Introduction

6.1 In this chapter we present the evidence and make our recommendations on the rate and arrangements for an apprentice minimum wage. We commence by giving the background to our remit from the Government and explaining how we went about our task. Information is then provided on current UK apprenticeship schemes, the number of apprenticeships and government apprenticeship targets. The chapter moves on to look at the possible structure, and then the rate, for the apprentice minimum wage. In both these sections the available evidence is presented, including stakeholder views, and we set out our recommendations. Later sections cover transitional arrangements for when the wage is introduced, as well as considering how the new wage rate fits within the existing National Minimum Wage framework. We conclude by giving our views on how the wage should be reviewed and evaluated.

Background

6.2 The current National Minimum Wage Regulations provide for certain categories of apprentice to be exempt from the National Minimum Wage. For the purpose of the National Minimum Wage, an apprentice is a worker who either has a contract of apprenticeship or is taking part in a specified government apprenticeship scheme. The exemption applies to apprentices aged under 19 and those aged 19 or over in the first 12 months of their training.

6.3 As part of the terms of reference for our last report the Government asked us to consider whether the apprentice exemptions were still appropriate. We recommended that:

• apprentices should still receive special treatment under the National Minimum Wage;
• a minimum wage for apprentices should be introduced under the National Minimum Wage framework; and
• the Government should ask us, as part of our work for the 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.

6.4 In reaching these recommendations the Commission referred to a number of factors, including:

• the need to recognise the particular costs and benefits involved in the provision of apprenticeships;
• that applying the current age-related minimum wage rates to apprentices would give rise to unrealistic and unaffordable increased costs to employers;
• that an apprentice minimum wage would be a floor, set below the National Minimum Wage; and
• that the apprentice minimum wage should operate under the National Minimum Wage framework and, in line with the other minimum wage rates, should apply across the UK.

6.5 We also saw a number of benefits from introducing a UK-wide National Minimum Wage for apprentices: reduced complexity; helping to minimise any exploitation; and better enforcement arrangements. The Government accepted our recommendations and included further consideration of the rate and arrangements in our remit for this report.

Our Approach

6.6 Our full terms of reference for this report, including those on the apprentice wage, are set out in Chapter 1. We have been asked to recommend the rate and arrangements for an apprentice minimum wage, which would replace the existing exemptions from the National Minimum Wage. In making our recommendations we are required to have regard to:

• the issues and groups to which we have regard when reviewing the established rates;
• the need to ensure sufficient volume, quality and sectoral variety of apprenticeship places to meet government targets;
• the education and training participation age, as it rises in England from 16 to 18 between 2013 and 2015;
• the effective functioning of the education market and young people’s choices; and
• the timing for introduction of the apprentice minimum wage.

6.7 In conducting our work we gathered and considered evidence from a number of sources, similar to those used for our work in the 2009 Report, and this evidence has provided the basis for our considerations and recommendations.

• Labour Force Survey (LFS) data: While this information has limitations it did help us look at how apprentice pay varied and its distribution across the UK.
• The DIUS apprentice pay survey, 2007: Although it is three years old and only covers England, it remains a key source of information on apprentice pay.
• Findings of independent research: In our last report we reviewed existing research on apprentices and commissioned research from the Institute for Employment Studies (IES, 2009) looking primarily at employers’ use of the apprentice exemptions. For this report we commissioned further research which in particular considered how apprentice pay affects young people’s decisions to take up and complete apprenticeships (Lawton and Norris, 2010).
• Information on apprenticeship numbers and programmes: Provided by the UK administrations and departments with responsibilities for apprenticeships.
• Evidence from stakeholders: Received through our written consultation, oral evidence sessions, Commission visits around the UK and our Secretariat’s meetings with key stakeholders.

6.8 We noted in our 2009 Report that available data on apprentice pay were limited. We therefore wrote to the Government and the devolved administrations last year urging them to collect better data and offering to work with them in developing this. We received a positive response from all the administrations and we are now working with them, with the objective of improved data on apprentice pay for our future reports. For this report, however, we have had to work with existing data sources, and have extracted available pay data from both the LFS and the Department for Innovation, Universities and Skills (DIUS) pay survey.

6.9 In designing the apprentice wage we adhered to the aims the Commission identified when it considered the introductory arrangements for the National Minimum Wage itself. We adopted these as our guiding principles for reaching recommendations on the apprentice wage rate and arrangements. These principles remain relevant today in the context of an apprentice wage that should:

• support a competitive economy – ensure the apprentice wage is supportive of developing a skilled workforce;
• be set at a prudent level – the precise impact of introducing the apprentice wage is uncertain, and having a prudent approach, minimising the risk to apprenticeship places, is important;
• be simple and straightforward – the wage needs to be simple so it can be easily understood, implemented and enforced; and
• make a difference – to provide a UK-wide wage floor for apprentices with improved protection from exploitation.

6.10 We used these principles, believing that an apprentice wage that follows them is most likely to match the successful introduction and endurance of the National Minimum Wage. We also identified that, in addition to the wage rate itself, there were a number of key issues that we needed to address and make recommendations on in respect of the structure of the wage:

• whether the wage should be an hourly or weekly rate;
• whether the wage should be a single rate and apply to all apprentices, or whether it should vary by age, level, duration or some other factor;
• the duration for the wage; and
• the treatment of non-employed, unwaged apprentices.

6.11 We next present the evidence we received and the conclusions and recommendations we reached. We start by looking at the current apprenticeship schemes in the UK and support arrangements for apprentices.

Apprenticeship Schemes, Numbers and Targets

6.12 This section first provides a very brief overview of the types of schemes and categories of apprentices that currently operate in the UK, together with information on wage and allowance arrangements. We then go on to look at data on current volumes, with information on the distribution of places by sector and groups of apprentices, as well as the duration of apprenticeship training. We conclude by considering government targets for apprenticeships.

Current Apprenticeship Schemes and Wage Arrangements

6.13 We reported in detail on government-supported apprenticeship schemes in our 2009 Report. Updated information is provided in Table 6.1. 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). In addition, there is government support for a more limited range of higher (Level 4) apprenticeships, mainly covering managerial and higher technical work. It is the Level 2 and Level 3 schemes that are covered by the exemption from the minimum wage.

Table 6.1: Apprenticeship Schemes and Financial Support, by Country, 2009/10

Source: UK administrations.

Notes:

a. Education Maintenance Allowance (EMA), available to 16–18 year olds, is means tested and currently a maximum of £30 per week.

b. 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.

6.14 There is also an exemption from the National Minimum Wage for certain government-funded pre-apprenticeship Level 1 schemes – see our 2009 Report for further details. We considered such schemes in our last report and found no support for removing their exemption from the National Minimum Wage. We believe their exemption should continue following the introduction of the apprentice minimum wage.

6.15 Primarily as a response to the impact of the recession, all the UK administrations have added special measures to their standard apprenticeship programmes. The general aim is to help retain and expand the volume of apprenticeships and help those apprentices facing the premature ending of their training programmes. These measures include the ‘Adopt an Apprentice Scheme’ in Scotland, where employers can recruit a redundant apprentice and receive £2,000 support from the Scottish Government, and the ‘ReAct’ and ‘ProAct’ Programmes in Wales, giving wage and training subsidies to employers to retain apprentices and take on redundant workers.

Wage Arrangements for Employed Apprentices

6.16 Table 6.1 also shows that there are differences between the UK administrations with respect to the wage arrangements offered to apprentices. Only in England is there a contractual minimum weekly payment to employed apprentices (£95) on government-funded apprenticeship training. When introduced in 2005 (at £80), the 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 employed apprentices, although there is a general requirement that they are waged.

Wage Arrangements for Non-employed Apprentices

6.17 The vast majority of apprentices in each country of the UK are employed and receive a wage. There are, however, a small proportion who are not, at least initially, employed. The UK administrations are moving towards all-employed, waged Level 2 and 3 apprenticeships, but non-employed, unwaged provision continues to have a role, such as where an employed place is not immediately available, particularly during the recession. These non-employed apprentices receive an allowance, paid by the state, instead of a wage (see Table 6.1). In Scotland and Wales they receive a training allowance, and in England there is payment of a means-tested EMA to programme-led apprentices. Northern Ireland has recently supplemented its all-employed apprentice programme by introducing a programme-led scheme. Apprentices on this scheme are paid a non means-tested EMA.

6.18 Some stakeholders raised with us the treatment of programme-led apprentices under a new apprentice minimum wage. The Association of Learning Providers said we needed to consider how they would fit into the apprentice minimum wage system. Barnardo’s, Rathbone and the YWCA recommended removing means testing for EMA eligibility for young people on programme-led apprenticeships. They said that this contrasted with a newly introduced EMA Guarantee for young people on Entry to Employment courses. The £30 for programme-led apprentices was also contrasted by stakeholders with the £95 for employed apprentices, even though they could be doing similar work. They said the treatment of programme-led apprentices could create financial hardship. UNISON said that programme-led apprentices should receive the National Minimum Wage if they do actual work with employers.

6.19 Although there has been some evidence of programme-led apprentices spending periods in the workplace without either a wage or an allowance (OFSTED, 2008), introducing the cost of an apprentice minimum wage for employers offering work experience would likely have an adverse impact on the provision of such opportunities. And non-employed, unwaged apprentices are eligible for financial support. In England, 16–18 year old programme-led apprentices are in scope for the means-tested EMA, and the same broad package of support as other learners – including parents’ eligibility for non means-tested Child Benefit and possibly for Child Tax Credits. In other parts of the UK, unwaged apprentices receive either a non means-tested EMA or a training allowance. Our conclusion is that as these unwaged apprentices are not employed, it is not appropriate to include them under the apprentice minimum wage. We recommend that non-employed apprentices are excluded from the apprentice minimum wage and continue to be exempt from the National Minimum Wage. This exclusion would cover programme-led apprentices on schemes in England and Northern Ireland and those in receipt of a training allowance on schemes in Wales and Scotland.

6.20 We will, however, wish to monitor the impact of this on non-employed apprentices, particularly in respect of two areas. First, that there is not an increased use of non-employed, unwaged apprentice arrangements, leading to a reduction in employed apprentice places. Second, to ensure that non-employed programmes continue as a route to training and progression onto employed apprenticeships, and not as a source for exploitation.

Numbers of Apprentices and Government Targets

6.21 This section provides information on the current numbers of apprenticeship places and how these are distributed across the UK administrations, sectors of the economy, and particular groups of apprentices. Data are also given on how the duration of an apprenticeship varies by sector and level. The section then goes on to consider targets on apprenticeships set by the respective UK administrations.

Current Volumes by Country

6.22 The latest available data on apprenticeship starts by country are shown in Table 6.2. Comparable data across countries were not generally available, but we have been able to calculate approximate UK figures for 2007/08 and provisional ones for 2008/09. Overall, there was an increase of 9,000 (3 per cent) in apprentice starts in the UK between 2007/08 and 2008/09, although not all countries experienced an increase.

6.23 The 2008/09 data for England show that the number of apprenticeship starts was higher than in 2007/08 (up 15,100 to 239,900). Northern Ireland introduced its Apprenticeships NI in 2007/08 and, since then, the total number of apprenticeship starts has increased. Scotland saw a fall in Modern Apprenticeship starts in 2008/09 to 10,600, however, as we have a limited data series it is not possible to draw conclusions about the trend. Provisional 2008/09 figures for Wales also show a small decrease in the number of starts to 18,300.

Table 6.2: Number of Apprenticeship Starts, by Country, 2003/04–2008/09a

Source: UK administrations, 2003–2009.

Notes:

a. England and Wales figures are for the academic year; Northern Ireland and Scotland figures are for the financial year.

b. In Northern Ireland, Apprenticeships NI replaced Modern Apprenticeships in September 2007, hence the figures from 2007/08 are the sum of these two schemes.

c. Figures for Scotland are only available for Modern Apprenticeships, which will not include all those at Level 2.

Sectoral Distribution

6.24 Figure 6.1 shows how the sectoral distribution of apprenticeship starts varied across the UK. England and Northern Ireland contained similar proportions of apprentices in the low-paying sectors of hairdressing, early years and social care (around 20 per cent), Wales had a higher proportion (30 per cent), and in Scotland only 13 per cent of apprentices were in these sectors. We know that in these sectors, particularly hairdressing, a high proportion of employers are small and micro businesses. Although retail and hospitality are regarded as low-paying sectors, they do not tend to be the lowest-paying sectors with regards to apprentices – we cover apprentice pay data in more detail later in the chapter.

Figure 6.1:Distribution of Apprenticeship Starts, by Sector and Country, 2007/08

Source: UK administrations, 2007/08.

Note: England and Wales figures are for the academic year; Northern Ireland and Scotland figures are for the financial year. Some definitions for sectors differ, but we have used the closest matches possible.

6.25 A large proportion of apprentices in Scotland and Northern Ireland were within the more traditional apprenticeship sectors. These included engineering (highest proportion in Scotland) and construction (highest proportion in Northern Ireland).

Distribution by Gender, Ethnicity and Disability

6.26 In 2007/08, just under half of English apprenticeship starts were female and just over half were female in Wales. At the same time there was more of a gender imbalance in other parts of the UK. Only around a third of apprenticeship starts in Scotland were female, and the proportion was even smaller, at less than a quarter, in Northern Ireland (gender data are only available for Modern Apprenticeships, not Apprenticeships NI). This picture hides very substantial gender segregation by sector, which has implications for apprentice pay (and is looked at in a later section).

6.27 For ethnic minority groups, we only have limited data for some parts of the UK. In those administrations for which we have some data (England, Northern Ireland and Wales), 6 per cent or fewer apprentices were from ethnic minority groups in 2007/08. This was smaller than the proportion of ethnic minorities in the UK working age population around that time. In Northern Ireland (ethnicity data only available for Modern Apprenticeships) and Wales, the proportions of apprentices from ethnic minorities are broadly similar to those for their working age populations; in England they are proportionally under-represented.

6.28 We also had difficulty obtaining information on the disability status of apprentices, with varying definitions and incomplete data across the UK. The proportion of apprentices in England who declared themselves as having a disability, learning disability or health problem in 2007/08 (11.5 per cent) was higher than the proportion of UK workers with a work-limiting disability around that time (7.5 per cent in the fourth quarter of 2008). In Northern Ireland (disability data are only available for Modern Apprenticeships) and Wales, the proportions declaring a disability were much smaller at around 1.5–2.5 per cent.

Duration of Apprenticeships

6.29 We next consider evidence on how the length of an apprenticeship varies. Figure 6.2 shows that the average apprenticeship duration in 2006/07 in England varied by sector and by apprenticeship level. Within the selected sectors, an average Level 2 apprenticeship ranged from nine months in retail to two years in some of the more traditional subjects such as electrotechnical. An average Level 3 apprenticeship took longer than a year but less than two, except for the traditional sectors, which could take up to three years. It needs to be borne in mind that these are average lengths and they include early leavers.

Figure 6.2: Average Duration of Apprenticeships, by Sector and Level, England, 2006/07

Source: National Apprenticeship Service, England, 2006/07.

6.30 In its evidence the Government stated that the data showed the length of stay of apprentices varied significantly, depending on age and level of framework. Level 2 frameworks generally took one to two years and Level 3 took two to three years. It said that the length of time young people spent on the programme before completion was much longer than for adults.

6.31 While submissions to us by some stakeholders gave an explicit view of how long the wage should be paid, much of the evidence on duration was inferred from the apprentice wage models they put forward. Some linked the wage to the duration of the current apprentice exemptions from the National Minimum Wage and/or the National Minimum Wage age structure and rates. Others thought the wage should simply be applied for the entire duration of the training.

Government Targets

6.32 Our remit required us to take into consideration government targets on apprenticeships. Each UK administration has its own targets for apprenticeships and training places. Key targets for the respective UK administrations are as follows.

• England: An increase to 250,000 individuals per annum starting an apprenticeship by 2020, with 440,000 in training. In addition, the Apprenticeships, Skills, Children and Learning Act 2009 provides for a guarantee by 2013 of an apprenticeship place for all suitably qualified young people aged 16–18. The Government anticipates that one in five of all young people will be undertaking an apprenticeship within the next decade.
• Northern Ireland: An increase to 10,000 apprenticeship places by 2010.
• Scotland: An increase in the number of appropriate training places to 50,000 by December 2010.
• Wales: To significantly increase apprenticeships.

6.33 As well as taking numerical targets into account, we were also required by our remit to consider the rise in the education and training participation age in England from 16 to 18 between 2013 and 2015. It should be noted, therefore, that the increase in the number of apprenticeship starts in England during 2008/09 (shown in Table 6.2) was not reflected in all age groups. The rise was driven by a doubling in the number of apprenticeships aged 25 and above (up from 27,200 to 55,900). Falls occurred in apprenticeship starts for both the under 19 age group (down 8 per cent to 99,400) and the 19–24 age group (down 6 per cent to 84,700). Starts for these age groups were also down on planned volumes. This shortfall could be an impact of the recession and reflect the vulnerable labour market position of young people.

‘The full NMW should apply through the entire duration of apprenticeships.’

Communication Workers Union (CWU) evidence

Structure for the Apprentice Minimum Wage

6.34 This chapter now looks at the available data and research evidence on apprentice pay and the implications of this for the structure of the apprentice minimum wage. It also presents the stakeholder evidence we received on wage structure. Our views are given on the implications of all this evidence and we set out our recommendations.

Varying the Apprentice Minimum Wage Rate

6.35 This section looks at the relationship between existing apprentice pay rates and a number of factors, such as age, level and duration of apprenticeship. It then considers whether the apprentice minimum wage should vary according to one or more of these factors.

Variation in Apprentice Pay

6.36 Figure 6.3 uses LFS data for the UK to show how median weekly pay for apprentices varies by different factors. As expected, pay increases with year of study, age and level. Both the DIUS 2007 survey and research by IES (2009) for our 2009 Report showed that apprentice pay increased with duration of time in the apprenticeship.

‘We would like to see the apprentice NMW replicate the age-banding currently in place for the NMW…’

Equality and Human Rights Commission (EHRC) evidence

Figure 6.3: Median Weekly Pay for Apprentices, by Country, Age, Level and Year of Study, UK, 2008/09

Source: LPC estimates based on LFS Microdata, quarterly, four-quarter average, UK, Q4 2008–Q3 2009.

Note: Sample sizes were too small to present further breakdowns.

‘…we would like to see the new National Apprenticeship Rate set at around 90 per cent of the relevant National Minimum Wage Rate…’

Usdaw evidence

6.37 Pay also varies by gender. The median gender pay gap for the whole economy in April 2007 (based on the Annual Survey of Hours and Earnings) was 11 per cent. The gender pay gap for apprentices found by the DIUS survey for 2007 was 21 per cent. 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 for England in Figure 6.4. Our research for this report (Lawton and Norris, 2010) found that a minimum wage for apprentices would have most impact on the low-paying sectors, especially hairdressing, which had a high proportion of female apprentices.

‘The Society of British Aerospace Companies (SBAC) recommends…applying higher wage levels to Level 3 apprentices.’

SBAC evidence

Figure 6.4: Average Apprentice Pay Rates and Gender Split, by Sector, England, 2007

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

Stakeholder Views on Varying the Apprentice Wage Rate

6.38 The majority of stakeholders responding to the consultation suggested varying either the apprentice minimum wage rate or how the rate was applied. Age was most commonly cited by those stakeholders as the factor that should be used to vary the wage rate or its application.

6.39 Those suggesting that the wage rate should vary by age fell into two categories: the apprentice wage should equal the current National Minimum Wage rates; or the apprentice wage should reflect the age bands of the National Minimum Wage but at discounted rates. Other stakeholders saw the wage as being a single rate but that its duration could vary by age, mirroring the current apprentice exemption age bands. A further group supported a single rate and no variation in its application. Only a minority of stakeholders favoured linking the apprentice minimum wage to the level of apprenticeship.

6.40 The British Hospitality Association (BHA) was among those stakeholders who suggested that the apprentice wage follow the National Minimum Wage age banding. While UNISON favoured removal of the 16–17 Year Old and Youth Development Rates, it thought the simplest approach would be to pay apprentices the age rates of the National Minimum Wage.

6.41 Some trade unions, led by the Trades Union Congress (TUC), favoured having an apprentice wage based around the existing National Minimum Wage age bands, but with a discount. It saw the wage as only applying to those apprentices currently exempt from the National Minimum Wage. The Union of Shop, Distributive and Allied Workers (Usdaw), also proposed a discounted approach, based on the age bands.

6.42 Other stakeholders did not favour linking the wage rate to age. They were generally divided between those who argued for a flat or single rate for the wage, close to the Learning and Skills Council (LSC) weekly contractual rate, and those who argued for all workers and apprentices to be paid at the adult rate of the National Minimum Wage. The CBI, favouring the flat rate approach, thought that varying the wage would make the regime unwieldy and complicated, and it did not regard age as an effective proxy for productivity. The British Furniture Manufacturers also argued for one minimum level, on grounds of simplicity. The National Hairdressers’ Federation (NHF) said apprenticeships should be open to all and subject to the same wage requirements regardless of age. A number of trade unions, such as the National Union of Rail, Maritime and Transport Workers (RMT), and some youth organisations such as the British Youth Council, believed that the apprentice wage should be equal to the adult National Minimum Wage.

6.43 Some employer stakeholders thought that there was a need to give encouragement to apprentices to complete. The Newspaper Society (NS) suggested that there may be some justification in increasing rates during the training period, but related to skills acquisition, not time served. The Association of Learning Providers said the wage should not be varied by age but by level of competence. The Employers Forum on Age thought that if there were a case for maintenance of an exemption, then this should be available only for small employers in respect of apprentices aged 16–18, not those aged 19 and over or on Level 3 schemes. In all other circumstances apprentices aged 16–18 should be paid at a discount from the youth rates, and those aged 19 and over should be paid at a rate set as a replacement for the Youth Development Rate.

6.44 Research by Lawton and Norris (2010) found that apprentices preferred rates of pay based on ability, qualification, or year of apprenticeship, rather than age. The researchers found that of the employers interviewed (all were in the hairdressing and childcare sectors) who made use of the existing exemptions, there was a preference for a flat rate of (weekly) pay, and also for a single rate regardless of level or year of study.

‘Many nurseries…report that they could not afford to pay an apprentice an hourly rate when training in the early stages, especially if they needed to pay this both when in the nursery and when attending college.’

National Day Nurseries Association evidence

Our Recommendations on Varying the Apprentice Wage Rate

6.45 Age was a factor we needed to consider in designing the wage. We were required by our terms of reference to take into account government targets for apprenticeships, and the increase in the education and training participation age from 16 to 18 in England between 2013 and 2015. There will be a need to encourage greater provision of apprenticeship places for this age group.

6.46 The current apprentice exemptions from the National Minimum Wage already vary by age. Those apprentices aged under 19 are exempt from the minimum wage for up to 3 years, while those aged 19 and over are only subject to the exemption for the first 12 months of their training. We were mindful not to introduce an apprentice wage that would have the effect of reducing apprentices’ current expectations for entitlement to the National Minimum Wage.

6.47 The evidence shows that age, as well as level, year of study, and duration, are all factors that seem to explain differences and changes in pay rates for apprentices, but that on their own none is a good proxy for the differences. While most employers will wish to have a pay system that rewards achievement, acquisition of skills and higher productivity, such decisions are probably best left to local discussions, negotiations and determination. Any statutory wage system that sought to incorporate all this would be more difficult to administer, and be counter to our stated principle of making the apprentice wage simple and straightforward.

6.48 The apprentice minimum wage could be either a single rate or, as suggested by a number of stakeholders, vary by age in its application to apprentices. Many suggested mimicking the existing National Minimum Wage age bands, giving three rates. As with a single wage floor for apprentices, the key would be to identify the appropriate discount from the National Minimum Wage. This could either be a common ‘discount’ from the respective National Minimum Wage rates or a variable discount rate. But we saw a number of problems with either approach.

6.49 If a common discount rate is adopted, then this could have a disproportionate effect on current levels of pay by age. If a smaller discount on minimum wage rates is judged appropriate, then adult apprentice pay rates could increase to levels that would be likely to have an impact on provision. A larger discount, which would prevent older apprentices from becoming disproportionately expensive, could see younger apprentices on very low wages. If a varied discount rate was used, it could iron out some of these bumps but would add to the complexity of the wage and could be hard to justify in terms of the labour market position of the different age groups. There is a danger that the different discount rates could be seen as arbitrary and that having more than one rate would also add to complexity. We therefore saw merit in a single rate for the wage.

‘Most organisations [responding to an IMI questionnaire] considered that if a minimum wage for apprentices covered both time in the workplace and off-the-job training, employer participation in the apprenticeship programme would stay the same.’

Institute of the Motor Industry (IMI) evidence

6.50 Taking the evidence and the above considerations into account we recommend that the apprentice minimum wage be applied as a single rate to those apprentices currently exempt from the National Minimum Wage. That is all those under the age of 19 and those aged 19 and over in the first 12 months of their apprenticeship. The wage should cover both those employed on traditional contracts of apprenticeship and employed apprentices on government-supported Level 2 and 3 schemes.

Treatment of Training Hours

6.51 The DIUS pay survey for England estimated that on average apprentices spent 40 hours a week working and training. Our own estimate for the UK, based on the LFS, was that most apprentices worked and trained between 38 and 40 hours per week. It should be noted that young people, under the age of 18, cannot by law usually work for more than 8 hours per day or 40 hours per week.

6.52 As shown in Figure 6.5, the DIUS pay survey estimated that the average time spent by apprentices in England undertaking off-the-job training was three hours a week. This varied, from one hour a week in retail to six hours a week in engineering manufacturing. In the low-paying sectors, the most off-the-job training occurred in hairdressing, early years, and health and social care, at three hours a week. The amount of on-the-job training also varied considerably but it is unclear how different sectors define different types of training. Studies have also found that the quality of training varies by sector, with the highest paying usually having the highest quality (House of Lords, 2007; and Hughes and Monteiro, 2005).

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

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

‘…some sectors which are dominated by women…are less likely to offer payment for overtime….It is important that the NMW for apprentices is paid at an hourly rate as it will help to address the gender pay gap.’

EHRC evidence

6.53 Some apprentices are already entitled to a statutory minimum hourly rate of pay, and must be paid for training hours. That is, those aged 19 and over who have completed the first year of their apprenticeship, who are entitled to be paid at least the National Minimum Wage. Under the National Minimum Wage rules, a worker must be paid the minimum wage for time spent training in connection with their employment, at or away from their place of work.

‘There is evidence of some employers not paying for off-the-job training. Weekly pay gives the message that all work and training is covered.’

Department for Employment and Learning Northern Ireland oral evidence

6.54 The majority of stakeholders responding on this issue saw training, whether on- or off-the-job, as an integral part of an apprenticeship. Most saw the need for all such time to be covered by the wage, but some were concerned that making employers pay for off-the-job training may adversely affect the volume of such activity. Those favouring a weekly rate saw this as a mechanism to help avoid the complications and complexities, which they thought could arise if an enforcement regime needed to account for, and differentiate between, different types of training.

6.55 The Welsh Assembly Government (WAG) said that there should not be different rates for on- and off-the-job training. The UK Government said that any new arrangement should, like the current weekly rate in England, apply to all aspects of the apprenticeship framework, including work, and both on- and off-the-job training. It was concerned that other activities connected with an apprenticeship framework, such as being assessed or taking exams, might be affected if the wage was set on an hourly rather than a weekly basis and appropriate measures were not in place.

6.56 Those who thought that all training and work time should be treated the same and counted for the wage also included the trade unions CWU, Unite and the GMB. The Apprenticeship Ambassadors Network saw no need to differentiate between on- and off-the-job training, while the Sector Skills Council for Science Engineering and Manufacturing Technologies said both should be paid at the same rate. Among employer groups the Federation of Small Businesses (FSB) said apprentices should be paid while on training. Lawton and Norris (2010) found that the majority of employers interviewed who currently use the apprentice exemptions saw little benefit in not having to pay apprentices for time spent training off-the-job, although they mainly supported a weekly wage.

6.57 Stakeholders who thought that off-the-job training should be treated differently included the BHA. It supported having the apprentice rates at the same level and on the same basis as the age-related National Minimum Wage rates, but thought on-the-job training should be treated as paid working time and off-the-job training as not paid working time.

Our Recommendations on Treatment of Training Hours

6.58 While excluding some or all training from the apprentice wage would allow employers to offset the cost of the time apprentices spend away from the workplace, it would, we believe, be contrary to the concept that training is an integral part of an apprenticeship. It would also be difficult to distinguish in some instances what is on- and off-the-job training, and so would be hard to enforce. For this reason we do not favour different rates of pay for different types of training. Some stakeholders believed that unless off-the-job training was excluded or at a lower rate of pay, then a number of employers could not afford it and would cut back on training. We believe such an approach would add considerably to the complexity of the wage arrangements.

6.59 Including all hours of training, whether on- or off-the-job, would help to keep the system simple and should not present a significant burden to employers in the low-paying sectors, as off-the-job training time is generally more limited in these than in the higher-paying apprentice sectors. At present the weekly contractual wage in England already covers training and working time. Including all training hours would also be consistent with the current treatment of apprentices and workers entitled to the National Minimum Wage. There was widespread support from our consultation for this approach. We recommend that all hours of work and training (relating to both on-the-job and off-the-job) under an apprenticeship should be counted as hours for which the apprentice minimum wage must be paid. All hours should be paid at the same wage rate. We see training as including other related activities, such as being assessed or sitting exams.

Weekly or Hourly Pay

Stakeholder Views

6.60 The majority of consultation responses favoured an hourly wage. Trade unions that supported this approach generally based their view on the belief that the apprentice wage should either equal the current minimum wage age rates; be based on a discounted age rate; or reflect the hourly basis of the adult minimum wage. The TUC said pay should be by the hour as it would be fair to both employers and apprentices to link pay to actual working time.

‘A lot of young women in the area are looking at hairdressing as a career and likely to start as apprentices. They needed protection from exploitation.’

Rhyl City Strategy Group Commission Visit to Rhyl

6.61 Employer groups supporting an hourly wage saw it as consistent with the current minimum wage regime and having the attraction of simplicity and ease of administration. The British Retail Consortium, FSB and Business In Sport and Leisure supported an hourly rather than a weekly rate. The BHA supported an hourly wage if the apprentice rate was linked in some way to the National Minimum Wage. The majority of members responding to an Institute of Payroll Professionals survey also favoured an hourly rate.

6.62 The WAG said that the rules need to be easy for employers to administer. It favoured rates on an hourly basis. The UK Government said it was concerned that a move from a weekly wage (as in England) to an hourly rate would raise certain risks, such as employers only paying apprentices for hours engaged in productive employment. It advised us to address these risks in our recommendations.

6.63 The CBI was among those stakeholders that argued for a weekly rate, believing that an hourly rate would be more complex to enforce. A weekly rate removed the need for any differentiation between working and training. It emphasised that employers could only afford to pay for productive work. The British Chambers of Commerce (BCC) argued that the nature of apprenticeships did not lend itself to an hourly wage. This was due to the training and off-site work involved. It thought that employers might be put off taking on apprentices if calculating the wage becomes too complex.

‘Views from one group of unemployed young people were mixed. Whilst some felt that apprentices should be paid at the same rate as other workers, others thought paying apprentices a full wage could lead to fewer apprenticeship opportunities.’

Young People (Prince’s Trust) Commission visit to Cambridge

6.64 Lawton and Norris (2010) found a strong preference among apprentices for hourly rather than weekly pay. Conversely, they found the employers interviewed favoured weekly pay. But very few of the employers said they would change the amount of training (on- or off-the-job) in response to an apprentice minimum wage, even if it was paid on an hourly basis.

Our Recommendations on an Hourly or Weekly Apprentice Wage

6.65 Our remit asked us to consider arrangements for an apprentice minimum wage under the National Minimum Wage framework. Rates of pay under this framework are set on an hourly basis. To do otherwise for the apprentice minimum wage would require a change to primary legislation. We nevertheless considered the possible benefits of setting a weekly rate, but concluded that an hourly rate was the right approach. Apprentices aged 19 and over and who have completed the first 12 months of their apprenticeship are already entitled, under the existing regulations, to the hourly National Minimum Wage. A weekly statutory payment to a different group of apprentices would differ from the existing National Minimum Wage regime. An hourly wage would also provide a link between apprentice hours and pay and should help minimise any possible exploitation through apprentices being asked to work excessive overtime. We recommend that the apprentice minimum wage be set at an hourly rate.

Rate for the Apprentice Minimum Wage

6.66 In this section we look at how the distribution of pay varies between different sectors, age groups, and training levels. We also consider research evidence on the role of pay in incentivising individuals to start and complete apprenticeships, as well as employers to provide them. We set out stakeholder views on the rate and conclude by giving our recommendations on the rate and the timing for introduction of the apprentice wage.

Distribution of Apprentice Pay

6.67 In Figures 6.3 and 6.4, we showed how the average wages of apprentices vary across age, levels, year of study, and sector. But we are also interested in the distribution of pay, particularly at the bottom end of that distribution, in order to estimate the potential impact of a new minimum wage rate for apprentices. Using LFS data and the number of apprenticeship starts from administrative data, we estimate that around 38,000 (11 per cent) and 52,000 (14 per cent) of apprentices in the UK were paid below £95 and £110 per week respectively in the 2008/09 National Minimum Wage year. But this is likely to be an overestimate of current numbers as the annual data period includes only two months when the LSC rate in England was £95 per week (in the other ten months it was £80).

6.68 Figure 6.6 shows how, for England, the pay distribution of apprentices varied by age, level and sector in 2007. In particular, the overall proportion of apprentices paid less than £95 per week was 26 per cent, but the figure was as high as 67 per cent for hairdressers, 45 per cent for 16–17 year olds, 43 per cent for care workers, and 37 per cent for those at Level 2 (£80 per week was the contractual minimum at the time of the survey).

‘The Modern Apprenticeship minimum payment of £95pw in England…in effect provides a good practical guideline for the Apprentice National Minimum Wage.’

NHF evidence

6.69 It will be the apprentices at the lower end of the wage distribution who will be affected by the apprentice minimum wage. As we have seen, that will generally be those who are younger, and in the hairdressing and early years low-paying sectors in particular. We therefore need to consider the impact on apprentices in these groups and sectors, remembering that younger apprentices saw a fall in the number of starts in England during 2008/09. The apprentice wage will have little impact on apprentices in the more traditional higher-paying sectors such as engineering and electrotechnical.

Figure 6.6: Distribution of Apprentice Weekly Gross Pay, by Age, Level and Sector, England, 2007

Source: LPC estimates based on DIUS Pay Survey, England, 2007.

‘There is a clear need for a significant increase and a greater equalisation between the current recommended LSC rate and the National Minimum Wage rates…’

Usdaw evidence

6.70 The DIUS survey (Fong and Phelps, 2008) found that around 5 per cent of apprentices did not receive their entitlement to be paid at least the (then) £80 weekly wage, with the proportions higher in the lowest-paying apprentice sectors. Lawton and Norris (2010) discovered a lack of clarity and participant understanding around minimum wage rules for apprentices. The researchers concluded that introducing apprentice pay within the National Minimum Wage framework could help simplify pay arrangements and improve understanding and compliance.

‘Since the Learning and Skills Council apprentice minimum has already increased from £80/week to £95 this year (19%), with likely damaging effects on apprentice slots we advise against any further increase.’

Unquoted Companies Group evidence

Pay and Incentives for Young People

6.71 In addition to the pay data there are also research findings on apprentice pay and how this acts as an incentive for young people to take up and complete apprenticeships. We undertook an extensive literature review of existing research for our last report and commissioned our own research (IES, 2009). We have kept abreast of developments since then and also commissioned further research on apprenticeships (Lawton and Norris, 2010).

6.72 Apprenticeships involve a trade-off for young people between lower apprentice wages in the short term and higher wages and improved employment prospects in the longer term. A number of studies have substantiated the existence of these benefits for young people (McIntosh, 2007; and LSC, 2008 and 2009a).

‘…the LPC should recommend the establishment of 3 new age-based hourly rates…set slightly below the existing NMW rates’

TUC evidence

6.73 Pay is one factor influencing people to take up an apprenticeship (LSC, 2006 and 2008; and Wiseman, Roe and Boothby, 2003), but far from being the only or most important one, and a complex set of factors are at work in explaining completion rates (IFF Research, 2000; West, 2005; and LSC, 2008). Lawton and Norris (2010) found that although receiving a wage was a motivating factor for many young people starting an apprenticeship, it was rarely the only or main reason: for most, other factors, such as family influences, had a greater impact. Where apprentices considered pay important, Lawton and Norris found that it was the existence of a wage rather than its level that was important. The EMA was most commonly used as a point of comparison and apprentices would be satisfied if they received more in work than in full-time education.

6.74 Lawton and Norris (2010) suggested that there did not appear to be a strong case for introducing a minimum wage in order to increase demand from young people for apprenticeships: most places were oversubscribed. However, some evidence was found that a minimum wage might help to increase apprenticeship completion rates. Although low pay was not the primary reason for leaving, it was one factor when alongside low job satisfaction and poor quality training.

Pay and Incentives for Employers

6.75 In our 2009 Report we identified a number of studies that had looked at apprentice pay and the incentives for employers to invest in this type of training. Some sectors made widespread use of the current apprentice exemptions (LPC, 2009; and IES, 2009). Pay tended to be lower in these sectors, and any rise in wage costs would be likely to have an adverse impact on the number of apprentice places provided by these employers. Our 2008 Survey of Employers (LPC, 2009) found that, while for three-quarters of respondents the apprentice exemptions did not affect their decision to employ apprentices, hairdressing (53 per cent) and childcare (34 per cent) had the largest proportion of firms that were more likely to employ apprentices because of the exemptions. IES (2009) found that for some hairdressing employers their business model was heavily dependent on the ability to pay apprentices lower wages.

6.76 Lawton and Norris (2010) found that among the hairdressing and childcare employers interviewed, current pay levels were not seen as a barrier to the provision of apprenticeship places, but there was disagreement over whether low levels of pay contributed to relatively low completion rates. In hairdressing, employers were clear that a minimum wage for apprentices would reduce the number of places they offered (assuming a higher rate than currently exists).

6.77 While apprenticeships can be cost-effective (Hogarth, Hasluck and Daniel, 2005), the experience varies by sector. Some sectors had quicker returns on their investment than others. Later research (Hasluck, Hogarth, Baldauf and Briscoe, 2008) found that the net investment cost was greatest in engineering with a payback in less than three years, while it was least in retail with a payback in less than two years.

6.78 Cambridge Policy Consultants (2006) researched schemes in Scotland and found that the main impact of apprenticeships for employers was in relation to increased productivity. The research by McIntosh (2007) also provided an indication of higher future productivity returns, greatly exceeding the investment costs of employers and the state.

Stakeholder Views on the Rate

6.79 Four main approaches emerged from the stakeholder evidence we received: that the apprentice minimum wage should be a flat weekly rate, at or around the current LSC rate in England; that the wage should be a discounted rate of the National Minimum Wage age rates; that the apprentice minimum wage should equal the age rates of the National Minimum Wage; or that it should equal the adult rate of the National Minimum Wage (and in some circumstances be higher). The first approach was mainly supported by employer groups. Some trade unions, youth organisations, and a few employer bodies favoured the second approach. The majority of trade unions and youth organisations favoured either paying the age-related National Minimum Wage rates, or the adult rate of the minimum wage. Some employer groups were supportive of the apprentice rate being linked to the age rates. A few stakeholders suggested an hourly wage set at the 16–17 Year Old Rate of the minimum wage. A number of stakeholders did not give a specific rate.

6.80 None of the UK administrations expressed a view on the actual rate for the apprentice minimum wage in their written submissions, although in oral evidence the Government indicated that the increase in the contractual rate in England to £95 a week had been broadly supported. In written evidence, the Government said at a time of economic downturn it was important that employers were not discouraged from continuing to invest in training. It said the rise in the education and training participation age would require a significant commitment by employers to ensure that an apprenticeship was maintained as a mainstream option for all 16–18 year olds. The Government believed that in many respects the comparison for apprenticeship pay for young people was with the education and training market rather than the labour market.

6.81 The WAG said that there was a fine balance between ensuring a fair rate of pay for apprentices and not deterring employers from offering places. The Scottish Government previously called for removal of the exemptions and encouraged payment of the minimum wage to apprentices in Scotland. In evidence, the Scottish Government recognised the need to consider an apprentice minimum wage that reflected the in-training status of apprentices, but it would not want this to mean them living in poverty.

6.82 Among the stakeholders that suggested setting the apprentice wage at or around the current LSC rate was the BCC. It called for a rate of £100 per week for the coming year, to be reviewed thereafter at the same time as the National Minimum Wage. The CBI supported a very similar approach, proposing an apprentice rate of £95 a week. It emphasised the sensitivity of employer involvement to additional costs, noting that demand for places outstripped supply. It thought the Commission should take into account the impact of the apprentice wage on the training and employment opportunities for vulnerable young people.

6.83 The TUC was among those stakeholders that called for a discounted wage based on 85–90 per cent of the existing National Minimum Wage age rates. This would produce £3.00–£3.18 at age 16–17; £4.05–£4.29 at age 18 (plus age 19 and 20 in their first year of apprenticeship training); and £4.87–£5.15 at age 21 and above (first year of apprenticeship training only). Usdaw supported a discounted rate, at around 90 per cent of the age rates. Rathbone also proposed setting the wage as a set percentage of the National Minimum Wage rates, but at a discount which would produce a weekly wage around the level of the current £95 in England.

6.84 Some trade unions and other stakeholders called for apprentices to be paid the age rates of the National Minimum Wage. The YWCA preferred one rate long-term, but, until a time when the youth rates were removed, it said the fairest and simplest step would be to align the apprentice rates with the existing age rates of the National Minimum Wage. Among employer organisations, the FSB suggested paying all apprentices the 16–17 Year Old Rate of £3.57 an hour, while the NS said the apprentice rate should not be set above this level.

6.85 A number of stakeholders, including the RMT, Unite, the CWU, the National Union of Students, the National Youth Council for Voluntary Services and the youth committee of the Scottish Trades Union Congress called for apprentices to be paid the adult National Minimum Wage, without any age variation. GMB suggested rates that varied by age and rose over time in the apprenticeship, with some eventually reaching well above the adult minimum wage rate.

6.86 Some stakeholders explicitly raised the issue of the timing for introduction of the wage. The BHA was concerned that as the adult minimum wage will apply to 21 year olds from October 2010 (a 20 per cent pay increase for some), the apprentice minimum wage should be delayed until 2011 in order to avoid a second change at the same time. Usdaw argued that Britain would be out of recession by the time of introduction in October 2010, and that for apprenticeships to be appealing they needed a decent minimum rate.

Recommendations on the Rate

6.87 In earlier sections we recommended that the wage be set as a single hourly rate. In reaching our recommendations on what that rate should be, we were mindful of the range of evidence we have received over the past couple of years, including pay data, administrative data, research, government targets, and submissions from stakeholders. We were also focused on our remit from the Government, which included a requirement for us to take into account the need to ensure that a sufficient volume, quality and sectoral variety of apprenticeship places was available in order to meet government targets. This would be a particular priority in England for the youngest age group as the education and training participation age rises from 16 to 18 between 2013 and 2015. We were also required to take into account the effective functioning of the education market and young people’s choices, and how their apprentice wage entitlement would in future compare with the payment that could be expected through other learning routes.

6.88 Given our remit, the evidence we have on the likely impact of the apprentice wage, and that no minimum wage for apprentices currently exists outside of government-funded schemes in England, we decided that it was appropriate to take a prudent approach. We recommend the apprentice minimum wage is set at a rate of £2.50 per hour and is introduced from October 2010.

6.89 We do, however, recognise that there will need to be transitional arrangements put in place as apprentices in England move from a weekly to an hourly-based system. These are outlined below.

Transitional Arrangements

6.90 In its evidence the Government said we should consider the position of current apprentices who may be worse off when any new arrangements were implemented and consider appropriate transitional arrangements. In moving from a weekly-based to an hourly-based wage some current apprentices in England, in receipt of the existing minimum £95 wage, may find their weekly wage changes. This depends on the number of hours they currently work.

6.91 Some may find their weekly wage increases. One benefit of moving to an hourly rate is that apprentices who work long hours would be paid for their additional time. This should help address any exploitation of apprentices. And some stakeholders highlighted to us how unpaid overtime was often used in sectors over-represented by female apprentices.

6.92 However, other apprentices, currently receiving £95, could find their weekly wage reduces, again depending on the number of hours they currently work. This only affects apprentices in England (as no other country in the UK has a contractual minimum wage) and the overwhelming majority of apprentices are paid far more than the LSC minimum rate. It is our intention, however, that all current apprentices in England should receive at least their current entitlement to £95 per week. No current apprentice should be worse off. We recommend that in England transitional arrangements are put in place so that current apprentices retain a contractual entitlement to a minimum of £95 a week for the remainder of their apprenticeship or until they are entitled to the National Minimum Wage.

Apprentice Rate and the National Minimum Wage Framework

6.93 We have set out our recommendations on the rate and arrangements that apply to the apprentice minimum wage. The wage rate will operate within the National Minimum Wage framework, and like the other three minimum wage rates, will be regulated by those arrangements. Such arrangements include the treatment of what counts as minimum wage pay, the hours of work for which the wage must be paid, and the treatment of benefits-in-kind and accommodation. It also includes the handling of tips, which should not, in line with existing minimum wage regulations, count towards the apprentice minimum wage.

6.94 The apprentice minimum wage rate is a UK-wide wage floor for apprentices, below which no one’s pay should fall. Employers are free to pay more and many currently do, often through collectively agreed arrangements with their workforce. The Government and the UK devolved administrations can also, if they wish, specify better conditions in any contractual arrangements they have with training providers and employers.

6.95 We will of course wish to monitor the impact of the apprentice minimum wage rate, including how it operates within the broader National Minimum Wage framework. Our views on how we should review and evaluate the wage are given below.

Reviewing and Evaluating the Wage

6.96 We have designed what we judge to be a simple and robust framework for the apprentice minimum wage that will be straightforward to administer. We will wish to monitor its impact, including on the provision, take-up and completion of apprenticeships. It is appropriate that we keep the wage under review and we think it right to undertake this on an annual basis at the same time we look at and report on the other National Minimum Wage rates. We recommend that the Government includes the review of the apprentice minimum wage rate and arrangements in our annual terms of reference.

6.97 When reviewing the wage we will wish to use a number of monitoring measures. While data for some of these measures are available, for many they are either not available for all the countries of the UK or not available on the same basis across all administrations. As outlined in paragraph 6.8, we are working with the UK administrations to improve the available data on apprentice pay, and the work resulting from this should help fill many of these data gaps. For some measures, however, better collection of administrative data will be required. We therefore urge the UK administrations to look again at their current information on apprenticeships to see if they can assist by generating the data we will require. The range of measures we will wish to look at include:

• number of apprentice starts;
• amount of on- and off-the-job training;
• total hours of work and training;
• duration of apprenticeships;
• completion rates;
• level of apprenticeships undertaken;
• weekly pay of apprentices;
• levels of paid and unpaid overtime;
• sector breakdowns of all measures;
• race, gender and disability breakdowns of all measures; and
• whether employers are receiving a government wage subsidy.

6.98 We will also wish to gather, in line with how we monitor the other minimum wage rates, evidence on the awareness and understanding of the wage by employers and apprentices, as well as the effectiveness of the enforcement regime.

Conclusion

6.99 We have carefully set out the evidence, and our resulting conclusions and recommendations for an apprentice minimum wage. The available data on apprentice pay are limited and we are working with the Government and the UK administrations to improve it. But the data that are available suggest that we needed to be prudent in recommending the introductory level in respect of the likely impact of the wage in particular sectors and parts of the UK, which at present do not have any minimum apprentice wage arrangement.

6.100 The wage marks an important extension to minimum wage protection across the UK. It is one that we intend to closely review and evaluate alongside the other minimum rates in our subsequent reports. In the next chapter we look at compliance and enforcement of existing wage protection under the National Minimum Wage.