5.1

We were asked to monitor the effect of the National Minimum Wage on pay structures, including that on differentials and different pay systems, and the impact of the special rules for output work, unmeasured hours work and salaried hours work. We were also asked if there was a case for making any change to the accommodation offset. The evidence we received confirms, as we said in our second report, that in general 'the definition of the wage has been easily accommodated by business'. We consider the continuing definitional issues under three headings:

• the definition of a worker: i.e. who is eligible to receive the National Minimum Wage;
• the composition of the wage; and
• the definition of working time.
• We also report on particular problems which we found relating to the impact of the minimum wage in the social care sector.

5.2

In our second report we discussed concern about the coverage of disabled people and voluntary workers by the National Minimum Wage and we made recommendations in both areas. Our terms of reference for this report asked us to continue to monitor the impact of the minimum wage upon both groups. We received further evidence and we also commissioned research on the impact on disabled people.

5.3

In preparing our second report we found that there was confusion over which activities carried out by disabled people should be defined as work for the purpose of the National Minimum Wage. We noted that some of the work designated 'therapeutic' for benefits purposes was in fact similar to that undertaken in open or supported employment. People undertaking open or supported employment are entitled to the minimum wage. There were cases, however, where the activity was purely therapeutic rather than productive and was of no commercial benefit to the employer.

5.4

We recommended in our second report that the relevant government departments and agencies work together to produce, and widely disseminate, clear further guidance on what constitutes worker status for individuals undertaking therapeutic activity to ensure that they are not adversely affected by confusion about the legal position. We also recommended that the Government should review the guidance on benefits for workers with disabilities who were in receipt of 'therapeutic earnings', with the aim of making it more coherent and accessible.

5.5

We are pleased that the Government accepted both of our recommendations. The Government published new guidance in December 2000, following consultation with 16 interested organisations. This gives illustrative examples using case studies provided by the organisations. It also includes information on the benefits system and therapeutic earnings. The new guidance is sent out by the National Minimum Wage Helpline if callers raise the issue of therapeutic work and is included on the Government's National Minimum Wage website at www.dti.gov.uk/er/nmw/therapeutic.pdf. The Government's evidence indicated that it had increased the therapeutic earnings limit for Incapacity Benefit and Severe Disablement Allowance in October 2000 to take account of the increase in the minimum wage.

5.6

Evidence we received before the new guidance was issued shows the concern felt about which activities carried out by disabled people should be defined as work for the purpose of the minimum wage. Cheshire County Council described the lack of clarity surrounding therapeutic placements. Other evidence described disabled people carrying out activities which were regarded as neither therapeutic activity nor work and suggested the need for a third category. Mendip Vale Workshops described people with a history of mental illness who might not qualify for therapeutic activity but were not yet able to move into normal employment. Another organisation, Making Space, suggested there should be three groups. The first would be people engaged in purely therapeutic activity, who would be exempt from the minimum wage. The second would be people able to hold down a job with support, who would be covered by the minimum wage. The third group would be people who could respond to appropriate training and might be able to assist in the manufacture of goods or the provision of services but who — it was suggested — should not be covered by the minimum wage.

5.7

The TUC, however, considered that those undertaking paid employment which included some therapeutic element were clearly workers. The GMB accepted the exclusion of purely therapeutic work but argued that an exemption from the minimum wage was not the solution in other cases.

It was not clear if the underlying problem which had caused some employees to reduce their hours or stop working was benefit withdrawal coming into play. ... this is an issue to be addressed by the benefits system and not by an NMW opt-out. Where the underlying problem is low productivity, a better course of action would be, firstly, to ensure that employers are making adjustments to jobs and workplaces to make their employees productive as required under the Disability Discrimination Act. Secondly for the government to look at subsidies to employers of workers with disabilities where their disability affects productivity. GMB evidence

5.8

We are not persuaded that an exemption would be in the interests of disabled people. The further guidance issued by the Government indicates that there will always be difficulty in establishing the employment position of people who are not in the general labour market or who are gradually being introduced to it. We are pleased, therefore, that the Government has invited interested organisations to provide feedback on the guidance. In our future monitoring we will be interested to see how the guidance has operated in practice.

5.9

We also considered the impact of the minimum wage on disabled people in supported employment. The Supported Employment Programme has provided employment for disabled people who, because of the nature or effects of their disability, have difficulty in securing and retaining work without practical or financial support to them or their employer, but who are able to make an effective contribution to the employing organisation. Workers in supported employment are covered by the National Minimum Wage. In our second report we noted that the evidence submitted by several agencies involved in supported employment reported inadequate increases in government funding to cover additional costs caused by the introduction of the minimum wage. We recommended, therefore, that, where necessary, the Government should fully meet the additional costs caused by the minimum wage to the Supported Employment Programme.

5.10

The Government's response to our recommendation was that questions of funding were outside our remit and subject to wider resource decisions, but that it would review the question of supported employment in the light of the issues raised in our report and by organisations such as MENCAP. The Government's evidence to us added that a small increase in the supported employment grant in 1999/2000 was made to offset the introduction of the minimum wage, and that there was no evidence of widespread opposition among providers to paying the minimum wage.

5.11

In April 2001 the Government introduced substantial reforms to the Supported Employment Programme, which is now known as WORKSTEP. The changes represent a shift of emphasis from compensating for limited productivity to improving employability and progression to mainstream employment. The new eligibility criteria focus on disabled people who are claiming Incapacity Benefit or Severe Disablement Allowance or who are long-term unemployed. The position of people who joined the programme before the implementation of these changes will be safeguarded. All those already on the programme, or who join WORKSTEP, will have contracts of employment, will be covered by the minimum wage, and will be paid the same wage as non-disabled colleagues doing the same or similar work.

5.12

Research which we commissioned for this report, and evidence we have received, give a mixed picture of the impact of the National Minimum Wage on supported employment. We describe the evidence and research in Appendix 2. We believe it is important that the opportunities available to disabled people to enter supported employment should not be adversely affected because of their entitlement to the National Minimum Wage. The research and evidence suggest that this may already be happening. In our view, if early action is not taken to address this problem it will present an increasing threat to the success of the Supported Employment Programme. We are pleased that the Government made additional funding available for supported employment in 1999/2000. We believe that the Government should do so again and that it should also provide reassurance to employers about how the Supported Employment Programme will work in future.

5.13

Genuine volunteers are not entitled to the minimum wage. The Government made its intentions clear, as we noted in our second report, when it consulted on the draft National Minimum Wage Regulations. The Government stated that 'most volunteers will automatically be excluded from the Act, because they are not covered by the definition "worker", due to the absence of any intention to enter into legal relations and the resulting absence of a contract'. Section 44 of the National Minimum Wage Act 1998, which was drafted in consultation with voluntary organisations, creates exemptions for voluntary workers. Because some uncertainty remained, we recommended that the Government should issue further detailed guidance on the definition of a worker geared specifically to the needs of the voluntary sector.

5.14

The Government accepted our recommendation. Detailed guidance had been produced in 1999 by the National Centre for Volunteering and the National Council for Voluntary Organisations with the co-operation of the Government. In addition, the Department of Trade and Industry's Detailed Guide to the National Minimum Wage (October 2000) includes further information on voluntary workers as does the Government's website Tailored Interactive Guidance on Employment Rights (TIGER) at www.tiger.gov.uk. The Government's evidence added that all Inland Revenue National Minimum Wage compliance officers and Helpline operators received further technical training during Summer 2000 which covered the legal issues which can be raised by 'voluntary work'.

5.15

In preparing this report we received evidence that there is still some concern about the impact of the National Minimum Wage on voluntary workers. Some submissions commented that further clarification of the scope of Section 44 of the Act would be helpful. Other organisations, while reaffirming support for the National Minimum Wage, would like to make monetary payments which might fall outside the Section 44 exemption for voluntary workers and which would be lower than the minimum wage. Some submissions favoured a change in the law.

5.16

A variety of situations was described to us. The Churches Main Committee asked whether some rewards for services in cash or kind, perhaps made at regular intervals — for example, to organists and people running mother and toddler groups — might, if they did not constitute genuine 'honoraria' and did not come within Section 44, be regarded nevertheless as inappropriate for the application of the minimum wage. The Methodist Church suggested that full-time volunteers should be able to receive subsistence payments without creating entitlement to the minimum wage, and it should be possible for people working for community groups to be paid small amounts of money. The Religious Society of Friends considered that the needs and practices of religious, voluntary and charity groups should be accommodated more carefully in the provisions of the Act. The National Centre for Volunteering argued that 'the framework of the minimum wage legislation does not reflect the ethos of volunteering or the reality of the volunteering sector. In practice there are almost no "pure" volunteers receiving only direct expenses — almost always, the relationship between volunteer and organisation includes at least some sort of benefit in kind. Likewise, there is almost always some form of agreement about mutual expectations, even obligations.' Relate Derby & District wanted to 'see recognition that people may choose to both work and volunteer for the same organisation — and if this is the case they should be allowed to maintain that choice, without the organisation or the individual being penalized'.

The Act has made a clear polarisation between employees and volunteers, assuming they are the two main categories … . The idea of Christian duty or community service … does not fit neatly into either the employment or volunteer categories … . We find it unfair, that if a … community minded person offers their services to the church, we are unable to provide living expenses as well as accommodation … . Often these people see this as part of their religious commitment and aspire to a simple lifestyle. It is important to distinguish this from an employment situation. The Methodist Church evidence

5.17

We understand the concerns expressed to us, and we certainly do not wish to discourage genuine volunteers. At the same time, we do not want Section 44 of the National Minimum Wage Act used as a loophole to avoid compliance, disadvantaging workers who should be paid the minimum wage. The Act does not allow workers to contract out of entitlement to the minimum wage: this is an important safeguard for workers. If there were an exemption for voluntary workers being paid small amounts of money, it is unclear how they could be distinguished from other workers who were entitled to the minimum wage but were being underpaid.

5.18

The Government's evidence stated that they were aware of concerns about the impact of minimum wage legislation on the voluntary sector and that they 'will continue to engage with representatives of the voluntary sector'. We welcome this continued dialogue which may prove a fruitful way of considering how the guidance already issued can be further clarified to reduce uncertainty about the scope of Section 44 of the Act. We hope that the Government will, as part of these discussions, examine with the voluntary sector how far the concerns which have been raised with us can be met within the framework of the current legislation.

5.19

In our second report we concluded that the definition of the minimum wage was 'simple and fair, easily enforceable and consistent with the needs of business and the low paid'. We received written evidence, and comments from respondents to our own survey, on three main issues: the accommodation offset, tips and gratuities, and the impact of the National Minimum Wage upon incentive schemes in the clothing and hairdressing industries.

5.20

In our first two reports, and the special report on accommodation in March 1999, we established the following principles about the accommodation offset:

• the offset is not intended to reflect either the commercial value of the property or the cost to the employer of providing accommodation. It is meant to protect employees from exploitation, whereby a worker could lose all or most of the benefit of the National Minimum Wage through high accommodation charges;
• the offset covers only the provision of accommodation, not meals or 'board'. This is to keep it in line with the general National Minimum Wage definition, which excludes the value of meals (for example, free or subsidised meals or luncheon vouchers); and
• the level of the offset should be derived from a balanced judgment based on a range of evidence.

5.21

In our first report we said that 'for employers, the advantage of providing accommodation is that it helps ensure workers are on the premises. For workers, the advantage is that convenient accommodation is available, reducing their costs and preventing problems in locations where finding accommodation can be difficult.' We were concerned that employers might transfer the accommodation charge from a benefit-in-kind to a cash charge to the worker. We therefore recommended that an offset should be allowed where accommodation is provided as a benefit-in-kind. In order to protect workers from unreasonable charges, we recommended a maximum deduction figure of £20 per week. Following a request by the Government, we submitted a further report on this issue in March 1999. We recommended no immediate change to the rate of the accommodation offset but recommended that we should monitor its use and impact and report on its future application in our next report.

5.22

The National Minimum Wage Regulations laid down an hourly rate of 50p or a daily rate of £2.85 for the accommodation offset. The employer must use whichever is the lower. In general, the hourly rate calculation applies to those working fewer than 40 hours per week and the daily rate to those who work more than 40 hours. Whichever rate is applied, a total maximum offset of £19.95 per week is set.

5.23

In our second report, which did not make any recommendations on the level of the minimum wage, we also recommended no change in the offset figure but said that we should consider this again when we recommended a new National Minimum Wage rate. We also recommended that the Government should investigate whether the Regulations relating to the offset could be simplified. In its evidence to us, the Government wrote that it had 'looked into simplifying the Regulations regarding the application of the accommodation offset but concluded that any simplification would be at the expense of fairness'. The Government pointed out that the Detailed Guide to the National Minimum Wage had been amended to make the treatment of accommodation clearer and that TIGER, at www.tiger.gov.uk, has a ready reckoner which calculates the offset automatically.

The Association believes that the continued low rate of accommodation offset at a maximum of £20 a week is still far from in line with actual costs of housing a worker. We believe this to be the case nationally and feel that our argument is simply greatly exaggerated when considering the cost of accommodation in London and other major cities and towns. We recommend a more realistic figure of £40—£50 a week. Association of Licensed Multiple Retailers evidence

5.24

The evidence we received from employers called for a considerable increase in the level of the offset to between £40 and £60 per week. They argued that this represented a realistic level reflecting either the cost to the employer or the commercial rent that could be obtained. In contrast, the GMB suggested freezing the allowance at its current level. The complexity of the calculation of the offset was also raised with us.

5.25

Some employers argue that the current level of the offset discourages them from providing good quality accommodation or, indeed, any accommodation. The emphasis in the employers' evidence is generally upon the advantage to the employee of provided accommodation rather than the advantage to employers. But one employer commented in his evidence that 'by the very nature of our business serving breakfast, lunch and dinner we work strange hours, it is vital to our business that staff can walk from their accommodation to work'. We also note that some employers make no charge for accommodation because it helps recruitment and retention.

5.26

Some employers argue for a more differentiated approach, with the deductor varying according to factors such as quality of property provided, the geographical location, or whether provided on site or externally. For example, the Churches Main Committee pointed out that 'the National Minimum Wage legislation allows only the same accommodation offset regardless of the size and quality of the accommodation provided: this does not seem right'.

Low Pay Commission Research In response to the research we commissioned in the hospitality sector, one hotel manager said 'the fair rate depends on the accommodation. Most [is] awful to be truthful. Ours are three brand new houses on the estate. Maximum of four people and they are all four bedroomed houses. If you look at how much it is to rent things down here we are very reasonable.' One hospitality manager said 'we give it to them free because we expect them to live in as part of their jobs. We need them to be on-hand. We think it is important for them to be close by, to be on call'. Another hospitality manager said 'I think £20 is cheap. Yes, I am in a position to increase it if I wanted to but the point is to provide accommodation for staff that you want to work for you, that you want to bring into the business, so there is no point trying to stitch people up'. Adam-Smith et al., 2001. The Impact of the National Minimum Wage in the Hospitality Sector

5.27

A differentiated approach, however, would conflict with our guiding principle of simplicity and would be difficult to enforce. Some employers already argue that the calculation of the offset is too complex and further complications might make this worse.

5.28

The written and oral evidence also indicates some particular problems with accommodation provided by both landowners and the churches. The Country Landowners Association maintained that 'those who may be affected worst are retired workers who would have been allowed to remain on an estate in what has been their home for years in return for small number of hours or caretaker duties'.

5.29

We also met a delegation from the churches who said that, while they welcomed the introduction of the National Minimum Wage, the limited amount allowed for accommodation has led to significant problems for some organisations. If wardens or caretakers who have been provided with a house or flat plus a minimal income as recompense for religious service are defined as workers, they have to be paid the National Minimum Wage. The accommodation issue is, for the churches, therefore generally part of a wider issue of how far the minimum wage applies to volunteers, voluntary workers and those engaged in religious activity, which we considered earlier in this chapter.

5.30

The largest numbers of employees living in tied accommodation are found in public administration and defence (e.g. caretakers and security staff) followed by health and social work (e.g. nurses). Around 2 per cent of hospitality workers are in receipt of tied accommodation. The vast majority of those in receipt of accommodation are aged 21 and above.

In other areas of the leisure and hospitality industry members are moving away from providing accommodation, although in areas like the South East the provision of accommodation is often a requirement for attracting staff, particularly those with families. Business in Sport and Leisure Ltd. evidence

5.31

Our research indicates that most workers in receipt of accommodation are paid above the minimum wage, which means that they can be charged more than the accommodation offset. In our own survey, only 12 of the 905 hospitality firms which responded mentioned the accommodation offset. In the Portsmouth research (Adam-Smith et al., 2001), most employers, when asked specifically about the level, said it was too low.

5.32

Despite the generally low (and declining) incidence of employer-provided tied accommodation, we recognise that it continues to be important to workers and employers in some sectors. And there are examples of people doing similar jobs for a similar wage but where one occupies company accommodation while another makes personal provision. Employers consider it important to be able to offset some of this additional benefit in order that the arrangements appear more equitable.

Since accommodation is occupied on a daily basis, there is no justification for the complexity of the offset being limited to the lower of '£x per day or y pence per hour'. The only limit should be a daily limit for each day the accommodation was available. British Hospitality Association evidence

5.33

Our intention, however, has never been to compensate employers for either the value of the property or the cost of providing it, but to allow them some recompense while protecting employees. Although the accommodation offset has remained at the same level since it was introduced in April 1999, both the main and the Development rates have been increased. The adult rate will increase again in October 2001, and we recommend a new rate for young people in this volume of our report. We consider, therefore, that the level of the offset should also now be increased. In recommending an increase, we have sought to retain the balance between providing employers with a reasonable amount which they can deduct in respect of accommodation while not reducing the value of the minimum wage to workers. We have therefore decided to recommend that the level of the offset should be increased by the same amount as the increase in the main minimum wage rate between April 1999 and the new rate in October 2001. We therefore recommend that the accommodation offset be increased to a maximum weekly amount of £22.75 or £3.25 per day.

5.34

We also received evidence suggesting that the rules about the treatment of tips and gratuities should be reconsidered. The research we commissioned from Adam-Smith et al. (2001) indicates that there are three main types of tipping arrangements:

• cash tips given to the worker direct, for example those left on the table;
• a central 'tronc' in which staff pool all tips and then distribute them on an informal basis; and
• tips collected centrally by the employer, for example via a service charge, and distributed to staff through the payroll.

5.35

At present neither cash tips nor tips distributed informally by the staff count towards the National Minimum Wage calculation because they are provided by the customer to the worker and are not part of the remuneration from the employer. But tips collected centrally and paid out through the payroll can be included within the National Minimum Wage calculation.

5.36

We received written and oral evidence on this topic from the British Hospitality Association (BHA), the Brewers and Licensed Retailers Association, the British Activity Holiday Association and the Restaurant Association. The BHA argued that 'both tips paid by the employer through PAYE and those paid by a tronc master should count towards the National Minimum Wage. Cash left "on the table" could be treated in the same way as in the USA with the amount assessed at a set sum per hour, counting towards the National Minimum Wage. The Commission's [view] is understandable, but fails to take account of the wide range of tipping practices.' The BHA went on to say that 'people who receive tips ... regard them as part of their income'. Whitbread made the same point and argued that tips should, therefore, count towards the National Minimum Wage calculation. The Restaurant Association told us that the treatment by the Inland Revenue of tips collected through a tronc system was leading to confusion among employers because the tax, National Insurance (NI) and National Minimum Wage rules were different.

Some companies in the leisure and hospitality industry have a commission structure, but many have a base rate and staff are expected to make up additional pay through tips. If tips do not make up the hourly rate, the company tops up the pay. It has cost one leisure company between £2 and 3 million to introduce the National Minimum Wage due to the change in calculation of pay ... . The current system in the UK is complicated and causes many misunderstandings with employees. Business in Sport and Leisure Ltd. evidence

5.37

There seems to be some misunderstanding among employers about both the purpose of the minimum wage and the tax and NI treatment of tips and gratuities. While the Inland Revenue treats all tips as 'income' for taxation purposes, this does not imply that the money is remuneration from the employer and hence covered by the National Minimum Wage. The purpose of the minimum wage is to provide a wage floor, not a minimum 'income'.

5.38

Cash tips left on the table by customers are seen as 'emoluments' by the Inland Revenue and must be declared by the worker in the same way as all other income, such as interest from bank accounts. Where a tronc system is run by an employer, the Inland Revenue guidance is that all tips and gratuities must be included 'in the amount paid to each employee in their gross pay' and PAYE deducted accordingly. In restaurants where the tronc is run by the staff, the troncmaster is responsible for operating PAYE on payments received from the tronc.

5.39

The NI scheme's treatment of tips does not follow the same principles. Neither employer nor employee NI contributions are payable on tips left on the table. In the case of the tronc system, the Inland Revenue makes a clear distinction in the case of those run entirely by staff, which are seen as an extension of the principle applied to cash tips on the table, and hence NI is not payable. The Inland Revenue requires contributions to be paid on tips only where the money passes through the employer's hands and where the employer decides on how the 'tronc' is to be distributed. Once the tips are collected and distributed by the employer they constitute remuneration for the purposes of NI contributions.

5.40

We conclude therefore that the tax treatment of tips is irrelevant to whether or not they form part of the employer's remuneration for National Minimum Wage purposes but that the NI treatment of tips is important in making a distinction between remuneration — passing through the employer's hands — and the distribution of tips by the employees themselves.

5.41

There is also evidence from our research that the income from tips among workers may vary considerably and many receive very little. While tips are an important element of total income in many restaurants, elsewhere they are less important. Adam-Smith et al. (2001) found that 'bar workers and housekeeping staff were likely to receive little over and above any that were centrally distributed. Indeed, several of those interviewed claimed that they received nothing by way of tips.' Smaller business proprietors confirmed 'that many of their workers would not receive anything by way of tips and even if they did, the amounts would be small'. The research found not a single manager in the establishments surveyed who was in favour of including tips as part of the National Minimum Wage.

Low Pay Commission Research Research we commissioned in the hospitality sector reported strong views from some managers about tips. One hospitality manager said 'I think it is scandalous to think tips should be part of the minimum wage. Whatever they get is entirely down to them'. Another hospitality manager told the researchers 'tips are there as a gratuity that are rewarded and earned through delivering service. It should be a minimum rate for what the services are by an employer and anything on top is a bonus to yourself for providing above and beyond that service ... people should not be penalised on their basic rate for giving great service'. Adam-Smith et al., 2001. The Impact of the National Minimum Wage in the Hospitality Sector

5.42

We remain of the view that the current system, whereby only money collected centrally and distributed through the payroll is allowable against the National Minimum Wage, is fair. The assessment for NI contributions, not the deduction of tax, appears to be a basic test of whether this has happened or not. The Restaurant Association told us that some employers were not clear as to what tips could be included under the term 'payroll'. The Government may wish to look at the clarity of the Regulations and guidance about the treatment of the tronc system, so that employers are clear.

5.43

We received evidence from both employers and trade unions about the operation of incentive schemes in the clothing and textiles industry and the hairdressing sector. The main issue for employers appears to be the effect of the National Minimum Wage definition upon incentives. Workers who are paid by their output must be paid at least the minimum wage. In our first report we recognised that variable incentive pay, such as piecework, is an essential part of some industries' payment systems and that employers should be able to include incentive payments in the minimum wage. We also recommended that the National Minimum Wage should be averaged over a pay reference period to cater for fluctuations.

5.44

There is evidence that in some sectors employers are adapting their payment systems. The GMB commented that in clothing and textiles 'there has been some consolidation of piece rates' and that there has been a move away from individual piecework towards team-based systems. The union considers that 'the NMW has been a positive factor in encouraging such moves'. IDS research (2000b) on the clothing and textiles sector found that the minimum wage had caused some firms to 're-examine their piecework payments systems and to look for a system with a higher proportion of guaranteed earnings'. Our own survey of employers in the textiles sector showed that of employers who used an incentive system, only 15 per cent said that the National Minimum Wage had significantly reduced productivity, with a further 19 per cent reporting a slight reduction. Four in ten said that motivation had been reduced, with 22 per cent reporting a significant reduction. In their evidence to us the National Hairdressers' Federation (NHF) and the Hairdressing Employers Association (HEA) expressed concern that differentials supported by productivity and performance criteria were being eroded. They reported that this reduces the incentives available to encourage and reward better workers.

5.45

In our second report we recommended that the Government should provide specific guidance to emphasise the difference between 'sleepovers' and 'on-call' and 'standby' arrangements. The Government subsequently amended the Regulations to provide that an employer does not need to pay the National Minimum Wage for the time a worker spends asleep under these arrangements as long as the worker is 'provided with suitable facilities for sleeping'.

5.46

We also recommended that the regulations on travelling time should be changed to make clear that workers travelling between work locations during their working time must be paid the National Minimum Wage for this travelling time. The Government accepted this and amended the Regulations. The issue was raised with us again in consultation for this report. We were told that fee income from local authorities did not reflect the increased cost of paying domiciliary care staff for time spent travelling between assignments. The United Kingdom Home Care Association reported that some local authorities would only pay providers for contact hours, not travel time. Some authorities were also starting to specify more, shorter visits instead of fewer longer ones. The Leonard Cheshire Foundation also expressed concern about this.

5.47

We received evidence from several organisations about the pay reference period. The major issue concerned fair estimate agreements for output workers. In preparing our second report we received some evidence that employers found it difficult to apply the requirement for a fair estimate of working time where a worker is paid entirely by output. Research by the National Group on Homeworking (NGH) indicated that the fair estimate agreement had not been widely used and, where it was, it had either been misunderstood or abused to avoid payment of the National Minimum Wage. We commented that the evidence to date did not point to any immediate need to revise the Regulations, which were straightforward. We suggested, however, that the application of the fair estimate agreement should be kept under review with the aim of ensuring necessary protection is provided to workers while minimising burdens on business. The Government's evidence indicated that it is fully aware that applying an hourly minimum to output work with no fixed hours of work 'was never going to be straightforward'. In response to the suggestion in our second report, the Government thought that the legislation had dealt with the issue effectively but agreed that it should be kept under review.

In most cases, fair estimate agreements (FEAs) are not agreed on an individual basis but are imposed on homeworkers across the board. Many do not contain all the elements of a FEA, as set out in the NMW Regulation 25. Where FEAs do appear to contain all the necessary elements, the estimated number of hours shown usually do not appear to have been calculated with any reference to the rate at which it would be reasonable to expect the homeworkers to do the work … . The imbalance of power between a homeworker and the supplier of their homework is such that homeworkers are usually not in a position to argue that the NMW is not achievable by reference to the piece rate offered to them. National Group on Homeworking evidence

5.48

Research by NGH for this report found that of the 100 homeworking jobs surveyed which were paid according to output, only 6 were covered by a fair estimate agreement. None of the homeworkers concerned had 'genuinely agreed' to its terms and only one was regularly able to earn the minimum wage following the introduction of the agreement. In its evidence NGH made a number of suggestions regarding fair estimate agreements, which appear to be mainly operational. We hope that they will be tackled as part of the forthcoming pilot project on minimum wage compliance and enforcement in homeworking established by NGH and the Government, which we described in Chapter 4, and we will follow the project's progress with interest.

5.49

When we met homeworkers in Yorkshire they told us that employers' estimates of how much work they could do in an hour were so unfair that they were being paid £1 or £2 per hour. NGH suggested to us that the Regulations on fair estimate agreements be amended to ensure that the piece rate in these agreements should relate to the hourly rate of the National Minimum Wage. While we were in the later stages of preparing this report we also received evidence from one employers' organisation proposing an amendment to the Regulations on fair estimate agreements. We were told that of a small sample of 14 member companies which employed homeworkers, none made use of fair estimate agreements: 5 companies were unaware of them while another 5 described them as unworkable for various reasons. All 14 employers paid piece rates. The general practice seemed to be for workers to be paid a piece rate which was based on the estimated time for completion of the work, and the rate for the piece was the relevant fraction of an hourly rate. Based on that estimated time, most of the workers in the sample were paid between £3.70 and £4.25 per estimated hour, though some were paid less. The employers' organisation suggested that the National Minimum Wage Regulations be amended to allow payment to be calculated on this basis, with the hourly rate equal to the minimum wage. This proposal was made too late for us to consult fully with workers' representatives and with other organisations of firms who employ output workers. We have not, therefore, been able to form a view on the merits of this specific proposal. In view of the range of evidence we have received about fair estimate agreements, however, we recommend that the Government should consult representatives of output workers and their employers to see whether there is a case for a change in the Regulations on fair estimate agreements.

5.50

There was also some concern about the application of the pay reference period in sectors where there are seasonal fluctuations in hours. One leisure organisation reported that the minimum wage had led them to 'radically re-arrange our contractual arrangements with our Site staff'. It said that for certain of its staff, who work from March to October, it is 'difficult to conform to the required hours within a four week period'. In July and August these staff are available almost continuously. When calculating the minimum wage this reduces the hourly rate considerably. We note, however, that other organisations, when faced with similar situations, overcome the problem by the use of the 'unmeasured hours' calculation (i.e. a fair estimate). We conclude that some employers are not aware of the potential for using this calculation. The Government may wish to consider publicising this aspect of the Regulations more widely.

5.51

We also received evidence from the GMB about the weekly reference period for time workers receiving piece rates. The union argued that workers' 'earnings can be depressed for no fault of their own to basic hourly rates less than the NMW for days at a time (notably in the clothing sector because of machine breakdown or waiting time). High productivity during the rest of the week, once the problems are resolved, is then not rewarded in the pay packet.' Of course, employees must receive at least the National Minimum Wage for all hours worked during the pay reference period. The National Minimum Wage Regulations merely reflect the existing practice under collective agreements in the clothing and textiles industries, whereby there are often 'fall-back' guaranteed minimum rates payable in such circumstances. The GMB has gone some way towards negotiating daily and hourly make-up in many firms but it claims that its members feel that 'this is a loophole, a means of legal exploitation by employers'. While we understand the GMB's argument, we consider that this is not an issue upon which we should make recommendations and that such guaranteed earnings protection for workers — over and above any statutory guarantee payments to which workers may be entitled — is a matter to be decided between employers and workers.

5.52

In general, we believe that the Regulations about workers, pay and working time are working well. In their evidence to us, the GMB wrote that 'in general, we believe that the rules for different types of work have worked well. This includes the rules for salaried hours work, which we lobbied for on behalf of term time only and annualised hours workers. Contracts have not had to be "unpicked" as a result of this method of calculating the NMW.' And the British Retail Consortium's evidence confirmed that 'due to its careful composition, the introduction of NMW has seen only very limited changes in retail wage structures'.

5.53

We referred above, in the context of the treatment of travelling time, to the impact of the minimum wage on the social care sector. In preparing this report it has been clear that the effect of the minimum wage on this sector is magnified by the reliance of very many employers on publicly funded clients. In the concluding section of this chapter we report on this issue in more detail.

Most members are reliant on the Local Authority purchasing care from them, and the increase in fee levels paid by the Local Authorities have not matched the increase in costs brought about by the introduction of the National Minimum Wage. Lincolnshire Association of Registered Care Homes evidence

5.54

In our second report we noted that the main issue for the social care sector was the adequacy of local authority fees. Although the minimum wage was a factor in the financial settlement under the Government's Comprehensive Spending Review, authorities had not necessarily adjusted fees accordingly and some companies were accepting low fees to remain in business. But we noted that this approach is not sustainable. The funding of residential care is an important issue to be addressed by the Government to ensure both quality care for those who need it and an adequate level of remuneration for workers in the sector. We recommended, therefore, that the Government should ensure that adequate funding is made available to meet the additional costs caused by the introduction of the National Minimum Wage in social care. The Government responded that questions of funding were outside our remit and subject to wider resource decisions, but that it would continue to take account of all the cost factors affecting social care, including the minimum wage, when deciding future spending.

It was the general view of Network members that local authorities are by far the largest customers of independently provided care. ... In areas of lower incomes where there are no self-funding clients in care homes, there is virtually a monopsony. Independent Care Organisations Network

5.55

In some areas there is over-provision of residential care while in other areas there is under-provision. In addition, public funding has become more important to the sector in recent years. By 2000 the proportion of places in independent residential care and nursing homes in England which were filled by residents supported by local authorities had reached nearly 50 per cent and 40 per cent respectively. We recognise the considerable pressures which are placed on local authority resources, and that the Government announced increased funding for social services in the 2000 Spending Review. We were told, however, that local authority fees commonly do not contain recognition of the quality or cost of care provided, and that some contracts are awarded mainly or solely on price. Some private sector providers suggested to us that those offering a good quality service risk being undercut by providers achieving lower cost by offering lower quality. This was particularly likely in areas where there is over-provision of care home places. The Lancashire Care Association, for example, told us that if a council pays the same fees whether a home provides good quality care or only minimum standards, and providers compete on price, the lowest quality providers will outlast the better ones. The British Federation of Care Home Proprietors suggested that in the West Country, even where local authorities agree to pay for a night-sitter, they will not pay more than £20 although it involves 10 hours' attendance. If the worker is not permitted to sleep, or is not provided with suitable facilities for sleeping, the whole period of attendance (excluding rest breaks) would qualify as work for minimum wage purposes.

Almost half of respondents providing social care under public sector contracts sought to renegotiate the contract as a result of the minimum wage, but over three-quarters were unable to recoup anything. Most of the others were able to recoup between 1 and 24 per cent of their increased pay bill. Low Pay Commission Survey of Employers

5.56

We were also told that although the Government has recently published new national standards for care homes, quality is under pressure as care providers try to reduce costs to bring them closer to the fee levels paid by local authorities and the Department of Social Security. The United Kingdom Home Care Association, for example, commented that where providers are paid below the cost of providing services they can make money only by delivering below specification. The Association suggested that a few local authorities had costed the service specification they set but others did not, and the length of domiciliary care visits specified by some local authorities was too short to deliver the care required.

Whilst Best Value may be considered, price is often the major factor in the awarding of a contract for services. As a consequence fees are very low … . An increase in the National Minimum Wage is rarely matched by increases in Social Services or Department of Health fees. If this trend should continue, it will become uneconomic to provide domiciliary care and services will have to cease. Leonard Cheshire Foundation evidence

5.57

We saw how one local authority and independent providers are working together in a region where quality of care was very variable and there was oversupply. Given that the market had to contract, the problem was how to retain the good homes. The issue was how the local authority could manage care provision effectively without using price as the sole criterion. The authority and independent providers therefore worked together in partnership to introduce an independent star rating system for services to encourage improvements in service quality and give an informed choice to potential and existing users. We are aware that this star rating system is also in use in some other local authority areas.

South Lancashire Health Authority told us that some care homes are coping with the impact of the minimum wage by, for example, restricting jobs like activity co-ordinators, which are not required by registration authorities but contribute to quality of care for residents. The Lancashire Care Association said that care homes were coping with the minimum wage by, for example, cutting staff levels to the minimum requirements, employing non-essential staff on short-term rather than permanent contracts, not paying hand-over time (fifteen minutes) between shifts and increasing the workload of staff. Low Pay Commission visit to the North West

5.58

We note that the Government has established a Strategic Commissioning Group — comprising representatives from the NHS, Social Services and the independent sector and chaired by the Minister for Personal Social Services — to give greater direction to the commissioning of care for older people. The remit of the Group is to encourage a more strategic approach to capacity planning and to improve commissioning arrangements so as to increase consistency and certainty, bring stability to the market and reassure older people about their future. The principal output is to be a concordat endorsed by central and local government, health bodies and representatives of nursing and care home providers. We very much welcome the establishment of this group and the intention to develop the concordat. Unless adequate funding is provided to meet the additional costs of the minimum wage in social care there could be a detrimental impact on the provision of social care. We recommend, therefore, that the Government should ensure the Strategic Commissioning Group's concordat makes clear that policies on commissioning care, particularly places in care homes, should reflect the costs of provision. To give this strength, the Government should ensure that the concordat is vigorously promoted, and that its implementation and impact are closely monitored. We will watch developments in this important area with interest.

5.59

Overall, the definitions of worker, pay and working time appear to have continued to work well. We are pleased that, following our suggestions in the second report, the Government has made some amendments to the Regulations. As we noted at the beginning of this chapter, the great majority of employers has found the operation of the National Minimum Wage Regulations unproblematic. The definition of the minimum wage has worked well but in some cases better publicity of the guidance might help resolve some of the issues which have been raised with us and which we have described in this chapter.

5.60

In preparing this report we have also found that the impact of the minimum wage on the social care sector continues to be magnified by the reliance of many employers in the sector on public funding of clients. Quality is under pressure where providers try to reduce costs to bring them closer to fee levels paid by public authorities. We consider that this cost pressure could have a detrimental effect which is why we have recommended that commissioning policies should reflect the cost of provision.

5.61

In this chapter we have reported on how the National Minimum Wage is operating in practice. During the preparation of this report we also received a significant amount of evidence about how the minimum wage should be reviewed in the future. We examine this in detail in the next chapter.