Fair Work First - conditionality in public sector grants: business and regulatory impact assessment

15. Summary and Recommendation

A table summarising the benefits, challenges and mitigations is included at Annex D.

FWF conditionality comprises two requirements, i.e. for recipients of public sector grants to:

• pay at least the rLW to all workers, including apprentices and 16-17 year old workers; and
• provide appropriate channels for effective workers’ voice, such as trade union recognition.

The BRIA was conducted on the basis of the FWF conditionality policy already being in place and sought to elicit further insights into the business impacts (for business and other organisations across the public, private and voluntary sectors) following representations from stakeholders and lessons learnt during the early implementation ‘test and learn’ stage.

Each of the FWF conditions above are dealt with in turn in the following sections.

15.1 Real Living Wage

A summary of responses to the survey and interviews is provided below.

Benefits

A range of potential positive impacts of paying the rLW were highlighted by interviewees and respondents to the survey – grouped into four main themes: worker benefits, recruitment and retention, organisational values and business benefits. In summary:

• The benefits of paying at least the rLW to apprentices and 16-17 year old workers articulated by interviewees and respondents to the survey were broadly similar with most highlighting positive financial impacts, and increased morale and wellbeing for those groups of workers.
• Others also expressed that paying the rLW to all workers was important and that all workers regardless of age or position should be paid at least rLW.

Challenges

A range of challenges to paying the rLW were raised by interviewees and respondents to the survey, many of which had a financial aspect – grouped into themes around affordability, the workforce, revenue, the wider economic context and competition. In summary:

• The challenges of meeting the rLW condition articulated for apprentices and 16-17 year olds were broadly similar with most mentioning costs.
• Concerns about wage differentials were mentioned along with some respondents to the survey stating that it was appropriate to treat those groups of workers differently as they felt they were in a ‘training grade.’
• There were some further potential negative impacts suggested, including a reduction in the number of apprenticeships or positions for 16-17 year old workers offered, and a reduction in the number of organisations applying for grants.

Scale of Organisations Impacted

With regards to the scale of the impact on organisations across Scotland, the policy applies to those applying for public sector grants. While data on the number of organisations across each sector who apply for grants is not held, this is not likely to be the majority of organisations in Scotland. Furthermore, only a subset of those organisations that do apply for public sector grants will employ apprentices or 16-17 year olds.

To further understand the scale of this issue an information request was issued by Fair Work policy officials in Spring 2024, asking for the number of exceptions to the rLW condition approved within the period 1 July 2023 to 31 March 2024. Based on the survey responses, 3,868 grants were issued to a value of over £2.5 billion of which 171 rLW exceptions were approved and the majority of those were for part/parts of an organisation’s workforce. The value of the grants in receipt of an exception was £171 million. This suggests that it is not impacting a large proportion of those applying for grants.

As this was the first year of implementation it was recognised at the outset that there may be challenges for organisations to meet the condition in full. Fair Work Policy’s view is that this level of exceptions at this stage is reasonable; it demonstrates that the exception mechanism is being used as intended.

Costs

The costs associated with meeting the condition in full for apprentices and 16-17 year olds includes direct and indirect costs as follows. These costs outlined below are generic and would vary substantially depending on whether an employer in receipt of public sector grants has apprentices or 16-17 year old workers, how much they pay them prior to taking a grant and the pay structures within the organisation.

Direct Costs

As outlined in section 4.2 the primary direct cost is associated with the uplift in wages for apprentices and 16-17 year old workers currently paid less than the rLW in a grant recipients organisation. The value of the uplift for these groups of workers, if currently on the statutory minimum, varies from £1,077 to £10,774 dependant on age and if they are an apprentice. However, any uplift will be reduced if they are currently paid at a rate above the minimum wage. An employer may also face additional costs associated with employer pension contributions, a statutory requirement for those 22 and over, or NICs for those aged 21 and over.

Indirect Costs

These include potential knock-on impacts of paying rLW to apprentices and 16-17 year on pay structures and reward schemes in order to ensure appropriate wage differentials across the organisation. Such costs are particularly difficult to quantify as there are a range of factors, including the size and structure of organisations.

Summary of Costs Associated with Real Living Wage Options

In summary, the costs associated with this policy will fall on those applying for public sector grants who currently employ apprentices or 16-17 year olds, with some second order impacts on grant funders where there is increased applications for exception. While data on the number of organisations across each sector who apply for grants is not held, this will not affect the majority of organisations in Scotland

The costs associated with the four options have been considered and are as follows. The potential costs associated with meeting the rLW condition may pose challenges for some employers which would prohibit them from accessing a grant. The scale of these potential costs will be driven by the composition of their workforce and pay scales and will vary by organisation. Overall maintaining the status quo (option 1) is likely to see the most organisations and individuals affected, and highest level of costs; this option will however result in more benefits. Both the costs and the benefits will reduce under options 2 and 3 as the conditions are removed from apprentices and young people and would be removed completely under option 4. The option for organisations to request a limited exception on ground of affordability helps mitigate this issue and may mean a grant can be awarded without the recipient having to meet the rLW conditionality in full. Although it is noted that the exception process does pose an administrative burden on those that apply this is current practice and does not solely apply to those with employees aged 16 to 17 or apprentices.

As noted previously, employers have a choice about accepting a public sector grant and therefore in doing so, they acknowledge that it may result in some additional cost to them.

The Role of the Limited Exception

The cost of meeting the condition in full for these groups of workers may therefore be unaffordable for some organisations.

Where an organisation considers either the direct or indirect costs associated with meeting the condition in full is genuinely unaffordable, it may request an exception for consideration by the funder. The scope to request an exception on grounds of affordability helps to mitigate the potential negative impact of the costs to meet the condition in full and may mean that a grant can be awarded without the recipient having to meet the rLW conditionality in full, although it is expected that the grant recipient indicates how it will work towards meeting the condition in full should they request a future grant.

Based on the information available^[22], the number of exceptions agreed in period 1 July 2023 to 31 March 2024, is at a reasonable level and the exception mechanism is being used as intended.

Apprenticeship Policy

The inclusion of apprentices within the scope of the rLW condition aligns with the Scottish Government’s policy on apprentices, recognising that apprenticeships are a significant part of our work to address youth employment and develop Scotland's workforce. Apprenticeship reform is focused on delivering a high quality apprenticeship system which supports people into good careers, is valued by employer and supports our widening access and equality ambitions.

Options Considered

This BRIA considers the following options for progressing the rLW conditionality, details of which are provided in Annex D. In summary, this covered, benefits and challenges, and mitigation of challenges for each of the four options for the rLW:

• Option 1 – maintain the status quo by keeping apprentices and 16-17 year old workers within scope of the rLW condition
• Option 2 – Remove apprentices from the scope of the rLW condition
• Option 3 – Remove 16-17 year old workers from the scope of the rLW condition
• Option 4 – Remove apprentices and 16-17 year old workers from the scope of the rLW condition

Real Living Wage Recommendation

On the basis of the findings of the BRIA and lessons learned during the test and learn phase, option 1 – maintain the status quo by keeping apprentices and 16-17 year old workers within scope of the rLW condition – is recommended.

The policy is intended to have an impact on organisations in receipt of discretionary public sector grants and is deliberately designed to raise wages to at least the rLW. Maintaining the status quo supports the Scottish Government’s longstanding commitment to improving pay for all workers, regardless of age or status and as a result has the potential for positive financial impacts on apprentices and 16-17 year old workers.

Importantly, the potential negative impacts of the inclusion of both these groups of workers within the scope of the condition and associated costs are mitigated by the inclusion in the policy for a limited exception to be agreed for an organisation that genuinely cannot afford to pay at least the real Living Wage to either or both of these parts of the workforce. From the information available, the number of exceptions agreed in period 1 July 2023 to 31 March 2024, is at a reasonable level and the exception mechanism is being used as intended.

15.2 Effective Voice

A summary of responses to the survey and interviews is provided below.

Benefits

A range of potential positive impacts of effective voice were highlighted by interviewees and respondents to the survey – grouped into four themes: organisational communication and culture, worker morale and job satisfaction, business/organisation performance, and recruitment and retention. In summary:

• The benefits of providing an effective voice articulated by interviewees and respondents highlighted positive impacts for both workers in the organisation and the organisation in terms of improving performance and reputation.

Challenges

A range of challenges to meeting the effective voice condition were raised by interviewees and respondents to the survey – grouped into three themes: resources, people and prescriptiveness of the requirement. In summary:

• Providing an effective voice is not without challenge and will vary depending on organisation size, sector and culture
• Respondents highlighted time, cost, capacity and managing change as having a being a potential challenge from a resource perspective.
• Ensuring both worker and senior management buy in if introducing a new effective voice channel
• The condition was viewed by some as being too prescriptive and designed with larger organisations in mind, making it more challenging for smaller organisations to demonstrate.
• The process to evidence and get trade union or worker representative sign off was not well understood and caused confusion due to a misunderstanding of what is required and when.

Costs

No quantifiable costs were identified in respect of the effective voice condition. Potential administrative costs associated with demonstrating the condition were mentioned by interviewees and survey respondents along with delivering voice channels in practice which for some may involve establishing a channel where one did not already exist. Such costs would vary depending on the factors including the mechanism adopted, the size and type of the organisation and may relate to rime and resource to implement. For example, where trade union recognition is a selected voice channel, trade union facility time is a cost in terms of resource, not necessarily additional spend and would only be considered in this context where a union is recognised for the first time. There may also be directly tangible costs such as using an external consultancy to design and conduct an employee survey.

As noted previously, employers have a choice about accepting a public sector grant and therefore in doing so, they acknowledge that it may result in some additional cost to them.

Options Considered

This BRIA considered the following proposal for the effective voice condition, the detail of which is provided in Annex D. In summary, this covered, benefits and challenges, and mitigation of challenges of the proposal to maintain the status quo by continuing to apply the effective voice condition to recipients of public sector grants.

Effective Voice Recommendation

On the basis of the findings of the BRIA and lessons learned during the test and learn phase, in relation to the effective voice condition, it is recommended to maintain the status quo by continuing to apply the effective voice condition to recipients of public sector grants.

This reflects the importance of effective workers’ voice and maintains the policy commitment to ensuring an effective voice in the workplace and has the positive impact of ensuring workers have a voice through appropriate channels which will be to their benefit and potentially that of the organisation in terms of productivity and reputation. While there are potential costs associated with evidencing the condition these are related to time and resource and should not be disproportionate. There may be further costs in terms of establishing voice channels. These have been captured earlier in this document and are summarised again in the paragraph below.

Providing an effective voice is not without challenge and will vary depending on organisation size, sector and culture. Challenges experienced in relation to evidencing process and the difficulties experienced by smaller organisations in terms of prescriptiveness can be addressed through the updated guidance. It clarifies the evidence requirements for demonstrating compliance with the conditions, including the role of the trade union or worker representative and offers a streamlined evidence gathering process. These have been determined through engagement with stakeholders and should therefore be a well-received improvement which will go towards helping employers to effectively implement voice channels and realise related benefits in terms culture, morale, staff retention and employer/organisational reputation.

Fair Work Policy are keeping evidence requirements and the related administrative process under review and will engage with stakeholders if there is any need to consider options for further simplifying.