DRAFT
NATIONAL MINIMUM WAGE REGULATIONS
ANNEX
5: REGULATORY IMPACT ASSESSMENT
NATIONAL
MINIMUM WAGE REGULATIONS REGULATORY IMPACT ASSESSMENT
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I.
Introduction
1. This
assessment estimates the costs and benefits of the draft National
Minimum Wage Regulations and sets out the assumptions used to
produce these estimates. It follows a more general regulatory
appraisal which was published with the introduction of the National
Minimum Wage Bill in November 1997.
2. In May
1998 the Low Pay Commission (LPC) reported to the Government with
recommendations and observations covering the level of the NMW,
its composition and calculation, and its potential impact. Its
report was published in June 1998 (CM3976). The LPC consulted
large and small employers and their representative organisations,
trade unions, voluntary organisations, pressure groups, academics
and others. It considered the wider economic and social implications
of the NMW; its likely effect on the level of employment and inflation;
its impact on the competitiveness of businesses, particularly
the small firms sector; and the potential costs to industry and
the Exchequer.
3. Many
of the estimates in this assessment are based on the LPC's findings,
in particular the direct impact on the wage bill. The assessment
also covers indirect impacts, for example arising from the proposed
method of calculating the NMW in line with a maximum one-month
pay reference period. Finally, the assessment considers the costs
and benefits of requiring employers to produce an NMW statement
and to keep certain records.
II.
Purpose & Intended Effects of the Measures
4. The NMW
Act 1998 establishes the legislative framework for a national
minimum wage. It provides a number of powers to make secondary
legislation to implement a national minimum wage. The draft Regulations:
- set the
rate of the NMW; and modified rates for 18-21 year-olds and
workers receiving accredited training in the first 6 months
of a new job with a new employer;
- provide
for exemptions for all those under 18 and apprentices under
26 in the first year of their apprenticeship;
- determine
the pay reference period for averaging out the calculation of
NMW pay;
- determine
the method of calculating pay for NMW purposes;
- determine
record keeping requirements and;
- require
employers to produce an NMW statement.
5. The Regulations
are designed to provide a mechanism which will:
- establish
a "wage floor" to prevent unduly low wages;
- provide
effective and proportionate enforcement;
- ensure
certainty as to who is covered by the NMW rate;
- identify
what counts as "pay" for NMW purposes;
- specify
requirements relating to NMW statements and records.
6. The NMW
will directly affect every company, irrespective of size, which
has workers who are paid close to or below the NMW. It will also
indirectly affect companies which contract with those whose workers
are paid close to or below the NMW. This means that the Regulations
need to cover a wide range of working arrangements and payment
systems, including workers who work at home and/or are paid on
a commission or piecework basis. The more specific and clear the
regulations are about the requirements on employers, the lower
the possibility of misunderstanding and confusion leading to unnecessary
and potentially costly conflicts.
III.
Options
7. The Government
made clear, during the passage of the Bill through Parliament,
its intention to introduce a single NMW which would apply throughout
the United Kingdom without variation according to region, sector,
industry or size of firm. The NMW Act rules out such differentiations
which are therefore not options for the NMW Regulations. Similarly,
the passing of the Act and the Government's acceptance of the
LPC recommendations rules out a "do nothing" option or the consideration
of different rates.
IV.
Benefits
Who will
benefit
8. The LPC
estimate that around 2 million workers should benefit through
higher pay (about 9% of all employees) from the introduction
of NMW rates at the levels agreed by the Government. This includes
approximately 1.4 million women, 1.2 million part-timers, 60,000
workers in the voluntary and charitable sector, and over 380,000
workers in Northern Ireland, Scotland and Wales combined (Tables
1.1-1.3 in Appendix A1 show detailed
breakdowns).
Higher
Income
9. The Institute
for Fiscal Studies have estimated that about half of all employees
currently paid below the NMW will gain £15 or more a week.
The LPC have estimated that the NMW will increase the net weekly
income in a variety of households by 2%-13%.
A More
Committed Workforce
10. A basic
right to a national minimum wage is an important element of the
Government's strategy of establishing a flexible labour market
underpinned by minimum standards. The Government believes that
the NMW will contribute to better relationships at the workplace,
and improvements in workforce commitment, morale, and performance.
It should also contribute to reductions in both staff turnover
costs and absenteeism. These effects should result in higher productivity
and benefit individual companies and the economy as a whole. Furthermore,
a more stable and motivated workforce will help create an environment
where employers will be more willing to invest in training their
staff thereby improving productivity, product quality and a better
service.
11. As the
British Chamber of Commerce stated in evidence to the LPC, "businesses
recognise that a low wage policy leads to a vicious circle of
low morale, low performance and low productivity." The CBI have
estimated that absenteeism cost UK businesses up to £25bn
in 1996. Figures from The London School of Economics suggest that
current staff turnover levels cost employers £380m-£1800m
per year. Both absenteeism and staff turnover costs are higher
in low paying industries.
12. The
introduction of the NMW should help address these costs, although
the extent of the benefits will depend on how individual organisations
react. For example, according to a report by Income Data Services,
Reading Borough Council found that the cost of introducing a minimum
wage in 1997 was more than offset by savings gained from reduced
turnover and improved morale.
Fairer
Competition
13. The
LPC have confirmed the view taken by Government that sustainable
economic growth and job creation cannot hinge upon low pay alone.
The rates introduced by these Regulations should encourage fairer
competition by preventing undercutting based on unduly low wages
and will reinforce companies which compete through quality, service
and timeliness of delivery rather than just price and wage costs.
A Better
Balance Between Work & Home
14. Low paid
employees are often compelled to work very long hours, sometimes
in a variety of different jobs, in order to afford basic necessities.
This can have a detrimental impact on their home life and health
due to excess stress and fatigue. By reducing the need for long
working hours to achieve a particular income level, the NMW could
facilitate a better balance between work and home life.
V.
Compliance Cost Estimates
15. The
following estimates of implementation costs are based on the LPC's
report. They have been refined in the light of the Government's
response to the report and further work by the Office for National
Statistics (ONS). Details of the work undertaken by the ONS are
provided in Appendix A1.
Business
Sectors Affected
16. A Table
1.4 Appendix A1 presents the number and proportion of employees
who will benefit from the NMW in the major industrial sectors.
Individual sectors mainly affected include: agriculture; hotels
and restaurants; wholesale and retail sales. In the charity sector,
the National Council of Voluntary Organisations (NCVO) have estimated
that NMW compliance will lead to a pay rise for around 14%
of employees.
Compliance
costs for a typical business
17. It is
very difficult to estimate the costs to a "typical" business.
The LPC found that many firms in low-paying sectors already compete
effectively and pay wages in excess of the proposed NMW rates;
others have been raising their pay in anticipation of the NMW.
Many businesses could therefore be totally unaffected, whereas
others will have to make changes to current working arrangements
and practices. The effects will also depend upon the responses
of employers and employees. As a result, estimating the compliance
costs for a single "typical" business is likely to give a misleading
impression. Appendix A2 attempts to
show the impact on four different notional businesses ranging
from a large manufacturing company to a small hotel.
Total
Recurring Compliance Costs
18. "Recurring
costs" are the continuing additional annual costs to business
resulting from the Regulations. The total recurring costs to UK
businesses of complying with the Regulations are estimated at
around £2.5bn. There are three main components:
- labour
costs (estimated at around £2.4bn, based on the LPC report)
[paras 21, 22 below];
- costs
arising from adjustments in pay arrangements to comply with
the maximum one-month pay reference period (estimated at around
£73m)[paras 23 below];
- costs
associated with the options for producing an NMW statement and
record keeping (ranging from £50m-54m: the non-recurring
cost range of these options is more substantial) [paras 24 below].
19. It should
be noted that the above costs may well be offset by some or all
the benefits identified in paragraphs 8-14 above, not least through
decreases in the costs of staff turnover and absenteeism. Some
believe these benefits could be very large indeed, outweighing
any direct, static costs. These benefits are not, however, readily
quantifiable.
20. This
estimate is consistent with the LPC conclusions, in that the NMW
has no immediate or long run effects on overall employment or
output. Like the LPC, the Government does not expect the NMW to
have a significant effect on inflation.
Labour
Costs
21. The
LPC estimated that the NMW would add some 0.6% to the national
annual wage bill. On this basis and at the NMW rates decided,
our estimates of the recurring labour costs to UK businesses are
around £2.4bn. This equates to roughly 0.56% of last
year's total labour costs. Appendix A3
shows the Calculations of these labour costs.
22. This
estimate assumes that only the wages of those who currently earn
below the prescribed levels will be affected. The LPC investigated
this issue and concluded that "the pressure to restore pay differentials
following the introduction of the NMW will be limited and localised."
Furthermore, after carefully reviewing the empirical evidence,
the OECD in their 1998 Employment Outlook state that "almost all
studies find that minimum wages do lead to a compression of the
earnings distribution."
Maximum
One-month Pay Reference Period
23. The
Regulations may entail some changes to be made to working practices
by those employers with employees whose working hours fluctuate
markedly over a period longer than one month (for example, seasonal
workers or those on annualised hours). For those employees, there
may be occasions when their hourly pay falls below the NMW. Such
changes may involve the need to link pay more closely to actual
working time. Estimates of the recurring costs associated with
making such adjustments are put at around £73m (see Appendix
A3).
NMW Statement
and Record Keeping
24. The
Regulations require employers to produce an NMW statement and
to keep certain NMW records. The assessment considered three options
(Appendix A3). The Regulations adopt
the cheapest option (taking recurring and non-recurring costs
together), requiring the NMW rates and information about access
to records to be displayed with every pay statement; and requiring
employers to keep specific NMW records for all employees with
gross pay below £12,000/year (£1000/month). The recurring
costs of this option are estimated at £51m/year. The non-recurring
costs (see paragraph 25 below) are estimated at £85m/year.
Total
Non-Recurring Compliance Costs
25. "Non-recurring
costs" are additional one-off costs of complying with the Regulations.
These are identified as costs of complying with the requirements
relating to an NMW statement and record-keeping. For the three
identified options, the total non-recurring costs are estimated
at between £85m and £330m. Appendix
A3 provides a breakdown of these costs.
VI.
Consultation with Small Business: The "Litmus" Test
26. The
assessment considers preliminary feedback (a "litmus test") from
a number of small businesses (Appendix
A4). These discussions suggest that the small businesses which
we consulted anticipate making few adjustments in order to meet
the requirements of the Regulations. In terms of the options concerning
the NMW statement and record keeping, there was a preference for
the approach which the Regulations take as both the cheapest and
the least disruptive in terms of any costly changes to computerised
payroll systems.
VII.
Other costs not subject to the Regulations
Budgetary
Costs
27. The
Government accepts the LPC's conclusion that the NMW should have
a broadly neutral budgetary impact. It may lead to rises in some
items of government expenditure (eg on public sector pay, procurement
and contracted-out costs) but there will also be increases in
revenue (eg income tax and national insurance receipts) and lower
spending on eg income tax credits and in-work benefits.
Publicity
Costs
28. Section
50 of the NMW Act requires the Secretary of State to publish information
about the NMW in order to bring the NMW to the attention of people
who are most likely to be affected by it. The Explanatory and
Financial Memorandum for the NMW Bill estimated a budget of £2m
for this work spanning a period just before and just after implementation
of the NMW.
Enforcement
Costs
29. The
Government believes that "self enforcement" is the best way to
enforce the NMW, with both sides of industry working together
to ensure compliance. The need for costly enforcement mechanisms
should be reduced by effective publicity and by the simplicity
of the NMW, which applies uniformly to all sectors and regions
of the UK. There will inevitably be cases, both deliberate and
accidental, where workers do not receive the NMW. In putting enforcement
mechanisms in place, the Government is aware of the need to strike
a balance between avoiding placing undue burdens on business and
ensuring that workers receive the NMW.
30. Workers
who feel they have not received the NMW will be able to take a
case to an Employment Tribunal or a civil court. In addition,
enforcement officers will be appointed to enforce the NMW through
visits to employers and responding to complaints and, in some
instances, bringing cases on workers' behalf before the tribunals
or the courts.
31. It is
difficult to forecast how many cases may come before tribunals
or courts or how quickly. As a working estimate, the number may
be of a similar magnitude to the number of cases brought under
the Wages Act 1986 (for unauthorised deductions from wages), some
15,000 per year. Experience shows that around two thirds of cases
are normally withdrawn as a result of being settled out of court
and/or following ACAS intervention. The estimated cost of hearing
the remainder is put at around £4m (based on 5000 cases
at £750/per hearing.)
32. The
costs of the enforcement agency will depend on a number of factors
which are currently under consideration.
33. The NMW
Act (not the Regulations) already provides for various sanctions
for non-compliance including fines up to £5,000 eg for refusal
or wilful failure to pay the NMW, failing to keep records or producing
false records. A table of all enforcement mechanisms including
these sanctions is at Appendix A5.
VIII.
Summary & Recommendations
34. The
overall compliance costs of implementing the NMW at the rates
decided and in the form proposed are estimated at around £2.5bn
(consisting of labour costs at £2.4bn based on the LPC's
impact estimate; costs of adjusting to a one-month pay reference
period - £73m; and implementation of the cheapest and least
burdensome option 2 requiring production of an NMW statement and
record-keeping - £51m recurring costs and £85m one-off
costs).
35. The
benefits in the form of higher productivity, improved motivation,
lower staff turnover costs and reduced absenteeism are not quantifiable
but could be substantial. There should be further benefits in
terms of fairer competition based on quality, not unduly low wages.
IX.
Monitoring & Review
36. The
Government has announced that it will be asking the LPC to continue
its work monitoring and evaluating the implementation and impact
of the NMW following introduction.
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