Apprentices

6.1 In both our 2006 and 2007 Reports we recommended that the Commission be asked to review the apprentice exemptions from the National Minimum Wage. This reflected the various developments related to apprenticeships in recent years, such as changes to learner support and the introduction of a minimum wage for 16 and 17 year olds. We had also received submissions from a number of stakeholders that some employers were abusing the exemptions by offering both low pay and poor quality training.

6.2 In November 2007 the Prime Minister announced that the Commission would be asked to look at the apprentice exemptions from the National Minimum Wage, and the Government included the review in the Commission’s work for the 2009 Report in the following terms:

Review the current apprentice exemptions and advise whether they are still appropriate. The Commission is asked to bear in mind the Government’s ambition to increase the number of apprentices to 500,000 and the need to ensure that sufficient employed places are available when the education participation age is raised in 2013.

6.3 This chapter sets out our review work and findings. It starts by explaining the current exemptions and the rationale supporting them. We then look at the apprenticeship schemes that currently operate in the UK and available data on apprenticeships. The chapter goes on to consider apprentice pay, including differences in pay according to sector, gender, and level of apprenticeship. We analyse the role of pay in employer provision of apprentice places and in workers’ consideration of participation in apprenticeships. We also look at the proposals put forward to us by stakeholders for retaining or changing the existing exemptions. The chapter ends with our conclusions and recommendations as to whether the exemptions are still appropriate.

6.4 In conducting our analysis we used a range of data and other evidence from various sources.

• The findings of independent research (both external and commissioned by us). The key information on apprentice pay was from the pay survey for England commissioned by the Department for Innovation Universities and Skills (DIUS) for 2007 (Fong and Phelps, 2008). We also commissioned our own research as part of our Survey of Employers (details in Appendix 3). Cox, Denvir and Pearmain (IES, 2009) carried out follow-up research to that work which was a small-scale, qualitative study of employers in some of the low-paying sectors to discuss issues relating to apprenticeships and particularly the apprentice exemptions (see Appendix 2).
• Annual Survey of Hours and Earnings (ASHE) and Labour Force Survey (LFS) data. This information is limited as ASHE only identifies ‘trainees’ (jobs classed by employers as paying a ‘trainee’ rate), and 75 per cent of the responses to the apprentice question in the LFS are by proxy (hence responses are less reliable).
• Information on apprentices and apprenticeship schemes from the UK devolved administrations and departments with responsibilities for apprenticeships.
• Evidence from stakeholders (including our formal written consultation, Commission visits around the UK, oral evidence sessions with a number of key organisations, and our Secretariat’s meetings with stakeholders).
• Information on apprentice minimum wage arrangements in other countries, provided through British Embassies and High Commissions (see Appendix 5).

Apprentice Exemptions

6.5 All workers in the UK are entitled to receive payment of at least the National Minimum Wage applicable for their age, unless they fall into one of the groups specifically exempted under the National Minimum Wage Act or the National Minimum Wage Regulations. One of those exemptions is for apprentices. For the purpose of the minimum wage, an apprentice is a worker who either has a contract of apprenticeship or is taking part in a specified government apprenticeship scheme.

6.6 The categories of apprentice exempt from the National Minimum Wage (set out in the National Minimum Wage Regulations 1999, Regulation 12) are:

• apprentices under the age of 19; and
• apprentices aged 19 and over in the first twelve months of their training.

6.7 In addition there are exemptions from the National Minimum Wage for:

• participants on specified pre-apprenticeship schemes (programmes designed to help young people to achieve basic skills and get them ready for an apprenticeship programme, other training, or work); and
• programme-led apprentices in England (apprentices on Further Education courses or Work-based Learning).

Rationale for the Exemptions

6.8 When advising the Government on establishing a minimum wage, the Commission took the view that young people in work, particularly 16 and 17 year olds, should receive education and training. It wanted to support and encourage high quality training through apprenticeships.

6.9 Looking at the wage data available at the time, the Commission found that by the second or third year of an apprenticeship wages are often well above the minimum wage, but for the first year or phase, wages are likely to be low, reflecting the extent to which the apprentice is in training rather than productive work. The Commission did not wish to cut across this means by which young people acquire skills to equip them for well-paid work and recommended that all those on apprenticeships should be exempt from the minimum wage.

6.10 The exemption, which was subsequently introduced by the Government in the National Minimum Wage Regulations, reflected the Commission’s findings. It exempted all apprentices under the age of 19 from the minimum wage. As the minimum wage at the time commenced at age 18, this created a year’s exemption. In addition, all those aged 19 to 25 were exempt for their first year. The upper age limit of 25 related to the availability of funding of government-supported training schemes at the time.

6.11 When in 2004 the Commission recommended the introduction of a minimum wage for 16–17 year olds, it considered again the position of apprentices. It recommended that the exemption for those under the age of 19 be retained rather than limiting it to the twelve-month exemption that applied to those aged 19 and over. In particular, it referred to the fact that many 16–17 year old apprentices were still working towards Level 2 (equivalent to GCSEs A*–C) rather than more advanced qualifications (so pay rates tended to be lower) and that a 17 year old starting an apprenticeship would become eligible for the Youth Development Rate after twelve months. The Commission was concerned that a number of pay agreements had second year apprentice pay rates significantly below the Youth Development Rate. The Commission also recommended an exemption from the minimum wage for young people on specified pre-apprenticeship schemes. The twelve-month exemption for those aged 19 to 25 was later extended to all those aged 19 and over following the introduction of the Equal Treatment Directive.

6.12 The exemptions from the minimum wage allow for a balance to be struck. In effect, the possibility of paying apprentices less than employees not in training offsets the costs of providing training incurred by the employer and the state. This is set against the expected future gains for the apprentice in terms of higher earnings and improved employment prospects. There are, of course, also potential longer-term gains for employers and the UK economy, such as higher labour productivity. We consider in more detail the balance of incentives for employers to provide training and apprentices to take up these opportunities later in the chapter. First we look at current apprentice policy and schemes that operate in the UK.

UK Apprenticeship Policy, Schemes and Numbers

Implications of Devolved Arrangements

6.13 Although the National Minimum Wage is a reserved matter, and so applies across the UK, education and training are devolved, with different arrangements operating in England, Scotland, Wales, and Northern Ireland. Given the devolution of responsibilities, data for apprenticeships are produced separately by each administration and their availability and breadth varies. We found only a limited range of data for which comparable information was available for each UK administration. Therefore our analysis of the data has had to focus on England, with use of data from the other parts of the UK only where available and appropriate. This problem of available data was highlighted by both employer and union stakeholders during our consultation, and some called for improvements, particularly in respect of UK-wide apprentice pay data.

6.14 The existing apprenticeship arrangements, as well as being different in each administration, are developing. The direction and speed of these developments differ between the UK administrations. A very significant expansion of apprenticeship funding and places is planned in England. This was announced by the Government in November 2007, with the strategy supporting this set out in January 2008 (DIUS/DCSF, 2008a). The Apprenticeships, Skills, Children and Learning Bill in the 2008/09 Parliamentary session is taking these plans forward. The proposals include a new entitlement to an apprenticeship place for all suitably qualified young people from 2013.

6.15 At the same time the compulsory participation age in education and training will rise in England from 16 to 18. From 2013 these young people will be required to participate in: full-time education or training; a contract of apprenticeship; or part-time education or training towards an accredited qualification as part of a full-time occupation or alongside an occupation of more than 20 hours a week (Office of Public Sector Information, 2008). Part of the arrangement to facilitate this raising of the participation age will involve a significant expansion of apprenticeship places. The Government envisages that one in five of all young people in England will be undertaking an apprenticeship within the next decade. The report by Lord Leitch (HM Treasury, 2006) recommended that there be at least 500,000 apprenticeships in the UK by 2020, with at least 400,000 of these being in England. The Government projects that the number successfully completing an apprenticeship will rise from over 100,000 now to around 190,000 in 2020. This expansion will require a substantial increase in apprenticeship places provided by employers, and is referred to in our terms of reference set by the Government. We note that among the many proposed initiatives to assist this expansion is a contribution to the wage costs of learners for employers who train additional apprentices for the supply chain and also to some small businesses that take on apprentices (DIUS/DCSF, 2008a). We understand that arrangements involving the former are to be trialled shortly (LSC, 2008c).

6.16 But, the plans announced for England will largely not be mirrored in other parts of the UK. None of the other administrations plan to raise the compulsory participation age for education and training. The other UK administrations have announced their own plans for apprenticeships, each with their own particular focus and priorities. For example, the Scottish Government has adopted an approach which does not focus on achievement of particular volumes or targets. It views apprenticeships as one component of skills and training opportunities on offer to employers and individuals, as a way of contributing towards its economic strategy. The Scottish Government announced in March 2008 that it would direct support in adult Modern Apprenticeships (MAs) only to sectors related to construction and engineering, equating to a rise of 500 places in these sectors (Scottish Government, 2008). It would also increase the MAs for 16–19 year olds by 10 per cent in all sectors related to construction and engineering – again 500 additional places. More recently, the Scottish Government announced that the budget for 2009/10 would include £16 million to increase apprentice recruitment. This would allow for an additional 7,800 apprentices (Scottish Government, 2009).

6.17 The Welsh Assembly Government (WAG) will be looking to increase the number entering apprenticeships as well as the number completing programmes, but does not have specific numerical targets. Wales has had an all-age approach to apprentices for some time, but provision of places has become skewed towards the older age group, over age 19. Therefore, the WAG is looking to increase the number of 16–17 year olds involved in the programme. In January 2009 the WAG announced that there would be an additional £20 million to support apprenticeships during the economic downturn and to help sustain and encourage new apprenticeship recruitment (WAG, 2009).

6.18 In Northern Ireland arrangements for apprentices were changed in September 2007. But the administration has already reviewed how the schemes were working and has revised and re-branded them. It has told us that it is also considering whether to change trainee remuneration arrangements (see section below).

Apprenticeship and Pre-apprenticeship Schemes

6.19 Government-supported apprenticeship programmes are available across the UK, with apprenticeships available at either Level 2 (equivalent to GCSEs grades A*–C) or Level 3 (equivalent to A levels), as set out in Table 6.1. There are also pre-apprenticeship schemes, aimed at helping young people acquire basic skills (Level 1) and to move onto further training and education or into work. Each UK administration has its own schemes and these continue to develop. For example, in Scotland the Skillseekers (Level 2) scheme is in the process of being replaced by a Level 2 Apprenticeship, with all trainees being waged. Apprenticeships provide a learning framework. They are a form of vocational training involving a mixture of work-based and theoretical learning (DIUS/DCSF, 2008a). They may include: a competence-based element, such as a National Vocational Qualification (NVQ); a knowledge-based element (typically a technical certificate); key or transferable skills; and other elements, such as employment rights and responsibilities or a specialised framework tailored to meet the needs of the employers and the sector. The precise content will vary between each country in the UK.

6.20 Public funding of apprenticeships is provided across the UK and is usually channelled through registered training providers, rather than employers themselves. The training providers contract for and administer training arrangements. The state funding regime varies by administration. In England there is a formula, with a number of variables determining the actual funding level for a particular apprenticeship. Funding is higher for younger apprentices, and for schemes that incur greater training costs, overheads, more costly equipment, and longer training programmes (OECD, 2008a). The range of possible public funding levels available to different sectors was illustrated in a recent study of the benefits to employers of investment in apprenticeship training (Hasluck, Hogarth, Baldauf and Briscoe, 2008). The researchers calculated that, for 16–18 year olds, public funding for a Level 3 business administration apprenticeship could be over £5,500, while for a Level 3 engineering apprenticeship it could reach just under £20,000.

6.21 The same study also illustrated that there were substantial employers’ costs in providing apprenticeships. In the case studies reported by the research, these ranged from nearly £4,000 in business administration to nearly £29,000 in engineering.

Financial Support for Learners

6.22 Table 6.1 shows that there are also differences between the UK administrations with respect to the financial support arrangements offered to learners. Only in England is there a contractual minimum weekly payment to waged apprentices (£80) on government-funded apprenticeship training.

Table 6.1 Pre-apprenticeship and Apprenticeship Schemes and Financial Support, by Country, 2008/09

Source: UK administrations.

Notes:

a. EMA (Education Maintenance Allowance) is means tested and currently a maximum of £30 per week.

b. One element of Training for Success in Northern Ireland is at Level 2.

c. In Northern Ireland a non-means tested EMA of £40 per week is payable for those in unwaged training. In addition to the EMA, contributions in respect of travel, childcare and lodgings may be payable.

6.23 When introduced, the £80 weekly payment reflected the value of the benefits package that young people could receive if they were in college. In the other administrations there is no such contractual minimum payment to waged apprentices: the Scottish Government encourages payment of the National Minimum Wage, and in Northern Ireland the administration encourages payment of a wage commensurate with the industry rate for the job. There are training allowances paid for unwaged Level 2 trainees in Scotland and Wales, and in England there is payment of a means tested Education Maintenance Allowance (EMA) to unwaged Level 2 and Level 3 apprentices. Each administration pays an allowance to pre-apprenticeship trainees.

‘This is a complex area where policy to increase the quality and quantity of apprenticeships is evolving in different ways in the different nations. The different education and skills strategies of the four governments mean this is far from a simple cut and dried decision.’

CBI evidence

6.24 We are aware that some administrations are currently reviewing learner support arrangements. In Northern Ireland, cases of very low pay have come to light and the Executive is considering whether to introduce its own minimum wage arrangements. In Wales the Assembly Government is reviewing whether to continue with Training Allowances or move to an EMA system. In England the Government is considering how the EMA will operate in future when the compulsory education and training age is raised. It has also announced that the weekly £80 payment to waged apprentices will rise to £95 in August 2009.

6.25 The vast majority of apprentices are employed and waged, particularly in Level 3 schemes. In their End-to-End Review of the Delivery of Modern Apprenticeships, the Department for Education and Skills (DfES) and the Learning and Skills Council (LSC) (2004) estimated that 86 per cent of new apprentices entered as employees (95 per cent at Level 3 and 83 per cent at Level 2). In oral evidence the LSC told us that it currently estimates that over 90 per cent of apprentices are employed. In research for Scottish Enterprise, Cambridge Policy Consultants (2006) found that 18 per cent of Level 2 apprentices (Skillseekers) had non-employed status, although this rises to nearly half on some of the schemes such as Administration. Those on pre-apprenticeship schemes may have short periods of work experience, but are not usually waged.

‘…we believe it is an unnecessary complication exempting apprenticeships from the National Minimum Wage while requiring employers to pay a set rate defined by another government department.’

Scottish Government evidence

6.26 We spent a great deal of time researching and understanding the different apprentice wage arrangements in each part of the UK. Public policy has developed since the introduction of the National Minimum Wage and the apprentice exemptions. Since 2005 the LSC rate has, in effect, provided a wage floor for employed apprentices in England. Some stakeholders told us the different wage policies of each administration made arrangements unnecessarily complex, while others urged caution in recommending any change, noting the devolved nature of apprenticeship policy in the UK.

Apprentice Profile

Number of Apprentices

6.27 In 2006/07 the average number of apprentices in learning was 243,000 in England, representing a decline from 259,000 in 2005/06. Only limited comparable data were available to us for the other administrations. The data which were available showed, not surprisingly, that in absolute terms, each of the other UK administrations provided far fewer apprenticeship places. For example, in 2007/08 in Scotland there were 29,000 Modern Apprentices (Level 3) in learning, and in Northern Ireland there were some 3,000 apprentices. In Wales in 2005/06, Modern and Foundation Apprentices in learning totalled 32,000. If we look at places provided as a proportion of the workforce, however, a different picture emerges. Using the latest available data, apprentices in England, Northern Ireland and Scotland represent less than 1 per cent of the working age population whereas in Wales they make up between 1 and 2 per cent.

6.28 Apprenticeship starts in England reached 194,000 in 2003/04, but then fell back in both 2004/05 (188,000) and 2005/06 (174,000) when the £80 weekly payment was introduced. The number of starts rose again to reach 224,000 in 2007/08.

6.29 In its economic evidence to us (BERR, 2008f), the Government highlighted that the number of apprentices in England had grown rapidly, from 65,000 in 1996/97. But the House of Lords Select Committee on Economic Affairs (House of Lords, 2007) found that most of the increase since the mid-1990s was the result of converting government-supported programmes of work-based learning into apprenticeships. It said that between 2000 and 2006 numbers in apprenticeships in England increased by almost 20 per cent, although by the end of the period growth appeared to have slowed or stalled and numbers in Level 3 apprenticeships had fallen. The failure to expand work-based learning significantly over this period was seen by the House of Lords Committee as suggestive of problems with employer demand. It received other evidence of an over-supply of apprentices for available employer-provided places.

6.30 The number of apprentices varies greatly by sector. Looking at apprentice starts in England in 2006/07, the sector with the highest number of apprentices was construction (21,000). In the low-paying sectors, hairdressing (17,000), childcare (13,000) and hospitality (13,000) provided the most places, followed by retail (8,000). According to the LFS, in the fourth quarter of 2008 the occupation with highest number of apprentices in the UK was electricians and electrical fitters. Hairdressing, one of the low-paying sectors, was the second highest ranked occupation with 23,000 apprentices. Our Survey of Employers (2008), also UK-wide, found that, within the low-paying sectors covered, 13 per cent of responding firms employed apprentices. But there was a large amount of variation across the sectors, ranging from 48 per cent of hairdressers to only 2 per cent of textile firms. In terms of the proportion of employers offering apprenticeships, the key low-paying sectors were hairdressing, childcare and retail.

Length of Stay

6.31 Looking at data from the LSC for England, we found that the average length of stay (for completers and early leavers) increased from 60 weeks in 2002/03 to 70 weeks in 2004/05, but then fell to 67 weeks in 2006/07. For Level 2 schemes the average length of stay has remained at 57 weeks since 2004/05, whereas for Level 3 there has been a fall from 100 to 91 weeks over the same period. Looking at average length of stay by sector, there is evidence to support the point made to us by some unions and young people’s representatives that the shortening of apprenticeships is particularly noticeable in some sectors where the average length is under twelve months: retail (42 weeks), customer service (43 weeks), business administration (49 weeks), and hospitality (51 weeks). The average length of stay was noticeably higher in electrotechnical (136 weeks), engineering (110 weeks), construction (72 weeks), and hairdressing (70 weeks).

‘…most apprenticeships today are of a much shorter nature, many less than a year and most less than 18 months….In these cases the productivity of apprentices will be expected to reach a reasonable level much earlier than in the more traditional models.’

TUC evidence

Age and Level

6.32 The administrative data on age are not comparable between the four UK administrations, whether by age-band, year, numbers in training, or starts. But it appears from the available data that the age profile of apprentices varies by nation. For example, there are roughly equal numbers of apprentice starts in England aged above and below 19, whereas the vast majority of apprentices are aged 19 or over in Wales. LFS data for the fourth quarter of 2008, which cover the UK, showed that 49 per cent of apprentices were aged 16–18 and 51 per cent aged 19 and over.

6.33 The DIUS pay survey (Fong and Phelps, 2008), which covered England, found the age profile varied significantly by sector. For example 60 per cent of respondents in hairdressing were aged 16–18 compared with 12 per cent in customer service. It found that overall 44 per cent of apprentices were undertaking an apprenticeship at Level 2 compared with 56 per cent at Level 3. But the age profile of apprentices working towards Level 2 was younger (46 per cent were aged 16–18) than that of those working towards Level 3 (20 per cent were aged 16–18). The ‘traditional sectors’ (motor industry, engineering, and electrotechnical), along with early years (childcare), had the largest proportions of apprentices undertaking Level 3 apprenticeships, whereas construction, retail, and hairdressing had the lowest proportions of Level 3 apprentices.

Gender and Ethnic Minority Groups

6.34 Again the administrative data available from the four administrations were not comparable for gender, either by year or whether in training or starts. It would appear, however, that whereas in England and Wales there is a fairly even divide between male and female apprentices, in Scotland and Northern Ireland over two-thirds are male. This overall picture hides very substantial gender segregation by sector, which has implications for apprentice pay and is looked at in the next section. For ethnic minority groups, the same problems arose with data comparability, but it would appear that, for the administrations we have some data on (England, Scotland, and Northern Ireland), 5 per cent or fewer apprentices are from ethnic minority groups. This is half the size of the proportion of ethnic minorities in the working age population of the UK as a whole. In Scotland and Northern Ireland the proportion of apprentices from ethnic minorities is broadly similar to that for the working age population; in England they are proportionally under-represented.

Apprentice Pay

6.35 As with data on apprenticeship numbers, the data we had available on pay were mainly for England. Only in England is there a regular survey of apprentice pay, commissioned by DIUS. The TUC said there was a need for higher quality data to be collected on apprentice pay rates, with a lack of data outside England. The CBI also noted the lack of UK-wide evidence. Unite said that neither ASHE nor the LFS provided adequate information on apprentices. The essential features of the DIUS pay survey for 2007 (Fong and Phelps, 2008) were as follows.

• It focused on 11 framework sectors, which account for around three-quarters of learners.
• It measured average net pay per week, not gross pay, and therefore excluded tax and National Insurance Contributions. The survey also excluded tips, bonuses and overtime from these net pay calculations (although some data on these pay elements were presented elsewhere in the survey report). It therefore measured pay in different terms to those used for determining compliance with the National Minimum Wage.
• The respondents in the 2007 survey were more likely to be older, more likely to be male, more likely to have been an apprentice for more than twelve months, and more likely to be undertaking a Level 3 qualification than respondents to the previous survey in 2005. The researchers acknowledged that this may have had some impact on the results.
• Around 12 per cent of respondents reported not being paid for their work as an apprentice and not receiving a training allowance/EMA. These apprentices were excluded from the pay calculations.

‘For evidence based policy decisions on apprentices there needs to be a better data set available.’

Unite evidence

6.36 We now set out key findings on pay from the survey alongside other evidence we received from stakeholders. We also report findings from ASHE, our Survey of Employers (2008), and other commissioned research (IES, 2009). We analyse this information, looking in turn at: average pay and sector differences; the gender pay gap for apprentices; how apprentice pay varies by age, level and duration of the apprenticeship; low pay and enforcement issues; and the hours of work and training for apprentices.

Average Pay and Sector Differences

6.37 Figure 6.1 shows the DIUS survey finding that in England average net pay per week for an apprentice in 2007 was £170. This was a substantial increase from 2005 when the average was £137. When the differing profiles of the two surveys are taken into account, however, the researchers’ analysis suggested that pay increased in line with inflation between the two periods.

6.38 Not surprisingly, the survey found that pay varied substantially by sector. The lowest-paying sectors included hairdressing, early years, and health and social care. The highest-paying sectors were those linked to traditional apprenticeships (engineering manufacturing, and electrotechnical), although hospitality was third highest. The highest average net pay per week at £210 (electrotechnical) was nearly double that of the lowest average at £109 (hairdressing). Some of this difference in pay between sectors could be explained by different demographic and training profiles (some sectors are more likely to have older apprentices, more undertaking Level 3, and more who have been in their apprenticeship for longer). The differences may also be explained by some sectors, such as hairdressing, receiving other payments such as tips, which were not included in the pay calculation. IES (2009) also found pay varied by sector, as well as within sector by employer. For example, first year wages in hairdressing ranged between £50 and £90 per week, and in retail from £100 to £346 per week.

Figure 6.1 Apprentices, Average Net Pay per Week, by Sector, England, 2005 and 2007

Source: DIUS Pay Survey, England, 2007 (Fong and Phelps, 2008).

6.39 Although the DIUS 2007 pay survey only covered England, we have used ASHE data from that time to give us some insight into pay levels in other parts of the UK. For April 2007 we found that the average basic weekly pay for ‘trainees’ (there is no measure in ASHE for apprentices only) in England was £172 per week. In Scotland it was higher at £197 (perhaps reflecting that the majority of trainees were in higher paid sectors); but in Wales and Northern Ireland pay was lower, at £147 and £144 per week respectively.

Gender Pay Gap

6.40 The median gender pay gap for the whole economy in April 2007 (ASHE) was 11 per cent. The gender pay gap for apprentices found by the DIUS survey for 2007 was 21 per cent. This had narrowed from the 2005 survey (26 per cent) as female wages rose faster than male wages. The average male apprentice earned £186 per week in 2007 compared with £147 for the average female apprentice. The gender pay gap may largely be explained by the gender segregation that occurs between sectors as shown in Figure 6.2. The bars show average pay rates by sector and the shading in each bar represents the percentage of male and female apprentices in that sector.

6.41 In the two highest-paying sectors the majority of apprentices are male, whereas in the three lowest-paying sectors the majority of apprentices are female. But DIUS found that the gender pay gap also exists in sectors with a more even balance between male and female apprentices (such as hospitality and retail).

6.42 In their submissions, the TUC and a number of other stakeholders cited the significant gender pay gap and occupational segregation in apprenticeships, and suggested that removing the exemptions would help close this gap if the exemptions were replaced with a statutory minimum wage that was higher than current pay levels. The TUC referred to the finding that 5 per cent of apprentices were receiving less than the £80 rate in England administered by the LSC and that these apprentices were concentrated in sectors dominated by women. It cited that 8 per cent of female apprentices were paid less than £80 per week compared with 2 per cent of male apprentices.

Figure 6.2 Apprentice Pay Rates and Gender Split, by Sector, England, 2007

Source: DIUS Pay Survey, England, 2007 (Fong and Phelps, 2008).

6.43 The Equality and Human Rights Commission (EHRC) pointed to the fact that the apprentice gender pay gap was greater than the overall gender pay gap in the workplace. It referred to an investigation by the Equal Opportunities Commission (EOC) in 2004 into apprenticeships, which led the EOC to recommend that the minimum wage be extended to cover apprentices. Although the EHRC recognised the role of apprenticeships in getting young people into higher paid, skilled jobs, it was concerned about inequalities, with women, disabled, and ethnic minority apprentices disproportionately represented in poorer, lower-paid apprenticeships with fewer opportunities. The push to increase the numbers of apprentices could be at the expense of equality. EHRC believed the exemptions should be removed to ensure a fair wage and to reduce take-up barriers. It called for guarantees of fair and equal pay, quality and greater progression opportunities to accompany the 2013 target for an apprenticeship place for everyone. Unite thought that the removal of the exemptions would help in addressing what it called an ‘undervaluing and exploitation’ of female workers. The GMB believed that ending the exemptions and introducing a national minimum rate would be a first step in making apprenticeships more attractive to women as well as black and ethnic minority, and disabled people.

Age, Level and Duration

6.44 The DIUS survey found that apprentice pay in 2007 varied according to age and scheme level, as can be seen in Figure 6.3. This pattern, of pay rising with age and level of scheme, can be seen as consistent with the current exemptions from the minimum wage for all apprentices below the age of 19, and a one-year exemption for those aged 19 and over. Our Survey of Employers (2008) also found that among the low-paying sectors the average of the lowest hourly pay rates for employed apprentices increased with each year of study.

Figure 6.3 Apprentices, Average Net Pay per Week, by Age and Level, England, 2005 and 2007

Source: DIUS Pay Survey, England, 2007 (Fong and Phelps, 2008).

6.45 Fong and Phelps (2008) found that pay varied by the length of time the apprentice had been employed. Those who had worked for their employer longer received higher average net pay. IES (2009) also found that pay varied by length of time in the apprenticeship.

Low Pay and Enforcement Issues

6.46 The DIUS survey (Fong and Phelps, 2008) found that 12 per cent of the apprentices who responded received neither a wage nor a training allowance/EMA. The previous DIUS survey, covering apprentice pay in 2005 (Ullman and Deakin, 2005), found 10 per cent of apprentices reported not being paid anything. The proportion of apprentices in 2007 who reported they received no pay or allowance varied considerably by sector. The sectors with the highest proportion were retail (41 per cent), health and social care (32 per cent), and customer service (30 per cent). By contrast, the proportion of apprentices reporting no pay was 1 per cent or less in electrotechnical, engineering manufacturing, and construction. The authors thought it was highly unlikely that such a high proportion of trainees received neither pay nor allowances and they suggested that the apprentices might have misinterpreted the information, for instance by seeing the apprenticeship programme as a form of qualification and training programme and not associating the pay or allowance they received with it.

6.47 Furthermore, the survey found that 5 per cent of those who reported being paid said that they were earning less than £80 per week on average. This compared with 17 per cent in 2005 (the survey was conducted just before the £80 minimum contractual requirement was introduced). Figure 6.4 shows that the breakdown of apprentices earning less than £80 per week varies by sector, with early years and hairdressing having the highest proportions at 11 per cent in 2007. The survey found a higher proportion of Level 2 apprentices than Level 3 apprentices receiving less than £80. Those aged 18 and under were also more likely to be receiving less than the £80. But the DIUS survey also showed that the overwhelming majority of apprentices earned substantially more than £80 per week. Calculations based on the DIUS pay survey showed that an estimated 81 per cent of apprentices earned an average net pay of £110 per week or higher (Low Pay Commission and DIUS calculation).

Figure 6.4 Proportion of Apprentices Earning Less than £80 Average Net Pay per Week, by Sector, England, 2005 and 2007

Source: DIUS Pay Survey, England, 2007 (Fong and Phelps, 2008).

6.48 The survey found that of the 5 per cent who reported being paid less than £80, 13 per cent were receiving a training allowance or EMA – suggesting they were programme-led apprentices (presumably in work-based learning given the learning stream used for survey sampling). Although this may explain at least some of the non-payment of the £80, the authors of the research found that there were still 4 per cent of apprentices who earned less than the £80 weekly wage required under the LSC contractual arrangements.

‘The exemption is unfair and exploits apprentices. The National Minimum Wage should be the baseline for all, including apprentices. To meet government targets of increased apprenticeships, apprentices need to be given decent pay.’

Irish Congress of Trade Unions Commission visit to Belfast

6.49 Using ASHE for April 2007, we found 6.5 per cent of ‘trainees’ in the UK were paid below £3.30 per hour, and around 1.4 per cent were paid below £2.16 per hour, the latter being equivalent to £80 per week for 37 hours.

6.50 In our consultation, trade unions also referred to the DIUS pay survey results. They told us that their own findings on pay were that rates for many apprentices remained well below the youth minimum wage levels and that current low levels of apprentice pay were used by rogue employers as a means of employing cheap labour. UNISON told us that apprentices often did a full-time job carrying out the same tasks as colleagues but for significantly less money. The TUC said it was aware of apprentices in England receiving as little as £1.52 an hour. The TUC was also concerned about those who reported receiving no pay or allowance in the DIUS survey. It noted the distinct sectoral bias for those reporting such problems, which we referred to above, and said that this needed to be investigated further. The CBI suggested that many apprentices appeared unsure of their status and this could have led to the 5 per cent of apprentices found to be paid less than £80 a week being an overestimate. The CBI noted that the average wage reported in the survey did not include tips. A fifth of all apprentices in the survey received tips, at an average of £13 per week. The CBI also pointed out that apprentices may additionally receive other benefits, including free or subsidised accommodation or canteens.

6.51 In our view, the findings of the DIUS survey need to be interpreted with care. Some of those included in the survey were on programme-led schemes rather than waged apprentices, and so were not entitled to the £80 per week. Some payments, such as tips, were not included in the survey’s average net pay calculations, and so apprentices may have received a higher gross pay. Even taking these factors into account, however, the evidence suggested that some apprentices were receiving little or no pay. These worries were reinforced by findings from a recent Office for Standards in Education (OFSTED) report into programme-led apprentices in England (OFSTED, 2008). Although such apprentices are not employed, and not entitled to the £80 weekly wage, the report found some were undertaking periods in the workplace of 30 hours a week and receiving no payment, not even the EMA (which is means tested).

‘Apprentices are, in many cases paid low wages, as we would expect since training is valuable and owned by the trainee. That most apprentices accept the fairness of this position is shown by the over-supply of applications for apprenticeships.’

Unquoted Companies Group (UCG) evidence

6.52 Both union and employer organisations voiced concerns about the lack of enforcement of the LSC wage rate. The TUC said that bringing apprentices within the National Minimum Wage framework would ensure that there was a robust enforcement mechanism in place. The LSC said that although employers were contractually obliged to pay the £80, in reality it did not have the mechanisms for monitoring employers and the wages they paid. It concluded that the current enforcement arrangements were not for fit purpose. The LSC argued for the £80 weekly rate arrangement to be brought within the National Minimum Wage framework so it could be effectively enforced. Some employer groups, such as the Apprenticeship Ambassadors Network, also suggested that consideration could be given to bringing the LSC rate within the minimum wage enforcement arrangements as an apprentice training rate. The CBI suggested that rather than including the £80 within the minimum wage framework, HM Revenue & Customs (HMRC) could check that the apprentice exemptions were being properly applied during its routine enforcement checks on the National Minimum Wage.

‘The current enforcement mechanism is too weak. The general National Minimum Wage regime would be much better.’

Unite evidence

Hours of Work and Training

6.53 Part of the rationale for the apprenticeship exemptions is to give an incentive to employers to provide high quality training places. One measure of whether high quality training is taking place is the amount of time devoted to training.

6.54 Figure 6.5 illustrates the findings of the DIUS survey (Fong and Phelps, 2008) that, on average, apprentices spent 37.0 hours per week working for their employer (this includes on-the-job training but excludes off-the-job training), a rise from 33.0 hours worked per week on average in 2005. Research we commissioned (IES, 2009) found apprentices typically worked 35.0 to 40.0 hours per week, including off-the-job training. The DIUS survey also found that overall 57.0 per cent of apprentices reported they received off-the-job training, a decrease on 2005 (68.0 per cent), although this differed by sector. Of those who reported receiving off-the-job training, the average they received fell from over 8.5 hours per week in 2005, to 6.5 hours in 2007. There were similar reported falls in on-the-job training, with those reporting they received this declining from 87 per cent in 2005 to 85 per cent in 2007. Those who received on-the-job training also reported a fall in the average number of hours per week, from 15 in 2005 to 13 in 2007.

‘…the current exemption means that monitoring apprenticeship wages falls outside the responsibility of minimum wage inspectors and makes enforcement problematic….The LSC believes that the current exemption of apprentices…should be ended and replaced with a minimum apprentice wage that can be enforced through arrangements for enforcing the National Minimum Wage.’

LSC evidence

6.55 There were substantial sectoral variations in the number of hours spent working and training. For instance, apprentices in engineering manufacturing spent an average of 20 hours working, 15 hours training on-the-job, and 6 hours training off-the-job. In retail, apprentices spent 31 hours working, 4 hours training on-the-job, and 1 hour training off-the-job. Steedman (2008) pointed out that apprentice pay was higher in those sectors where apprentices spent a higher proportion of their time training. She found there were more applicants for training places in these sectors, who were mostly well-qualified, than in sectors offering less training. In the latter, demand for places was lower, with anecdotal evidence suggesting applicants were poorly qualified. Steedman (2008) suggested that a case could be made for lower apprentice pay in those high-paying sectors that had an over-supply of well qualified applicants, and in turn more places could be offered. In some sectors, which already had lower pay and less training, Steedman suggested employers could afford to offer more training and improve its quality.

Figure 6.5 Apprenticeships, Hours Spent Working and Training (On and Off-the-job), England, 2007

Source: DIUS Pay Survey, England, 2007 (Fong and Phelps, 2008).

6.56 According to Fong and Phelps (2008), the increase in the average number of hours worked per week is possibly linked with the decrease in the proportion of apprentices reporting they received training. This is because apprentices may have mistakenly included training with their answer for number of hours worked, and recent initiatives such as ‘blended learning’ may also have blurred the distinction between training and working.

6.57 In our consultation, trade unions were concerned about what they regarded as the low quality of the training received by many apprentices. They also highlighted that as the £80 wage in England was a weekly rate there could be no relationship between pay and hours worked, and that in some cases this led to very low rates of hourly pay. Employers emphasised the importance of employer-provided training for quality apprenticeships and the heavy investment made. The CBI was concerned that rises in wage costs could have an impact on this. It maintained that the DIUS pay survey showed a fall in the amount of training apprentices received after the £80 minimum rate was brought in. It noted that the number of hours worked in the same period increased, and suggested that employers had to extract more ‘value for money’ from their trainees to compensate for the increase in pay.

‘Many of our survey respondents felt that the payment of apprentices did not accurately reflect the work they were expected to do. Training quality was inconsistent and professionals advising young people on apprenticeships reported frequent misuse of the training rate.’

UNISON evidence

6.58 Although there is no minimum entitlement to off-the-job training, in each UK administration there are inspection arrangements for monitoring training standards. The Organisation for Economic Co-operation and Development (OECD, 2008a) reported that research showed that the quality of off-the-job training was considerably higher in the traditional manufacturing sectors than in the service sector (Hughes and Monteiro, 2005b). The House of Lords Select Committee on Economic Affairs (House of Lords, 2007) received evidence of some apprenticeships providing poor quality training and of great variability in training practices across sectors, referring in particular to the findings of the Adult Learning Inspectorate (ALI) in England. But we found other evidence that suggests there was widespread satisfaction among apprentices with their training. For example, LSC (2008a) found that four in five apprentices rated the quality of their training as good and most apprentices could think of no necessary improvements to the programme. Apprentices on non-traditional frameworks were most likely to suggest that more support and feedback were needed from external trainers or assessors. The TUC accepted that the majority of apprenticeships offered a good programme, but said a minority were exploitative.

Pay as an Incentive to Participate in and Complete Apprenticeships

Pay as an Incentive for Workers to Participate

6.59 Our review of previous research revealed a number of important factors in influencing people to take up an apprenticeship (Wiseman, Roe and Boothby, 2003; LSC, 2006 and 2008a; Cambridge Policy Consultants, 2006; and Spielhofer, Nelson, O’Donnell and Sims, 2006). Pay is one factor, but is far from being the only one. Others include: having a paid job with training; the opportunity for qualifications; personal development; future career opportunities; gaining work experience and continuing learning; and gaining qualifications for skills and experience already possessed. Similarly, there were a number of non-pay barriers faced by those wanting to enter apprenticeships, including: a lack of places; a lack of basic skills required to enter training; and inadequate careers advice and information on apprenticeship opportunities (House of Lords, 2007; LSC, 2008a; Cambridge Policy Consultants, 2006; and DIUS/DCSF, 2008a).

‘Employers invest heavily in their apprenticeship training – apprentices are not cheap labour.’

CBI evidence

6.60 We found little research specifically on the role of wages as an incentive or barrier to joining apprenticeship programmes. A study by Spielhofer, Nelson, O’Donnell and Sims (2006) investigated the role of training allowances in creating incentives for young people and employers. The survey covered England and was conducted just prior to replacement of the Minimum Training Allowance by the EMA. It covered trainees, training providers, employers, and local LSCs. The researchers found that the extent to which trainees were motivated to take up an apprenticeship for financial reasons varied. Around 30 per cent of the apprentices surveyed reported that they would have started their apprenticeship even if they had found out before they started that they would not be paid for it. But the remaining trainees would have taken an alternative route, most commonly to other paid employment (33 per cent) or a college course (16 per cent). Just over two-fifths of trainees were so dissatisfied with the level of payment they received that they had considered leaving their apprenticeship. Researchers also found that two-thirds of training providers believed that training allowances were an incentive for young people to take up apprenticeships, particularly those aged 16 and those needing additional encouragement or support. Cambridge Policy Consultants (2006) found only 4 per cent of Level 2 (Skillseekers) and 7–8 per cent of Level 3 (MA) apprentices cited training while earning a wage as their main reason for participating.

6.61 Recent research confirmed that an apprenticeship involves a trade-off between lower apprentice wages in the short-term and higher wages and improved employment prospects in the longer-term. McIntosh (2007) undertook a cost-benefit analysis of apprenticeships for DfES and found that in 2004/05 there were substantial wage returns to apprenticeships of around 18 per cent at Level 3 and 16 per cent at Level 2 compared with individuals who were qualified at Level 2 and Level 1 respectively. The wage returns varied by sector, however, with no observed wage effect of apprenticeships in retail. Obtaining an apprenticeship was also found to have employment enhancing properties. LSC (2008a) also found completed apprenticeships had a positive impact on an individual’s employment prospects. A caveat of the McIntosh (2007) research was that the results may partly reflect that employers are able to select the most able apprentices, with demand for places exceeding supply.

Pay Incentives and Employers

6.62 Research by the LSC (2008a) revealed that the principal attractions to employers in providing apprenticeships were that they: provided them with the most effective route to a skilled workforce; acted as an effective way to train recruits in their way of doing things; and helped to support their recruitment by providing an alternative way of attracting skilled and good quality candidates. Research for Scottish Enterprise by Cambridge Policy Consultants (2006) found similar reasons, with the principal ones being to upskill trainees, as a way of introducing additional training into the organisation, or as a means of recruitment. Anderson and Metcalf (2003) also found that employers used apprenticeships as a way to give staff a chance to gain a qualification, to improve staff retention, and provide opportunities for career progression. We also identified a number of barriers to employers participating, including: a lack of suitable candidates; bureaucracy; the costs involved; a lack of training facilities; a lack of awareness of apprenticeships or consideration of using this means for training staff; apprenticeships not seen as relevant to an organisation; and a sectoral bias in participation, with larger firms and those firms in traditional apprenticeship sectors being more likely to offer apprenticeships (Wiseman, Roe and Boothby, 2003; Cambridge Policy Consultants, 2006; CBI, 2008; IES, 2009; and LSC, 2008a). The work previously cited, Spielhofer, Nelson, O’Donnell and Sims (2006), tried to understand the impact of training allowances as an incentive for employers to take on apprentices. They found that four-fifths of training providers and three-quarters of local LSCs believed that training allowances acted as a strong incentive for employers to take on young people. The large majority of employers providing an opinion also shared this view.

6.63 Just as apprenticeships have a long-term payback for apprentices in terms of higher wages, so there are potential financial incentives to employers. Hogarth, Hasluck and Daniel (2005) found that apprenticeships were deemed to be cost-effective by employers. The costs and risks borne by the employer of investing in training could be high, but this tended to be offset by the funding available, the productive contribution made by apprentices, and being paid a trainee’s wage while training. Employers tended to break even on the costs of the apprenticeship. However, the experience of employers varied, particularly by sector, with quicker returns in some than others. Some incurred a substantial net cost over the training period and faced a longer timescale for payback in their investment. Of six sectors looked at in a more recent study (Hasluck, Hogarth, Baldauf and Briscoe, 2008), the research found that the net investment cost was greatest in engineering, with a payback in less than three years. The net cost was least in retail, with a payback in less than two years.

6.64 Cambridge Policy Consultants (2006) found that in Scotland the main impact identified by participating employers was in relation to productivity, with 78 per cent stating that it had increased slightly or a great deal as a result of participation. Around 43 per cent of employers felt that participation had contributed to company employment growth. Estimated total additional value added by the programmes was high, with every £1 spent by Scottish Enterprise on direct contributions to trainee costs delivering between 24 pence and 27 pence net additional impact. The research by McIntosh (2007) also provided an indication of higher future productivity returns from apprentices, dwarfing costs incurred by the state and employer.

6.65 During our consultation, a number of employer groups voiced concern that the removal of the exemptions could lead to an increase in apprentice wage costs and this could have an adverse impact on employers’ decisions to provide training places. The National Hairdressers’ Federation (NHF) conducted a survey of members and found widespread use of the exemptions, with 91 per cent of the sector supporting their retention. It said 94 per cent of the sector offered training to at least one apprentice, with a sector average of two per salon. Around two-thirds of the sector reported they would either reduce the number of apprentices or employ none at all if the exemptions were removed. The NHF estimated this to mean that up to 60 per cent of apprenticeships (9,000 places) would be lost or put at severe risk. The National Day Nurseries Association (NDNA) also reported use of the exemptions by its members in the childcare sector. Its evidence suggested that removal of the exemptions would have a detrimental impact on the provision of training places, in that some members reported they would not feel it feasible to take on apprentices if they had to pay them more. But stakeholders in other low-paying sectors, such as the British Retail Consortium (BRC) in retail and the British Hospitality Association (BHA)/British Beer & Pub Association (BBPA)/Business In Sport and Leisure (BISL) in hospitality/leisure, told us that use of the exemptions was far less widespread among their members.

‘If the apprentice exemptions were removed then the nurseries would have no choice but to put up the fees they charge to parents.’

Nurseries Commission visit to Nottingham

6.66 Our 2008 Survey of Employers asked whether the current exemption regime for apprentices makes firms more or less likely to employ apprentices. As shown in Figure 6.6, three-quarters of respondents stated that the exemptions did not affect the decision to employ apprentices. Hairdressing recorded the largest proportion of firms (53 per cent) that was more likely to employ apprentices as a result of the exemptions. This was followed by the childcare sector with 34 per cent.

6.67 The CBI did not believe that a significant increase in apprentice pay would help in increasing the number of high quality apprenticeships. It believed more employers must be encouraged to take on apprentices as employer-led apprenticeships are valued more highly and have the highest completion rates. But the Federation of Small Businesses (FSB) found in a survey of members that 82 per cent had supported a wage rise for apprentices; 72 per cent said the current exemption did not have an impact on their decision to employ apprentices; and of those who employed apprentices, 58 per cent said the exemption had no impact on their decision, whereas 38 per cent said it made them more likely to take on an apprentice.

‘The most significant constraint on apprentice pay is the inability of apprentices to bring in money for the salon. If an apprentice is not earning for the hairdresser, the National Minimum Wage is simply too high a price to pay.’

Hair Salon Commission visit to Cardiff

Figure 6.6 Likelihood of Employing Apprentices, as a Result of the Current Exemption Regime, UK, 2008

Source: Low Pay Commission, Survey of Employers, UK, 2008.

Note: Base is all firms employing apprentices that responded to the question (12 per cent).

6.68 The second stage of our 2008 Survey of Employers (IES, 2009) asked employers for their views on abolishing or amending the current exemptions. The following issues were cited:

• Use of the apprentice exemptions from the minimum wage was extensive.
• Employers had strong opinions in relation to the exemptions and possible change.
• Although generally supportive of minimum standards most referred to overriding cost and market pressures that dictated lower levels of pay for those in training.
• For smaller employers and those in the childcare and hairdressing sectors, apprentices were seen to make it possible for the company to operate on a profitable basis.
• There was little support for the exemptions to be abolished and for the age-related National Minimum Wage rates to be applied.
• There was quite widespread support for the introduction of a statutory basis for existing contractual arrangements, subject to certain flexibilities and limitations. Some valued this option as a way to avoid exploitation of apprentices. It was favoured by those who did not employ apprentices.
• Variation in pay according to qualification level and performance were accepted by many as a useful distinguishing factor, but not in isolation.
• Not surprisingly, employers with apprentices were not keen to commit to a separate National Minimum Wage for apprentices without knowing its level. Those without apprentices tended, in general, to favour either a separate National Minimum Wage or a statutory basis for existing contractual arrangements.

Role of Pay in Completion Rates

6.69 The completion rate in Scotland has remained the highest in the UK, rising from 51 per cent (Highlands and Islands Enterprise schemes) and 60 per cent (Scottish Enterprise schemes) in 2004/05 to 65 per cent (for both organisations) in 2006/07. The overall completion rate in Scotland in 2007/08 was 71 per cent. Completion rates for Level 3 apprenticeships in Wales stood at 43 per cent in 2006/07. The equivalent rate in Northern Ireland was as high as 50 per cent in 2004/05 and is currently estimated at 41 per cent in 2005/06.

6.70 One of the most striking developments in recent years has been the improvement in completion rates in England, shown in Figure 6.7. This stood at 64 per cent in 2007/08, up 15 percentage points on 2005/06 and an increase of 24 percentage points since 2004/05. Completion rates vary by sector in all nations. The reasons for non-completion and the variation in rates between administrations are complex. We look below at the range of factors, including pay, that research suggests can play a role in completion rates.

6.71 Trade unions believed that removing the exemptions would be likely to have a positive impact on completion rates. The TUC noted that completion rates had improved in England since the £80 rate was introduced, with rates increasing most in sectors with the lowest average pay rates. It also cited research that found that 27 per cent of trainees who dropped out of training stated ‘not getting enough money’ as their main reason. Usdaw believed that at the current level of pay, apprenticeships are not attractive enough for individuals, so the government targets for increasing numbers in apprenticeships will be missed. Young people’s representatives, such as the YWCA, also maintained that low pay is leading to non-completion of apprenticeships. The Scottish Government said that research had found dissatisfaction with pay on Modern Apprenticeship and Skillseekers programmes by a large number of trainees, which is likely to be a major contributory factor to the non-completion rates in both programmes.

‘Financial pressures mean that some disadvantaged young people do not have the luxury of being able to invest in their futures by doing an apprenticeship…. Low pay is leading to young women having to drop out of their apprenticeships before they are completed.’

YWCA evidence

Figure 6.7 Apprenticeship Framework Completion Numbers and Rates, England, 2001/02–2007/08

Source: LSC, administrative data, England, 2001–2008.

6.72 The Greater Manchester Pay and Employment Rights Advice Service (GMPERAS) believed that the high drop-out rate for apprentices was caused by very low pay rates and remained concerned that apprentices were vulnerable to exploitation. It thought that the availability of better paying apprenticeships would encourage young people to take up positions offering ongoing training and opportunities for their futures. If all apprentices were paid at the National Minimum Wage and apprenticeships were made more accessible, they could become a tool for influencing young people’s early career choices. The EHRC said that the National Minimum Wage has not had negative consequences on employer recruitment practices, and the evidence suggested an apprentice minimum wage would have beneficial effects on recruitment, motivation and retention.

6.73 Employer organisations, such as the CBI, cited evidence that pay was neither apprentices’ key concern nor a cause of apprentices leaving their schemes. The CBI did not believe that pay was the answer to increasing quality or completion rates. It thought the costs of the lower productivity of the apprentice and training needed to be allowed for in some form of offset in wages if apprenticeships are to be attractive to employers. It said that wage costs, on average, represented 40 per cent of apprenticeship costs, varying between 18 per cent and 51 per cent. Member firms’ annual investment in their apprenticeship programmes usually ranged between £14,000 and £30,000 per apprentice, depending on the sector, whereas 41 per cent of smaller employers reported that cost prohibited their involvement.

‘While pay rates are not a key driver of participation and completion for apprentices, employer cost plays a key role for firms.’

CBI evidence

6.74 Many research and policy papers have highlighted as a key issue the significant number of trainees that do not complete their apprenticeships. Although completion rates have improved significantly since 2003, non-completion still remains an issue. As noted above, a number of stakeholders have referred to the introduction of the £80 rate in England as an important factor in the improvement in completion rates. But other factors may be at work. OECD (2008a) noted that changes to training providers’ remuneration arrangements helped to boost completions. From 2004, training providers were paid only 75 per cent of apprenticeship funding in advance, with the remaining 25 per cent paid when the apprentice completed the course.

6.75 We found that much of the research into the reasons for non-completion showed that a complex set of factors was at work, not just low pay. Reasons for leaving included getting a new job with better pay and prospects, the structure and quality of training, support arrangements in the workplace, and gender issues. A study by IFF Research (2000) found a wide variety of reasons why young people did not complete. Reasons varied widely by age, gender, and sector. Most common was getting a new job (typically for reasons of better pay or prospects), followed by difficulty in combining training with job workload (28 per cent of non-completers stayed with the same employer). Results suggested many young people who undertook apprenticeships were still experimenting with the labour market. West (2005) concluded that wrong choices by young people and the attraction of other jobs outside apprenticeship were major reasons for leaving, while poor training quality was not.

6.76 West also found that variation in completion rates between local LSCs did not appear to be correlated to any strong degree, or often not at all, to differences such as the sector, the age of trainees, or the labour market. This appeared to support the hypothesis that management practices, by LSCs or providers, explain most of the differences in completion rates. West suggested that good practices, which aid completion of apprenticeships, are likely to lie in a number of areas including: initial briefing of apprentices and employers; arranging trial periods; identifying ‘at risk’ trainees; thoughtful attitudes to pay issues above the minimum required levels; and clarity with employers about expectations of completion and their obligations.

6.77 Gallacher, Whittaker, Crossan and Mills (2004), explored the factors that influenced completion rates for Modern Apprentices in Scotland. Provision of a supportive workplace environment, including management support and interest in training, was a key factor in completion, but low pay was cited by several young people as a reason for leaving. Cambridge Policy Consultants (2006) found the main reason for dissatisfaction for both completers and non-completers in Scotland was pay. Around 20 per cent of completers and 37 per cent of non-completers rated this as poor or very poor; the rate was highest for Skillseekers and lowest for adult MA trainees. Employers interviewed for our commissioned research (IES, 2009) pointed primarily to problems with individual commitment and aptitude as reasons for non-completion, although dissatisfaction with pay was also an issue.

6.78 In their research into expanding apprenticeships in England, the LSC (2008a) found that the main reason given by non-completers was that they had left the employer (usually to move to a higher paying job) or that personal circumstances had changed. Around a third of those who had dropped out had done so because of a lack of interest, because they had changed their mind about what they wanted to do, or because they had changed to a different course. Around a fifth of apprentices stated that nothing would have persuaded them to complete the programme. Those who could be persuaded suggested that better pay or greater support with transport, materials, and other costs would have been appreciated. This was more the case for apprentices on traditional frameworks (typically longer than non-traditional ones), whereas those on non-traditional frameworks were more likely to cite more time to train during working hours.

Stakeholder Proposals for Retaining or Changing the Current Exemptions

6.79 In response to our consultation, there was widespread common ground among stakeholders in recognising the value of apprenticeships and supporting government plans to expand places. But there was a divergence of views on the principal of retaining the exemptions from the minimum wage.

‘…a minority of apprenticeships are exploitative…in these cases the traditional wage bargain is not being fairly implemented and the TUC believes that bringing apprenticeships under the National Minimum Wage regime would be a move towards addressing this issue.’

TUC evidence

6.80 The TUC, and trade unions generally, proposed that the existing exemptions should be removed, and either the National Minimum Wage rates should apply or an apprentice minimum wage be established. The TUC said that an apprentice rate should be set that reflected the National Minimum Wage for each age group, initially with a modest discount to recognise the training element of the programme. Its suggested rates would represent around 90 per cent of the full National Minimum Wage rate for each age band. It believed that, as any changes would apply from October 2009 or possibly 2010, the economy would be in a period of recovery and able to sustain an increase in apprentice pay. Usdaw was among unions that proposed an apprentice rate under the National Minimum Wage rather than abolition of the exemption and use of the existing age rates. It suggested the introduction of a rate for under 18s, at 80 per cent of the current 16–17 year old National Minimum Wage rate, to reflect the training and skills acquisition aspect. It said a similar discount should apply to the minimum wage age rates for those aged 18 and over. Some other unions, such as UNISON, proposed that the current exemptions should be abolished, with the minimum wage rates applied (ultimately with all ages paid at the adult rate). Groups representing young people also generally supported paying the National Minimum Wage rates to apprentices. The EHRC called for the exemption for those 19 and over to be removed and those under 19 to be paid at a wage equivalent to the youth rates.

6.81 Stakeholders proposing removal of the existing exemptions and the establishment of a rate under the minimum wage framework pointed to a number of possible benefits, many of which we have noted in the preceding sections, including: improving completion rates; addressing issues of very low pay; establishing an effective enforcement regime; helping to reduce the gender pay gap for apprentices; helping with the under-representation of women, ethnic minorities and those with disabilities, particularly in certain sectors; and ending the current complex devolved system of potential wage rates set by each UK administration.

‘It is clear that for the ambition of doubling apprenticeships to become reality, cost is a key barrier. For employers, particularly SMEs, the cost of training is substantial…41 per cent of smaller employers reported that cost prohibited their involvement.’

CBI evidence

6.82 Some stakeholders saw other benefits from bringing the apprentice wage within the National Minimum Wage framework. The minimum wage setting process itself provides transparency, through widespread consultation and open consideration of evidence. The LSC, in oral evidence to us, said there would be process benefits of setting the apprentice wage under the National Minimum Wage framework.

‘The employer role in providing apprenticeship slots tends to be ignored – many more young people wish to become trainees than there are slots available.’

UCG evidence

6.83 While employer organisations also voiced their support for apprenticeships, they generally argued for the maintenance of the current exemptions, noting that an effective and attractive apprentice system was an essential part of a successful UK education and skills strategy. The CBI emphasised the employer role, and the need to encourage a growing number of employers to provide apprenticeship schemes if the Government was to reach its 500,000 apprentice place target. It supported the retention of special treatment for apprentices and did not believe that paying the relevant National Minimum Wage rates was appropriate. The CBI advised us to exercise caution in reviewing the apprentice exemptions at a time when the economy is slowing. The sectors most likely to be exposed as consumer spending slows were among those employing significant numbers of apprentices. CBI members were not yet convinced that moving to an LPC-set apprentice rate, and replacing the existing exemptions, was the right way forward. The UCG said that although some companies would not be affected by the removal of the exemption (i.e. those which already pay considerably more than the minimum wage), some would. Employer groups argued that it made sense for apprentices to pay for skills development by accepting low earnings while in training in order for the employer to offer such training opportunities.

6.84 The FSB was one employer group calling for the exemptions to be removed, stating that National Minimum Wage pay levels for 16–18 year olds undertaking apprenticeships must be the same as for 16–18 year olds in employment. It also referred to the availability of government subsidies for wages during training, such as those already in existence under the Train to Gain scheme.

6.85 The Scottish Government supported removal of the exemptions, seeing them, and different pay levels set by each devolved administration, as an unnecessary complication. But the Welsh Assembly Government believed the present exemptions recognised that in the early stages of their apprenticeship the trainee is not a fully productive member of the workforce. It also recognised that apprentices receive a substantial investment both from the Government and their employer, which resulted in strong wage returns in future careers. It was concerned that removal of the exemptions might act as a disincentive to employers to take on apprentices – particularly from under-represented groups – and undermine greater take-up of apprenticeships by small and medium-sized enterprises (SMEs). The Northern Ireland administration recently reviewed the Department for Employment and Learning’s (DEL) apprenticeship programme. Its review suggested that while the exemptions made it easier for employers to provide places, some of them were paying very little. In some cases rates are equivalent to the minimum training allowance, with no contribution towards expenses for attendance at college. DEL was considering the introduction of a minimum wage for apprentices to stop employers paying such low wages. In further evidence to us DEL suggested that we consider recommending the introduction of a minimum rate of pay for all apprentices, similar to the stance adopted by the LSC in England.

‘…we would wish to see the current exemption for Modern Apprenticeships and Skillseekers removed as we do not believe that this would have an adverse effect on the take up of the programmes here in Scotland.’

Scottish Government evidence

6.86 We received few submissions calling for adjustment of the existing arrangements. Most either wanted them to remain as they are, or to be abolished so that a minimum rate applied to apprentices (either the National Minimum Wage or a rate for apprentices within the National Minimum Wage framework). No one proposed that Level 1 pre-apprenticeship schemes should not be exempt from the minimum wage, although some stakeholders did seek minimum income levels from the state for all young people undergoing training. There was little evidence presented to us by stakeholders on length of exemptions, as a stand alone issue, or on changing the age bands. The main response on length of exemption was from the NHF, which argued in favour of an extension of the exemptions to all apprentices regardless of age for the first two years of their apprenticeship and a one-year exemption for re-training individuals returning to the sector following a career break.

‘Removal of the apprenticeship exemption at this point in the economic cycle…would inevitably lead to a significant reduction in training positions. This would cause short term unemployment and long term damage to a key sector in the service industry.’

NHF evidence

Recommendations

6.87 Having considered all the evidence before us, we remain of the opinion that the rationale for giving apprentices special treatment under the minimum wage remains compelling. We are not persuaded that apprentices should be entitled to the National Minimum Wage. We believe, however, that the existing special treatment should change. We recommend that a minimum wage for apprentices should be introduced under the National Minimum Wage framework. Our rationale for making this recommendation is based on the following factors.

6.88 Introducing an apprentice minimum wage would mean the continued acceptance of the principle that apprentices require special treatment. They would be entitled to a minimum pay level but at a discount to the National Minimum Wage. This would recognise the particular costs and benefits involved in the provision of apprenticeships. There is a cost to the apprenticeship provider of both the training itself, of lower productivity during training, and the opportunity cost of managing the apprentice at the workplace. There is also considerable investment by the state in apprenticeships. In return for lower pay, there are considerable gains to individual apprentices through higher future earnings and increased employment prospects. Although there are also potential longer-term gains for employers, without some discount in the apprentice wage during training, there is a danger that insufficient employers would provide places and there are particular low-paying sectors where this would have most impact (e.g. hairdressing and childcare). The evidence we have received points to an over supply of apprentices relative to the places made available by employers.

6.89 We believe that removing the current apprentice exemptions from the National Minimum Wage and applying the current age-related minimum wage rates would give rise to unrealistic and unaffordable increased costs to employers. A rise in apprentice pay from the current £80 per week in England to the level of the minimum wage would be equivalent to an increase in wage costs to employers of at least 63 per cent (based on the current 16–17 year old minimum wage rate and a 37-hour week). And this is at a time when government strategy in England is to encourage a substantial expansion of employed apprenticeship places. Giving an entitlement to the National Minimum Wage would act as a significant disincentive for employers to engage with apprenticeships, particularly those in the low-paying sectors of hairdressing and childcare, and would be likely to have an adverse impact on the achievement of government apprenticeship targets. While we found that the rationale for treating apprentices in a special way under the minimum wage continues to be sound, developments in public policy towards apprentice wages since the minimum wage and the exemptions were introduced lead us to conclude that a different approach is now appropriate.

6.90 The National Minimum Wage provides a wage floor for workers across the UK, regardless of the area they work. Employed apprentices are workers, but are given an exemption from the minimum wage, recognising the need for them to have a wage discount. Most apprenticeships are provided through publicly funded schemes and each of the UK administrations has the ability to set, on a contractual basis, a wage for the employed apprentices on those schemes. Such a wage, in effect a minimum apprentice wage rate, was introduced in England in 2005 and administered by the LSC. Although in Northern Ireland, like in Scotland and Wales, no contractual requirement for a minimum wage exists, its administration is concerned about very low levels of apprentice pay, and is currently considering the introduction of a similar arrangement to that which operates in England. Although we acknowledge that the different apprentice arrangements between the respective administrations of the UK are a function of devolved responsibilities, we find the different entitlements to a minimum wage unsatisfactory and unnecessarily complex – a view supported by the administration in Scotland. If there is to be a wage rate set for apprentices by public authorities, we believe a more appropriate approach, in keeping with the rationale of a wage floor for workers across the whole of the UK, would be to operate it under the National Minimum Wage framework. In line with other minimum wage rates it would be set on the basis of a recommendation by the Low Pay Commission, and be applied across the UK under the National Minimum Wage framework, rather than by each devolved administration or government department.

6.91 Placing an apprentice minimum wage under the National Minimum Wage framework would have other benefits. We heard in evidence from some stakeholders that they found that the current process for determining the level and timing of uprating the £80 weekly wage in England lacked openness and transparency. The increase now due in August 2009 will be the first since its introduction in 2005. The process used for setting the National Minimum Wage would provide the opportunity for widespread and regular consultation together with open consideration of all the available evidence.

6.92 There is a need for better enforcement. At present there is an £80 weekly minimum entitlement for LSC apprentices in England, but there is no effective mechanism for enforcing it. Evidence exists from the DIUS pay survey for England of apprentices receiving less than the £80 minimum entitlement. The LSC voiced concern on this point and proposed that a minimum apprentice wage be placed within the National Minimum Wage arrangements so as to improve enforcement arrangements. Any minimum wage that is introduced by the administration in Northern Ireland will also face the need for effective enforcement mechanisms. We also heard evidence from a number of stakeholders that the current position of no statutory minimum pay for apprentices had led to a detrimental impact on apprentices: exploitation through very low wages; low quality training; poor completion rates; and a higher gender pay gap for apprentices than generally in the UK workforce. We would not wish to overstate the scale of evidence we have received on very low levels of apprentice pay, with the overwhelming majority of apprentices earning far more than £80 per week and receiving good training opportunities. But having an apprentice minimum wage should assist in enforcement and in minimising any exploitation as far as possible.

6.93 We require more time and further information to be able to consider properly and make recommendations on what the apprentice minimum wage rate should be and the detailed arrangements that should replace the existing exemptions. In particular, we would like to commission additional research on apprentice pay to establish better data than currently exists on apprentice wage rates on a UK-wide basis. We recommend that the Government asks the Low Pay Commission, as part of the work for its 2010 Report, to consider the detailed arrangements for an apprentice minimum wage under the National Minimum Wage framework, and to recommend the rate and arrangements that should replace the existing exemptions, together with the timing for its introduction. We acknowledge that in setting such a wage floor for apprentices, and in determining the ‘discount’ from the National Minimum Wage, we would need to take a cautious approach so as to not have an adverse impact on the supply of apprenticeship places provided by employers. Also the timing of introduction would require us to take into account the likely path of the economic downturn.

6.94 In considering the detailed arrangements for an apprentice minimum wage, we would need to look at the appropriate level(s), age band(s), and duration for the wage. We would also need to bear in mind other changes that will impinge on employers and young people, such as the rise in the compulsory education and training age in England from 2013. We would also wish to gather further information on how arrangements for an apprentice minimum wage operate in other countries. We would consider how the existing unwaged training opportunities are handled within the new framework. In addition we would have to determine whether the apprentice wage should be on a weekly or hourly basis. The rate of the apprentice wage would need to be considered against existing apprentice wage rates and the prevailing National Minimum Wage rates. We will want to gather additional evidence, looking in further detail at apprentice wage rates and arrangements across the UK. In undertaking this work we would consult widely with stakeholders, including the relevant government departments and the Devolved Administrations which have responsibility for apprenticeship policy.

Conclusion

6.95 We were asked by the Government to review the current apprentice exemptions and advise if they were still appropriate. In undertaking this task we gathered a range of evidence, including information on the current arrangements for apprenticeships and apprentice pay in each country in the UK; unfortunately, however, data restrictions meant data on pay were almost entirely limited to England. We also reviewed the current relevant research in the area of apprenticeships as well as supplementing this with our own commissioned work.

6.96 Contributions from stakeholders provided a further insight into how the current exemptions operated and the possible impact of any change to these arrangements. Female apprentices dominate the sectors that have lower average apprentice pay, and there remains a substantial gender pay gap. We found that although average apprentice pay was well above the £80 weekly entitlement set in England, it varied greatly by sector, with around ten per cent of apprentices in the early years and hairdressing sectors earning less than this level. This raised issues around enforcement.

6.97 Apprenticeships offer those who undertake them the prospect of higher future earnings and better employment prospects. Although there are also longer-term paybacks for employers, such as higher productivity, without a discount in the apprentice wage during training there is the danger that employers are less likely to make the investment. Fewer places would result and Government targets could be missed.

6.98 We concluded that the evidence remained strong for continuing to give apprentices special treatment under the minimum wage. A number of factors led us to recommend that there should be a change to the current arrangements, and that a minimum wage for apprentices should be introduced. We require more time and further information, however, to consider adequately, and make recommendations on, the rate and detailed arrangements. We recommend that the Government asks us to undertake this work as part of our remit for our 2010 Report.

6.99 The factors which led us to recommend the introduction of a minimum wage for apprentices included the changes to public policy on apprentice wages since the minimum wage was introduced, with the different treatment of apprentice pay in the home nations. The administration in Northern Ireland told us that it was considering the introduction of its own minimum wage for apprentices. We concluded that effective enforcement of apprentice pay arrangements was important: apprentices should be confident of receiving the pay due to them. Having an apprentice minimum wage within the National Minimum Wage framework should help achieve this goal. Effective enforcement in general is the cornerstone for a successful National Minimum Wage and we turn in the next chapter to look in more detail at this area.