FDF response to Low Pay Commission Consultation on the National Minimum Wage rates (including National Living Wage) to apply from April 2017

Transcription

1 FDF response to Low Pay Commission Consultation on the National Minimum Wage rates (including National Living Wage) to apply from April This submission is made by the Food and Drink Federation, the trade association for food and drink manufacturing. Food and drink is the largest manufacturing sector in the UK (accounting for 16% of the total manufacturing sector) turning over 83.7bn per annum; creating GVA of 21.9bn and employing around 400,000 people. 2. FDF s evidence in response to the latest consultation exercise by the Low Pay Commission (LPC) on the National Minimum Wage (NMW) and National Living Wage (NLW) is set out below. 3. Issues relating to the NLW and NMW are of great importance for FDF members in helping to maintain the competitiveness of, and employment levels in, the UK food and drink sector. FDF s evidence to the LPC is based on consultation with representatives from FDF members facilitated through its Employment and Skills Forum. 4. FDF and its members value the importance of an independent Low Pay Commission that provides evidence-based recommendations regarding NLW and NMW rates to government. The LPC plays a vital role in recognising the need to protect the lowest paid without damaging employment prospects, whilst balancing rate changes against inflation, economic growth and the effect rises would have on businesses large and small. Economic Outlook What are your views on the outlook for the UK economy, including employment and unemployment levels, for (a) the period up to April 2018 (b) the period up to April 2019? 5. We expect food and drink manufacturing to grow during the period up to April 2018 but at a slightly weaker pace, in line with the revised down predicted growth for the UK economy, due to the increased political and economic uncertainty following the UK s decision to exit the European Union. 6. A falling pound in the first half of 2016 has helped boost export figures so far and, with sterling taking an even bigger hit post-referendum, we would expect in the short term at least for food and drink exports to continue to rise. However at the same time we are seeing an increase in the cost of imported ingredients required for processing which is causing manufacturers to put hedges in place in the short term to control these rising raw material costs. 7. Beyond April 2018, the outlook for the food and drink industry depends upon what business investments may occur in the preceding years. There may be a decline in business investment, particularly from overseas due to uncertainty about the UK s future trading relationships with the EU and other key trading partners. There is the concern that multinational companies may consider alternative Food and Drink Federation 6 Catherine Street London WC2B 5JJ Tel: +44 (0) Fax: +44 (0) Web: Registered office as above. Registered in London with limited liability. Certificate of Incorporation no VAT number: The Food and Drink Federation seeks to ensure that information and guidance it provides are correct but accepts no liability in respect thereof. Such information and guidance are not substitutes for specific legal or other professional advice.

2 European locations for particular investments, in order to access cheaper raw materials and skilled labour. Given the potential for uncertainty in investment, innovation and job creation, there are real risks to future industry growth in the medium to long term. 8. As an industry committed to developing innovation through both a dynamic workforce and high-tech machinery, we will need to recruit for roles in both engineering and processing to replace an ageing workforce. Latest UK Commission for Employment and Skills (UKCES) projections indicate that, whilst overall employment in food and drink manufacturing is set to shrink by 2%, the sector will still require 130,000 new recruits by 2024 to replace the existing workforce set to retire over the next five to ten years. 9. Furthermore food and drink manufacturers in the UK, like the rest of the agri-food supply chain, benefit from bringing in skilled labour from outside of the UK. Around 27% of the UK's food and drink manufacturing workforce are non-uk EU nationals almost 100,000 workers. FDF has already taken steps to ensure that the UK develops more homegrown talent, especially skilled food engineers and scientists, through ambitious graduate and apprenticeship programmes. However, workers from other EU Member States will continue to provide a highly valued solution in helping to close the skills gap. What has been your experience of wage growth and inflation in the last year and what do you forecast for the next couple of years? 10. In May 2016 ONS Average Weekly Earnings (AWE) data showed that wages at a broad sector level 1 were 5% up on the same time a year previous. There is a pressure to push up pay settlements in the food and drink sector. Despite AWE starting the year well, the effects of low inflation are now being felt by food and drink manufacturing employees, who are starting to see wages decline. If inflation is set to rise to its target rate, we would look for wages to increase at a similar trend. However, with the uncertainty of the UK economy, firms may prefer to hold off on wage increases until markets settle again and the investment outlook recovers. 11. It is too early to say how the decision to exit the European Union will affect pay decisions but there are real concerns about the access to labour and how this may influence company investments. Whilst we had expected a gradual pick-up in earnings growth for food and drink manufacturers, in line with recent trends, this is now much less clear after the vote to leave the EU. A weaker pound could feed through into higher nominal earnings growth, but this also has the potential to be offset by weaker economic growth and weaker labour demand after Brexit. What do you assess as the current state of business conditions in the UK? To what extent are the economic and business conditions in place to allow a faster increase in the minimum wages taking into account the implications on employment? How, if at all, do these vary by sector, type and size of business and nation or region? 12. UK food and drink manufacturers face a number of challenges including changing shopper habits, supermarket pricing pressures and the drive to adapt products for

3 health to help address obesity. The tough trading conditions connected to retailing are likely to result in slow revenue growth for food and drink manufacturing in the next few years if consumer habits remain the same. 13. The food and drink manufacturing sector has seen a fall in employment numbers in recent years because firms have been increasing investment in innovation, such as high-tech machinery, technology and automation, and other measures to increase productivity. The sector has seen an 11% increase in productivity growth between and there will continue to be an increased focus to improve output per hour as labour costs rise. 14. Latest output data indicates food and drink manufacturing is beginning to recover from a slow start in In April 2016, output was up 1.8% on the same month a year previous for our sector, and whilst this is slower growth than we have seen in recent years, it is a good sign that the second quarter of 2016 will see more solid growth than recent months. Impact of the NMW and NLW What has been the impact of the NLW (from April 2016)? We are interested in any views or data on the initial effects on employment, hours, earnings, pay structures (including premium pay) and benefits, outsourcing, differentials, progression, job moves, training, contract type, business models, prices or profits. 15. The impact on larger companies has been limited in these first few months as the majority of roles were already paid the same as or above the National Living Wage. The impact on smaller companies has been far greater. Many companies have found that following the introduction of the NLW, they have been unable to pay the Living Wage Foundation rate which is something they prided themselves in doing. 16. The introduction of the NLW has meant that the differential between unskilled and skilled workers has been reduced. Companies are still keen to ensure that this differential is clear and maintained. 17. Smaller companies have also found that as the NLW is affecting the entire supply chain, this means that additional labour costs are unable to be passed on. As all companies are now contending with the exact same cost pressures. 18. Larger companies are disappointed that salary sacrifice schemes are not accounted for within the NLW calculations. By participating in schemes, employees may have a lower base pay and therefore fall below the National Living Wage and National Minimum Wage rates threshold. By failing to include salary sacrifice schemes, companies will inevitably have to pay staff more which will impact the schemes and mean that employees are taken out of them. 19. As it stands shift pay is excluded from the National Living Wage and National Minimum Wage rates. Another indirect impact of the NLW is food and drink manufacturers having to increase their shift pay to maintain a differential between employees who work unsociable shifts and those who do not. FDF members are

4 calling for shift premiums to be included in the NLW rate. Employers are also seeking to reduce weekend overtime to avoid having to increase weekend pay in order to maintain a differential from the NLW. We believe regular, guaranteed shift pay must be included in the National Living Wage and National Minimum Wage rates. Has the impact varied, and if so how (for example, by sector, type and size of business, nation and region, or groups of workers including women, ethnic minorities, migrant workers, disabled people, older workers, and those who have few or no qualifications)? 20. Our members have not seen particular groups of workers impacted by the changes but in terms of companies we have found SMEs are feeling the impacts more acutely. However companies of different sizes and sub-sectors are all concerned about the move to 60% of median earnings by What are your views on the likely impact of NLW reaching 60 per cent of average earnings by 2020, or just over 9 on current earnings forecasts? To what extent does it differ from the impact in 2016, and how do you anticipate it will be accommodated? 21. FDF members are concerned by the proposal to increase the NLW rate to 60% of average earnings by This move coupled with the decision to exit the European Union, tough trading conditions with suppliers and customers and the cumulative burden of upcoming legislation (e.g. apprenticeship and soft drink levies due to be introduced in 2017 and 2018 respectively) will increase cost pressures on our members. These cost pressures come at a time when our industry is focused on improving productivity and in turn raising living standards through investment in higher level skills in the longer-term. Equally there is the risk, as input costs including labour continue to increase, that the UK food and drink manufacturing sector will become less competitive in a global market when we are competing with EU and non-eu companies in the domestic and export markets. 22. Whilst we recognise the need to ensure flexibility, FDF members are seeking some level of certainty so that they can plan ahead in terms of what 60% of average earnings will be in We are calling on the Low Pay Commission to revise its projected earnings growth forecasts before adopting a straight-line approach to the NLW. Earnings growth may be slower, particularly in the early years due to the uncertainty following the EU referendum result. What has been the impact of the National Minimum Wage (NMW), such as on employment, hours, pay structures, contract type, and profits, in particular over the last twelve months? Has this impact varied, and if so how (for example, by sector, type and size of business, nation and region, or groups of workers including women, ethnic minorities, migrant workers, disabled people, older workers, and those who have few or no qualifications)? 23. Since its introduction in April 1999, the NMW has been increased by government at a rate well in excess of the rate of inflation or the level of pay settlements that have been reported by FDF members over this period. As a result, the NMW has

5 had a direct impact on pay levels and the structure of remuneration for FDF members. In particular, members have reported pressure to maintain differentials between their basic rates of pay and the NMW as some employees still attach a stigma to the term minimum wage and therefore seek to maintain a distance from employers paying the NMW. 24. Whilst the NMW may initially have had only a minor direct impact on FDF members, they have always felt its indirect impact on the cost of services, such as cleaning, catering and security, which are provided to them. Suppliers of these services, which are generally labour intensive, try to pass on the direct cost of any increases in wage costs, such as the NMW, to FDF members and this therefore has an adverse effect on their competitiveness. 25. Over the last few years, FDF members have reported considerable upward cost pressures, particularly for fuel and raw materials and these, together with the additional burden of increased labour costs, have had an adverse impact on them. Ongoing and forthcoming changes to employment regulations both at UK and European level continue to have a significant impact on businesses of all sizes. Business profitability has also been significantly squeezed in recent years. 26. FDF considers that it is critically important for the future competitiveness of the UK food and drink manufacturing sector that the direct impact of the NMW on its members is minimised. In the current uncertain economic climate, it will therefore be particularly important for the LPC to adopt a cautious approach when making recommendations to the Government about future increases in the NMW to minimise any possible adverse impact that these increases could have on including business costs, competitiveness and employment levels. To what extent are firms making use of the Year Old Rate ( 6.70 currently)? 27. Food and drink manufacturers generally pay based on skill/job band and not age and would therefore not necessarily use the under 25 rates. What do you estimate will be the effect of the increases in October in the rates affecting workers aged under 25 and apprentices (3.7 per cent increase to the Year Old Rate, the 4.7 per cent increase to the Year Old Rate, the 3.4 per cent increase to the Year Old Rate, and the 3 per cent increase to the Apprentice Rate in October 2016)? 28. FDF members do not feel there will be much of an effect given the number of employees paid at these rates. However increasing the NMW twice within a six month period would have more of a detrimental effect on the food and drink manufacturing sector. Setting the NLW and the other rates Do you have any comments on our proposed approach to the NLW? 29. FDF and its members support the NLW in principle. The proposed approach to the NLW could however hit training budgets and may limit production in the UK in

6 the future. Companies will also be impacted due to indirect effects, such as the increase in other employees salaries to ensure that these remain competitive. To combat these issues, many companies have suggested that processes will have to be automated, costs within the business will have to be absorbed and there will be an increased focus on productivity improvements. A proportion of members have suggested they will have to increase prices and reduce or restructure their workforce in the longer term. The rates for workers aged under 25 and apprentices are set to increase in October 2016 and then again in April after six months rather than the usual twelve. How should the LPC take this into account? 30. FDF members would argue that due to the quick succession of increases, a rise in the rate should be minimal if at all. We are in support of moving the rate increase to April for continuity with other wage increases and we are glad that the LPC took this original feedback into consideration. What bearing should the NLW have, given that it is likely to increase significantly in April 2017? (In our Spring 2016 Report we concluded that genuine differences in labour market performance meant pay for younger workers, including year olds, could not currently be set at the same level as that for workers aged 25 and over without risk to employment. We thought that, in the absence of changes in relative performance, the rates for younger workers may increase less rapidly than the NLW to Equally there were countervailing concerns that we said would also play an important role in our recommendations: that, if too large a gap opened up between the pay floor for different ages, there would be disincentives to hire or retain employees near the boundary and substitution by younger workers would be encouraged. We committed to balance these considerations in future recommendations.) 31. The NLW should not affect the pay for younger workers, including year olds. In the food and drink manufacturing industry as employees are paid by level rather than age, as those on lower levels tend to be younger these employees have not been affected by the NLW. This has been felt in other manufacturing industries as well. In our most recent recommendations, set out in our Spring 2016 report, we sought to improve clarity in relation to the minimum wage structure, which is now more complicated than in the past, by rounding rates to the nearest 5 pence. Should we continue to take this approach to the NLW and the other rates? 32. FDF would suggest that the same approach should be used for all wage structures including the NMW and NLW. This will help to provide clarity and less complication if all rates are set in the same way. April 2017 Rates of the NLW and Other Minimum Wage Rates At what level should the NLW be set in April 2017? The projected on course rate for the NLW for April 2017 is around 7.60 or a 5.6 per cent increase over

7 the introductory rate. What do you estimate would be the effect of an increase of this approximate level? The LPC has been asked to provide indicative second year rates for 2018 for the NLW. At what level should the NLW be set in April 2018 (the on course rate is currently projected to be 8.05)? 33. The LPC should only make modest increases in April 2017 given the economic uncertainty businesses are currently facing. We see a number of risks around the current forecasts for median earnings growth. If economic growth should be weaker, the proposed rates for 2017 and 2018 would result in companies having to front-load NLW increases ahead of the 60% of median earnings target in We would therefore recommend a more cautious approach over the next two years and the need to revise the LPC s forecast for median earnings growth. 34. FDF members feel that the increases should be kept as continuous and fluid as possible rather than steep hikes. This rate will mean that larger companies are more likely to be effected at this point. At what level should the Year Old Rate be set in April 2017? 35. Due to the introduction of the Apprenticeship Levy in April 2017, we feel that this rate should not be set much higher than it currently is due to other costs that companies will be feeling. At what level should each of the other rates of the minimum wage be set in April that is, for year olds, for year olds, apprentices, and the accommodation offset? 36. As above due to the numerous costs, we feel the levels set should be of minimum impact to companies Year Olds What has been the impact of the minimum wage on workers aged and what effect do you think it has on their employment prospects? 37. The impact on younger workers has been minimal for the food and drink manufacturing sector as we already pay according to the market and over the rate of the NMW for young people. The priority for our industry remains to keep recruiting young people to replace the ageing workforce due to retire in the next five to ten years. Young People and Apprentices What has been the impact of the minimum wage on young people and what effect do you think it has on their employment prospects? 38. Due to the skills level needed in the food and drink manufacturing industry and the health and safety environment we operate in, employers in our sector do not tend to employ many young people below 19 years of age.

8 39. FDF perceives that the biggest impact of the NMW on young people is the pressure faced by FDF members to maintain differentials between their employees basic rates of pay and the NMW, as some employees still seem to attach a stigma to the term minimum wage and therefore appear to want to ensure that there is a gap between their rate of pay and the NMW. In order to try to reduce this perceived stigma, some FDF members have suggested that consideration should be given to renaming the NMW as a standard pay rate. There are also concerns that the NMW is used as a default rather than the right rate for the job. 40. The food and drink industry currently pays according to the market for both employees and apprentices, rather than the NMW and most FDF members already pay well above the NMW apart from a few entry level positions. What has been the impact of the Apprentice Rate (on pay; provision and takeup of places; and training volume and quality)? 41. Companies in the food and drink sector already pay well above the Apprentice Rate, therefore changes to this have not impacted our industry. As stated above, for this very reason some FDF members have questioned the need to have a specific rate of the NMW for Apprentices. 42. There is concern about the impact on the future impact of apprentice pay due to the Apprenticeship Levy due to be introduced in This will create a large additional cost to businesses. What do you think might help employers to comply with paying the right apprentice pay rate? 43. Further funding support for apprenticeships at all levels, including higher level apprenticeships, would help employers to comply with paying the right pay rate for apprentices, whether this is linked to the NMW or market rates. 44. The level set for co-investment is vital to the success of the Apprenticeships because it will determine whether programmes are financially viable for employers to be able to invest. Co-investment encourages employers to commit to the development of their Apprentice, but if too much is demanded of employers, beyond their existing investment through internal training and scheduled work, then Apprenticeship numbers are likely to reduce substantially. The possible impact of the Apprenticeship Levy should also be considered. The danger of overburdening employers should not be underestimated, and will determine the success or failure of the system. Compliance & Enforcement What issues are there with compliance with the minimum wage? Do particular groups experience problems with NMW compliance (for example apprentices, those working in the social care sector, migrant workers or interns/others undertaking work experience)? What is the extent and trend?

9 45. Compliance issues centre on having to accommodate both the standard rate for NMW and apprentice rate for the NMW for your workforce. Moving away from the latter means that compliance becomes simpler. What impact, if any, is the National Living Wage having on compliance and enforcement? 46. FDF and our members envisage a limited impact on enforcement from the NLW if it is aligned with the NMW causing a limited administrative issue. However, enforcement must be fair to both businesses and individuals. Enforcement should concentrate on non-compliant businesses and sectors with evidence gathered through intelligence rather than by creating further administrative burden for all.

10 The UK Food and Drink Manufacturing Industry The Food and Drink Federation (FDF) is the voice of the UK food and drink manufacturing industry, the largest manufacturing sector in the country. The industry has a turnover of 83.7bn, which is 16 per cent of total manufacturing turnover, and Gross Value Added (GVA) of 21.9bn. The industry employs around 400,000 people. Exports of food and non-alcoholic drink have doubled in the last ten years, amounting to a worth of 12.8bn in The following Associations actively work with the Food and Drink Federation: ABIM ACFM BCA BOBMA BSIA BSNA CIMA EMMA FCPPA FOB PPA SMA SN SNACMA SPA SSA UKAMBY UKTIA Association of Bakery Ingredient Manufacturers Association of Cereal Food Manufacturers British Coffee Association British Oats and Barley Millers Association British Starch Industry Association British Specialist Nutrition Association Cereal Ingredient Manufacturers Association European Malt Product Manufacturers Association Frozen and Chilled Potato Processors Association Federation of Bakers Potato Processors Association Salt Association Sugar Nutrition UK Snack, Nut and Crisp Manufacturers Association Soya Protein Association Seasoning and Spice Association UK Association of Manufacturers of Bakers Yeast United Kingdom Tea & Infusions Association Ltd FDF also runs specialist sector groups for members: Biscuit, Cake, Chocolate and Confectionery Group (BCCC) Frozen Food Group Ice Cream Committee Meat Group Organic Group Seafood Committee For more information contact: Abi Alter Competitiveness Policy Executive abi.alter@fdf.org.uk