Introduction

In our remit the Government invited us to review our recommendations for uprating the adult and development minimum wage rates in October 2006 in the light of present economic circumstances. The Government also asked us to review the level of the minimum wage rate for 16-17 year olds, the operation of the accommodation offset and the treatment of benefits-in-kind, including those offered as part of a salary sacrifice arrangement.

Terms of Reference

1.1 On 11 July 2005 we received our new terms of reference from the Government which asked us to:

• consider whether the October 2006 upratings of the adult and development rates recommended in our 2005 Report remained appropriate in the light of economic circumstances and the other factors identified as relevant in that report, and if not to make any recommendations for change;
• review the level of the 16-17 year old rate, keeping in mind the position of the youth labour market and the incentives for young people to participate in education and training;
• review the operation of the accommodation offset and, if appropriate, make recommendations for any changes needed to the regulations; and
• review the treatment of benefits-in-kind, including where those benefits are offered as part of a salary sacrifice arrangement.

1.2 We were asked to report to the Prime Minister and the Secretary of State for Trade and Industry by the end of February 2006.

1.3 At the same time the Government announced that it would itself review the position on the older workers' Development Rate and the way the minimum wage exemption applied to older apprentices, working closely with the Commission, in time for these issues to be addressed in the forthcoming age discrimination regulations.

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Consultation and Research

1.4 As we have done for previous reports, we have consulted widely during the preparation of this report and our consultations have provided us with valuable input. We carried out two formal written consultations in July and August: the first covering the non-economic issues in our remit and the second focused on our macroeconomic review. Our website also helped us to reach interested parties and encouraged individuals, firms and organisations to submit their written evidence to us. Overall, we received over 90 responses from employer organisations, trade associations, unions, voluntary organisations, pressure groups, academics and the Government.

1.5 We also heard oral evidence from a number of organisations, including the TUC, CBI, the British Retail Consortium and a youth delegation. We continue to find these sessions very productive, providing an invaluable opportunity to expand on points that had been made in written evidence.

1.6 For this report we commissioned one research project specifically tailored to focus on a key part of our remit. On our behalf Incomes Data Services Ltd (IDS, 2005a) conducted a survey of the non-cash benefits offered by employers in four low-paying sectors. A summary of the findings is provided in Appendix 2.

1.7 We continue to be keen to hear first hand the views of all groups with an interest in the minimum wage. Talking with and listening to those directly affected often provides insights that cannot be found in learned papers or formal submissions of evidence. In England, we visited Cumbria, Doncaster, Gateshead, Hastings, Lincolnshire, London, Manchester, Newcastle upon Tyne, Nottingham, Reading and Worksop. In Northern Ireland we had the opportunity to visit Coleraine and Derry and in Scotland we travelled to Aberdeen and Peterhead. We also visited Colwyn Bay and Llandudno in North Wales. The visits gave us the opportunity to meet employers and workers from many affected parts of industry at local level.

1.8 We are very grateful to all of those people and organisations who assisted us in the arrangement of these visits and who gave their time in order that they might share their views with the Commission.

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Review of Minimum Wage Rates for 2006

1.9 In our 2005 Report, we recommended that the adult rate of the minimum wage should be increased to £5.35 in October 2006 and the youth Development Rate should be increased to £4.45. In making our original recommendations, we prepared an extensive report on the minimum wage.

1.10 Our review of the rate for October 2006 has focused on the current economic circumstances and prospects; we did not re-open all of the associated issues. We considered whether the broad economic outlook had changed to the extent that might require or make advisable a modification of the rates we had recommended for October 2006. In addition to examining the overall economic picture, we looked at the circumstances affecting those groups and sectors in which low pay was most prevalent and asked whether their circumstances had changed sufficiently to warrant the modification of our original recommended rates. Our analysis and conclusions are described in Chapter 2.

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Review of 16-17 Year Olds and Trainees

16-17 Year Olds

1.11 In our 2004 Report we recommended the introduction of a new minimum wage rate of £3.00 an hour for 16 and 17 year olds from October 2004. The Government accepted this recommendation. Our aim in recommending a minimum wage for 16-17 year-olds was to prevent exploitation of young people without encouraging them to leave education or training. In our 2005 Report we made no recommendation for uprating the 16-17 year old rate as it had only just been introduced and there was insufficient evidence to assess its impact. Accordingly, we recommended that a full assessment be carried out and reported on in 2006.

1.12 In order to inform our deliberations on the 16-17 year old minimum wage, we consulted and received evidence from a range of interested parties including employers and their representative organisations, trade unions, youth organisations, voluntary organisations and others. A summary of their views and of related evidence for our conclusions and recommendations can be found in Chapter 3.

Trainees

1.13 In our 2005 Report, we reviewed the older workers' Development Rate and the 12 months minimum wage exemption for apprentices. We concluded provisionally that the older workers' Development Rate should be abolished from October 2006, and that, simultaneously, the 12 months exemption from the minimum wage should be extended to cover all apprentices aged 19 and over. We noted that the current 'below age 26' threshold applied to the exemption might no longer be justifiable, in particular given the Equal Treatment Directive (2000/78/EC) due to be implemented outlawing age discrimination at work. We also noted that take-up of the older workers' Development Rate continued to be very low and the consultation responses we received had suggested near unanimous support for abolishing it. We proposed that the remit for our 2006 Report include a review of our provisional conclusion.

1.14 However, the Government decided that it would be more appropriate for it to carry out its own review, liaising closely with us, to fit in with the timing of its work on the Equal Treatment Directive. We consulted with stakeholders on this as part of our written consultation exercise for this report and provided feedback to the Government late in 2005. Our deliberations and conclusions on these issues are also given in Chapter 3.

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Review of Benefits-in-kind, Salary Sacrifice Schemes and the Accommodation Offset

1.15 At present, benefits-in-kind (with the exception of accommodation up to a specified daily offset limit) may not count towards the calculation of the minimum wage. Salary sacrifice schemes depend upon employees voluntarily forgoing a part of their pay in order to take advantage of a benefit provided by their employer such as childcare vouchers or a home computer. However, if a worker's cash pay were to fall below the minimum wage as the result of a salary sacrifice scheme, the employer concerned would be acting unlawfully. It was becoming clear at the time of our 2005 Report that this was causing problems for some employers. In order to allow us sufficient time to consider this issue, we suggested that the Government include a review of salary sacrifice schemes in our remit for this report. The Government accepted our recommendation, but broadened the review to cover the minimum wage treatment of all benefits-in-kind, including where they are provided by means of a salary sacrifice arrangement.

1.16 We looked carefully at the benefits typically offered under salary sacrifice schemes, including the savings on tax and National Insurance Contributions that they offered to employers and workers. We compared the childcare benefits offered through a childcare voucher salary sacrifice scheme with those that were available to low-paid workers through the Working Tax Credit system. The evidence for our conclusions and recommendations can be found in Chapter 4.

1.17 The accommodation offset is designed to recognise the significance of the provision of accommodation in certain sectors and the benefit it offers to both employers and workers. The level of the accommodation offset aims to retain a balance between providing employers with a reasonable amount to be deducted in respect of accommodation without making severe reductions in the cash value of the minimum wage to workers. The offset rate is currently £3.90 per day, and is set to rise to £4.15 per day from October 2006. The Government invited the Commission to review the operation of the accommodation offset and, if appropriate, to make recommendations for any changes. Details of our review and recommendations can also be found in Chapter 4.

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Conclusion

1.18 Finally, we would like to declare our gratitude for the valuable input we have received from many different organisations and individuals; some of them are named in the report or its appendices, others preferred to remain anonymous. Their views helped to inform the work that we do and, hopefully, they have helped us make this report more relevant, accurate and well informed.