2004, were ill-founded, as migrant workers appear to have complementary skills to the native workforce. A cross-departmental submission to the House of Lords Select Committee on Economic Affairs in October 2007 stated, “So far, both theoretical and empirical analysis suggests that migration has had no impact on the employment prospects of UK natives”. In its evidence to us, the Government referred to research conducted by the Department for Work and Pensions (DWP) in 2006 which found no discernible statistical evidence to suggest that A8 migration has had a negative impact on employment.

3.51 The effect of migrant workers on wage inflation is slightly less clear, although most indications are that if there has been an impact, it has been minimal. The study we commissioned for the 2007 Report by Dustmann, Frattini and Preston (2007) to assess the impact of migrant workers on wages found some evidence that there had been a small negative effect on wages at the bottom end of the earnings distribution, while native workers in the middle of the earnings distribution appeared to have gained as a result of the increasing number of migrant workers. The study, however, used data that largely pre-dated the arrival of significant numbers of A8 workers in 2004.

3.52 We have looked at other sources of information to help assess whether migrant workers had an impact on wage inflation. Research by Gilpin, Henty, Lemos, Portes and Bullen (2006) and Blanchflower and Shadforth (2007) found no evidence that the increased flow of migrant workers into the UK has exerted downward pressure on wages.

3.53 In evidence this year, a few stakeholders referred to the impact migrant workers were having on employment and pay. A joint submission from the British Hospitality Association, the British Beer and Pub Association and Business in Sport and Leisure noted that the availability of A8 workers had made a favourable impact on labour shortages in the sector. However, their joint submission also expressed concern that the continued inflow of A8 workers to the sector might not be sustained as the tourism industry in the A8 countries was beginning to develop. It was thought that the westbound flow of hospitality workers could be reversed over the coming years. The submission also noted that migrant workers might have had an impact on average wage levels. The ALMR advised that, in a survey of its members, 35 per cent had employed migrant workers this year to curb costs.

3.54 During our visits throughout the UK, there was some evidence that A8 workers were willing to take on jobs with greater levels of responsibility for only a slight increase in pay, work which UK nationals were unwilling to do for a similarly low rate of remuneration.

3.55 In their evidence to us, Unite expressed the view that migrant workers (both those with and without documentation) were often recruited because employers knew they would be able to get away with paying lower wages, sometimes significantly less than the minimum wage. The union believed that this had exerted a downward pressure on the wages of indigenous workers at the lower end of the earnings distribution.

Compliance and Enforcement

3.56 The vulnerability of some low-paid migrant workers is a concern for worker and employer representative organisations and not-for-profit groups alike. A number of responses to our consultation raised concerns about the exploitation of migrant workers. A similar picture emerged from our visits throughout the UK.

3.57 The Scottish Low Pay Unit reported a high number of calls from young migrant workers from Eastern Europe, particularly from Poland, and primarily working in the hospitality and agricultural sectors. The issues raised ranged from blatant underpayment of the minimum wage to a wide range of excessive deductions from pay.

3.58 The Government in its evidence recognised that migrant workers were a group at particular risk of being underpaid the minimum wage, as well as at risk of missing out on other basic employment entitlements. It referred to the emphasis which it had put on ensuring there was information available to inform migrant workers about UK employment laws, including the Know Your Rights leaflets, the National Minimum Wage migrant workers campaign and the Vulnerable Workers Pilots which were set up this year in Birmingham and London. We consider the compliance and enforcement issues relating to migrant workers further in Chapter 4.

Voluntary Workers

3.59 Voluntary workers are a group given a particular meaning in the National Minimum Wage Act. When working for specific organisations (a charity, voluntary organisation, associated fund-raising body, or a statutory body), and receiving only very specific payments and benefits-in-kind (such as necessary expenses incurred, reasonable subsistence or training required to perform the work) they are excluded from minimum wage coverage. The objective of this arrangement is to ensure that genuine ‘volunteers’ may continue to work (and receive necessary expenses) without minimum wage liability, while ‘workers’ in the voluntary sector retain their right to be paid at least the National Minimum Wage. Our experience is that the minimum wage law has worked well in this area, and when problems have arisen they have generally been organisation specific and have been resolved through improved guidance and understanding. The Commission regards good guidance as particularly important for the voluntary sector, and in recent reports we have called for the existing guidance to be updated, consolidated and made more accessible.

3.60 During the summer of 2007 the Government consulted on a proposal, arising from its review of the National Minimum Wage and Voluntary Workers (DTI, 2007e), to exclude from National Minimum Wage coverage participants on schemes that are supported by the Russell Commission’s national framework for youth action and engagement. It also sought views on whether a similar exclusion should apply to Ministry of Defence (MOD) Cadet Force Adult Volunteers. In addition, it confirmed its intention to act on the Commission’s recommendation to update guidance to the voluntary sector. We welcomed confirmation of the Government’s intention to update the existing guidance. While fully supporting the Government’s intention to encourage more volunteering activities for young people, we raised a number of concerns about how the proposed new exclusion for national framework participants would operate and the possible implications for the minimum wage. We argued for a clearer statement of the benefits for the young people involved, and a precise account of the quality standards and systems which will ensure that they are delivered. There was potential for exploitation of those participating under the framework, with their use in substitution for workers. We called for greater clarity on the parameters of the proposed exclusion in order to ensure organisations did not use it opportunistically to avoid paying the minimum wage. We were not convinced of the case for an exemption from the minimum wage for MOD Cadet Force Adult Volunteers. Our full response can be viewed on our website (www.lowpay.gov.uk).

3.61 In evidence to us, trade unions expressed concern at the Government’s proposal regarding schemes supported by the national framework. The TUC said that the change would undermine the minimum wage settlement that was painstakingly negotiated for the voluntary sector by generating pressure to extend exclusions further. UNISON said the proposed new exemption would take thousands of job opportunities for young people outside minimum wage coverage and create a loophole whereby there would be an incentive to replace paid positions with voluntary posts.

3.62 In its response to the public consultation (BERR, 2007b), the Government re-confirmed its intention to prepare new guidance. It also made clear that it intends to legislate to exclude MOD Cadet Force Adult Volunteers from coverage by the minimum wage. In addition, the Government response indicated that there were continuing discussions, involving the devolved administrations and the Office of the Third Sector, about the conditions under which an exclusion from National Minimum Wage coverage for participants on schemes that are supported by the Russell Commission’s national framework would apply. We are pleased to note that the Government recognises the importance of clearly defined criteria for any exclusion, which avoids loopholes that might be exploited by unscrupulous employers. However, the Commission remains concerned about how this proposed exclusion would work in practice, and we will continue to monitor and report on any change the Government eventually introduces.

Unpaid Work Experience

3.63 There are specific types of work experience placements for which the minimum wage does not need to be paid, such as students on certain higher education courses undertaking a work placement as part of their studies. The Government has recently revised the regulations in this area so that the exemption for higher education is now for ‘undertaking’ rather than ‘attending’ a course (and will now cover distance learning), and the exemption has been extended to cover further education courses as well. There may also be other situations where the minimum wage does not apply, such as where the individual does not have an obligation to perform work and is therefore not a worker. However, sometimes labels such as ‘volunteer’, ‘intern’ or ‘work experience’ are applied to activities which are clearly work and for which at least the minimum wage should be paid. We expressed concern at evidence we received for the 2007 Report which suggested that it was becoming increasingly commonplace in certain sectors, particularly the media sector, for employers to demand a period of unpaid work as a price of entry into the industry. Guidance had been published by the Department of Trade and Industry (DTI, 2007b) for the television industry which we regarded as useful in helping improve employers’ understanding of their obligations, both in that sector and more widely. We said we would monitor how the development and dissemination of this guidance affected employer practice.

3.64 We have again received evidence on unpaid work experience from trade unions, the TUC and workers in the media industry suggesting continued non-compliance with the minimum wage with regard to work experience. The TUC noted that some progress had been made (new guidance in the Houses of Parliament and the broadcast industry) but that it was not clear whether this was sufficient. It called for action to stamp out the use of unpaid work experience as a ‘toll’ for entering a desirable career and it asked us to review the rules on work experience to ensure that they were sufficiently rigorous to rule out exploitation. The National Union of Students thought that students on work placements as part of a further education course should qualify to be paid at least the minimum wage. It had concerns regarding the welfare of such students as well as believing non-entitlement created a significant barrier to education.

3.65 We believe that work experience is an area where wider dissemination of guidance and more effective enforcement, rather than any change to the rules themselves, is needed. We recommend that the material concerning work experience placements in the official guide to the minimum wage should be updated in order to help raise awareness of this issue, including the recent extensions to the types of work experience which are exempt from the minimum wage. We therefore fully support the Department for Business, Enterprise and Regulatory Reform’s (BERR) decision to revise the existing official guidance in this area at the same time that it updates guidance on voluntary workers.

Homeworkers and Fair Piece Rates

3.66 Although homeworkers are given a specific definition in the National Minimum Wage Act 1998, with the intention of removing any possible ambiguity about who they are and the circumstances in which they are entitled to the minimum wage, we have repeatedly noted the particular difficulties such workers may face in ensuring they receive at least the minimum wage. Many low-paid homeworkers are rewarded through an output based payment method (piece rate), typically undertaking packing, sewing or assembly work. In October 2004 the Government introduced a new system of ‘fair piece rates’ as there were difficulties with the original arrangement for paying the minimum wage for output work (through ‘fair estimate agreements’). The intention was that this would make arrangements simpler and more easily understood (DTI, 2004a). The Government also hoped that the change in regulations would significantly improve compliance and that there would be an increase in the coverage of the minimum wage among homeworkers.

3.67 We received evidence from the National Group on Homeworking (NGH) that in a small survey of 67 homeworkers only half were aware of the current rate of the minimum wage and, based on the available evidence, NGH estimated that probably around half were receiving less than this. Of the 44 who were paid by piece rate it was only possible to estimate the hourly rate of 28, but, of those, 19 were found to be earning less than the minimum wage (£5.35 at the time of the survey), with some earning as little as £1 per hour. The average for the 28 workers was £4.41 per hour. While NGH had welcomed the introduction of the fair piece rates system in 2004, its experience suggested that it was rarely applied. Its survey results showed only a minority of the 28 workers on piece rates were being paid in accordance with the fair piece rates system: most were not aware of any change to the way they were paid, and had not received the required written notice setting out such matters as their rate of pay.

3.68 Other evidence we received included that from the National Centre for Social Research, which reported the complexities it faced in applying a system of payment by assignment for its fieldforce of freelance interviewers, in order to ensure that at least the minimum wage was paid in each pay reference period. UNISON advised that the underpayment of the minimum wage to housekeeping staff paid at a ‘room rate’ by agencies, which it highlighted in 2006, had in many cases continued. Employment Information Services (EIS) supplied evidence on the problems faced in applying fair piece rates in the door-to-door distribution sector, together with a heightened potential for exploitation of the workforce. EIS claimed that workers were reluctant to complain for various reasons, including the often temporary nature of their employment.

3.69 We continue to receive evidence that homeworkers and those paid through fair piece rates face difficulties in enforcing their right to be paid at least the minimum wage. The fair piece rates system has been in place for around three years, but it is difficult to obtain hard evidence on how it is working in practice. However, the evidence put to us suggests that awareness and proper use of the new arrangements may be low. We recommend that the Government takes stock and evaluates whether the fair piece rates arrangement is meeting its objectives.

Seafarers

3.70 Seafarers are covered by the National Minimum Wage while employed to work on UK registered ships working in the UK or its internal waters (that is estuaries and the sea between the UK mainland and many islands). When working on board a ship registered in the UK, seafarers must be paid at least the minimum wage wherever in the world that ship may be, unless all their work takes place outside the UK and its internal waters, or they are not normally resident in the UK and the ship is outside the UK (and its internal waters). In its evidence, the TUC raised concern that the current exemptions from the minimum wage exclude many seafarers who do not live in the UK but who work for UK companies and whose work regularly brings them into UK ports. Over the coming year we will monitor carefully the application of the minimum wage in respect of seafarers.

Tips

3.71 One form of income which employers may use to make up minimum wage pay is tips – although only tips, gratuities or service charges paid by the employer to workers through the payroll may count towards the minimum wage. In our last report we said we would monitor the new guidance from Her Majesty’s Revenue and Customs (HMRC) on the treatment of National Insurance Contributions (NICs) payments on tips to see if it led to any change of employer practice. We have received only limited evidence on tips this year, and little official data is available. ALMR advised us that, since the revised HMRC guidance, there was anecdotal evidence that some businesses in hospitality, in particular food-led operations, had sought to benefit from the revised NIC position by re-instating ‘tronc’ arrangements7 to help make up some of the minimum wage. For these businesses, this had assisted in cushioning the effect of the recent upratings in the minimum wage. In a further development in the treatment of tips, a decision in a recent employment tribunal (ET) case found that the payroll could consist of two parts – one for basic wages and one for tronc payments – with both elements counting towards the minimum wage. This decision could perhaps have wider implications for the payment of the minimum wage if the tronc was to be accepted as part of the employer’s payroll. We understand that HMRC is appealing the ET judgement and we will again monitor developments.

Sleepovers

3.72 Sleepover arrangements concern payments made to workers when they are provided with facilities to sleep at or near their place of work and be available to deal with emergencies, but would not necessarily expect to be woken otherwise. The National Minimum Wage Regulations provide that the minimum wage does not apply when a worker is permitted to sleep, but that time spent awake and working is time for which the minimum wage must be paid. The official guidance on the minimum wage (DTI, 2004b) emphasises the need for the employment contract to set out clearly the period the worker is permitted to sleep, and for suitable sleeping facilities to be provided. In cases where the contract does not specify sleeping time, the guidance suggests tribunals are likely to conclude that the minimum wage should be paid for the full time when the worker is at work.

3.73 However, the evidence we received this year referred to a number of court and employment tribunal judgements which have created uncertainty about the obligations to pay the minimum wage during sleepovers. UNISON told us that a growing number of tribunal and court decisions are finding that workers are in fact ‘working’ during the entire sleepover period, by virtue of the fact that their work requires them to be in a particular place at a particular time and to be ready to react when a situation arises. It called for clarification of the guidance as it relates to sleepover payments to ensure that the National Minimum Wage is paid for all hours worked. The English Community Care Association (ECCA) said that sleepovers are now classed as working time and that this had a significant effect on its use by employers in the care sector. To be sure there was no breach of the regulations, ECCA considered that it was advisable for care providers to pay all sleepover hours at the minimum wage; however, it said employers could not afford to pay at this level because of the underfunding of care by local authorities. During our visits and in oral evidence we heard from social care employers that payment for sleepovers – especially in domiciliary care – was a significant issue. There was an increasing concern regarding what payments should be made to these staff.

3.74 The tribunal and court judgements have often been complex, involving decisions both on working time under the Working Time Regulations, and the minimum wage under the Minimum Wage Regulations. It appears that a situation has developed where some stakeholders believe there has been a change to requirements under the minimum wage, and that that the existing official guidance is not sufficient for employers to be sure what their minimum wage responsibilities are when asking staff to undertake a sleepover period. In the light of the uncertainty created by these tribunal and court decisions we recommend that the Government reviews the existing official guidance on sleepovers as soon as practicable. Following the outcome of such a review this is an area we may wish to return to in a future report.

Therapeutic Activity

3.75 Therapeutic work or activity are terms used to describe arrangements whereby people who have problems functioning in the normal labour market, because of a mental or physical impairment, are given the opportunity to undertake some form of work-like activity, for which they may receive some type of payment. If they are not workers the minimum wage will not apply. However, if these activities are carried out under an arrangement that is a worker’s contract, they must be paid at least the minimum wage.

3.76 We recognise this is a complex area. In our last report we were concerned at continued claims of non-compliance with the minimum wage and possible exploitation of vulnerable people. We were also concerned that misplaced fears or misunderstandings regarding the minimum wage should not inhibit the provision of services of benefit to people with a disability or mental heath problem. We emphasised the need to raise awareness and for effective dissemination of guidance and therefore welcomed the publication by the DTI of an updated version of its guidance note on the minimum wage and therapeutic work (DTI, 2007a), which was widely distributed to appropriate organisations.

3.77 Citizens Advice Northern Ireland said there is a growing concern that arrangements used by many organisations, placement employers and disabled clients may be breaching the minimum wage legislation. It reported continued confusion regarding entitlement to the minimum wage when clients move from a supported placement with employers to become workers. Moreover, some employers may not be willing to pay the minimum wage to clients they regard as less productive than other workers. The minimum wage was not the main cause of the issues faced by the sector, but it has acted as a catalyst to highlight what was regarded as inflexibility in the benefits system and time restraints placed by their funding bodies, with the result that the client group were put at risk of exploitation and some were not receiving the minimum wage when it was due. We heard from another organisation that the minimum wage was having a strong and often detrimental impact on the availability of opportunities with employers providing therapeutic activities. These opportunities were ‘carved out’, not advertised vacancies, and the service users were additional to a staffing quota. Enforcement of the minimum wage was, they said, at risk of discouraging employers from offering such opportunities.

3.78 Our attention was also drawn to the fact that service users were on Incapacity Benefit, and most were also on other means-tested benefits. Under regulations governing permitted work8, the weekly earnings disregard for Incapacity Benefit is £88.50, and has risen in line with upratings of the minimum wage. However, for income related benefits, the weekly earnings disregard is set at £20. This limits the hours that can be undertaken without loss of benefit to under four if service users must be paid at least the minimum wage. In addition, as the earnings disregard for income related benefits has not risen annually in line with the minimum wage, then each year service users have been able to work fewer hours without loss of benefits (this fell from 3.7 to 3.6 hours on 1 October 2007).

3.79 In our past reports we have highlighted the need for better guidance and awareness raising to address problems relating to therapeutic activity. The DTI issued new guidance in January 2007, and while we understand this generated little further comment from stakeholders, it is too early to assess fully its impact. We acknowledge that the structure of the benefits system is outside of our remit, but we do want to draw the Government’s attention to the difficulties which arise when the earnings disregard for income related benefits is not increased in line with the minimum wage. We have been advised of this issue in previous consultations and we have been told again that it can have the effect of reducing the opportunities for therapeutic activity in terms of the number of hours per week those with a disability or health problem can work.