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

5. Scottish Firms Impact Test

Scottish firms impact test questions:

• Will it have an impact on the competitiveness of Scottish companies within the UK, or elsewhere in Europe or the rest of the world?

Unclear:. Some survey respondents indicated that this could potentially risking lowering competitiveness through passing on increased costs to customers/clients where competitors were not adopting the rLW. However, due to data limitations, it is unclear as to the scale and reach of this issue.

• How many businesses and what sectors is it likely to impact on?

Unclear: As outlined in Section 4 this policy will impact only on business which are in receipt of a Scottish public sector grant. The Scottish Government does not hold data on the number of, current or future, grant recipients who employ either 16-17 year olds and / or apprentices at below the rLW.

• What is the likely cost or benefit to business?

Unclear: This policy will not impact all businesses the same way, businesses who currently pay the rLW and apply for a grant will see no impact. However, the primary cost to some grant recipients will be on the increase in salary costs for those 16-17 year olds and apprentices not already paid the rLW. As highlighted above in section 4.2.1 the largest uplift in wages of £10,774 before tax would be seen for individuals aged 16-17 years old, apprentices aged under 19 or those in their first year of apprenticeship (i.e., those employees earning the lowest National Minimum Wage rate).

Respondents to the survey identified that this has potential implications for budgets, profitability, tight margins and financial sustainability. While benefits were seen to arise from areas such as improved recruitment and retention. Further details can be found in section 5.1 below

In respect of the effective voice condition, no quantifiable costs were identified. However, there may be costs associated with the administrative burden on grant applicants to evidence they meet the condition, an issue raised by stakeholders. Section 5.2 below provides further details.

Further evidence is outlined below on the impact on Scottish firms on the real Living Wage, effective voice, impact by size sector and location, impact on grant applications and impact on grant funders are drawn from the interviews and the surveys. Details of the interview and survey participants are set out in the consultation section.

5.1 Real Living Wage

Positive impacts from paying the real Living WageRespondents to the survey offered a range of potential positive impacts to their organisation from paying at least the rLW. These can be grouped into four main themes: worker benefits, recruitment and retention, organisational values and business benefits.

Worker benefits: respondents highlighted different potential benefits including increased morale, motivation and job satisfaction, of feeling valued and appreciated and an increased standard of living through higher pay.

Our organisation committed to paying the real Living Wage 5 years ago. It has had a very positive impact in that staff see that the company values them and seeks to give them adequate remuneration for their work. 3^rd sector organisation, 10-49 employees

Recruitment and retention: potential benefits included making the organisation more attractive to staff particularly in competitive sectors/area, enable the organisation to attract high calibre staff and reduce staff turnover.

Supporting staff through the Cost of Living Crisis, our sector is highly competitive in terms of staff recruitment and retention so it is essential that we pay at least the rLW. Private sector, 10-49 employees

We have been paying significantly above the rLW since the company started. We employ talented crafts people and they deserve to be rewarded appropriately. It's a strain on the profitability of the business but I believe will pay dividends in the long run. Private sector, 1-9 employees

Organisational values: these impacts reflected a desire to act with integrity and fairness which aligned with the values of the organisation. Respondents commented that it was the right thing to do, workers should be paid decently and reflect the cost of living, wanting to support local communities and have a social impact.

We believe in the Real Living Wage and as a good employer think its important that we do all that we can to ensure the workforce is paid appropriately. Especially in the currently economic climate - it fits with our social purpose and we are a fair work first employer. 3^rd sector organisation, 50-249 employees

Good for business: potential benefits to the business were highlighted including financial (through increased productivity, efficiency, sustainability), being able to apply for grants, better workplace culture with positive relationships with staff and contractors, and strengthened reputation, brand and competitive advantage.

Ability to attract better workforce leading to the potential for greater efficiency and productivity improvements. Private sector organisation, 50-249 employees

Support for the concept of a rLW was also expressed by the organisations interviewed, including as an aspiration by those who currently do not pay it. Some who now pay the rLW said they felt FWF conditionality had been the incentive for them to do this.

There was also supporting evidence from interviews with grant funders, who said that their engagement with prospective grant applicants on the issue had been largely positive.

Challenges to Paying at least the Real Living Wage

There were a range of views expressed when survey respondents were asked about potential challenges in relation to paying the rLW. Some respondents reported there were no challenges, with some saying this was because they were already paying the rLW. For others a range of challenges were highlighted, many of which had a financial aspect. Potential challenges can be grouped into themes around affordability, the workforce, revenue, the wider economic context and competition.

Affordability: respondents highlighted higher wage costs with implications for budgets, profitability, tight margins and financial sustainability.

As a low margin business increasing these employees to the rLW would wipe out the small profit margin that we have on our products. A move to rLW would cost our business upwards of £1,000,000. Private sector organisation, 250+ employees

Workforce: potential challenges included maintaining grade/band differentials if there were increases to the lowest paid or conflict/low motivation if less skilled workers had a similar salary to fully trained/experienced works. Managing increased salary costs could mean reducing the workforce, reducing apprentices or delaying recruitment to fill vacancies.

Staying within payroll budget limits has proven to be quite difficult. The difference in pay between skilled and unskilled workers has become smaller, which is fairer for unskilled workers but puts skilled workers at a disadvantage. This is because the reduced pay gap lessens their motivation to enhance or develop their skills, knowing they'll earn a living wage simply by being present. Occasionally, this leads to encountering individuals who adopt this mindset, attending work but contributing minimally to productivity. Private sector, 50-249 employees

In next year's budget, the need to find an additional £8,000 and that the rise this year almost wipes out the pay band system we had worked hard to develop to show employees that there were opportunities for progression - in the current climate, we will find it difficult to differentiate enough between levels of responsibility. 3^rd sector, 1-9 employees

The cost is very challenging when it is coupled with the general cost of living increases. The rLW annual increment has been over 10% for two years in a row now which is putting huge pressure on our staffing budget. We have reduced staffing numbers and in some cases contract hours from full time positions to part time to help pay for this. 3^rd Sector, 10-49 employees

Revenue: respondents highlighted that some grants had not increased and increases to the rLW rate were larger than anticipated – which caused difficulties.

…we have been on a standstill grant since 2015. In order to keep up with inflation and continue to pay the rLW at minimums, we have had to seek additional funding from Trusts and Foundations, which are also becoming less likely to be able to fund us long term. 3^rd Sector, 10-49 employees

Budgets for grants are fixed at the award stage and the 10% increase in rLW was not expected. 3^rd Sector, 1-9 employees

Economic context: respondents highlighted several different challenges including that other business costs had also increased, recovery from the pandemic was ongoing and the rate of increase to the rLW in recent years.

Some organisations who were interviewed echoed this, highlighting the condition being introduced in what was perceived to be already difficult conditions and reflected as a lack of understanding of the current context.

Competition: survey respondents also highlighted they felt they were risking lowering competitiveness through passing on increased costs to customers/clients where competitors were not adopting the rLW.

Other issues raised by survey respondents included the exclusion of non-salary benefits such as bonuses and private health care in the rLW requirement. Some suggested that including these could make them compliant, though it is unclear how these could be quantified in a consistent way. Another challenge was having to register and pay to be a Living Wage accredited employer when an organisation was already paying the rLW.

Summary

The evidence gathered through the survey and interviews highlight a range of views in terms of the potential benefits and challenges of adopting the rLW. While there are benefits to workers and the organisation from paying rLW, the decision to pay rLW can also be a reflection of the organisation’s values and ethos. Anticipated challenges to adopting the rLW tended to be financial, not just from the uplift to those not on the rLW but also the knock-on effects in terms of maintaining grade differentials. There were further anticipated challenges in how to respond to increased costs and potential impacts on competitiveness.

5.1.1 Young People/Apprentices

Positive Impact on young people/apprentices from paying at least the real Living Wage.

Similar to the survey responses on paying the rLW generally, respondents highlighted potential positive financial impacts for young workers and apprentices: higher wages increasing standards of living, increased financial stability and independence, being able to plan for the future and less financial stress. Respondents also pointed to potential increases in morale and wellbeing through feeling valued, happier, more equal, increased job satisfaction and commitment.

Negative Impact on Young People/Apprentices from Paying at least The Real Living Wage

There were few negative impacts suggested in the survey responses for young people/apprentices from receiving payment of the rLW. One respondent suggested young people/apprentices may be less likely to move jobs as they will want to maintain the higher pay rate.

Employer Views on Paying Young People/Apprentices at least the Real Living Wage

There were a range of views expressed in the survey. For some respondents, paying all of their staff the rLW, irrespective of age, was important to them as an employer.

Our position is resolute: all employees regardless of age or position must be paid at least the Real Living Wage. This is as true for a 21 year old full-time worker as it is for a 16 year old apprentice: everyone will make at least the real Living Wage. Private sector, 50-249 employees

Real Living Wage has ensured that all staff including young people receive a fair wage for their work and are not discriminated against by age. Young people have a more realistic route into work and therefore less reliance on DWP. 3^rd sector, 10-49 employees

Some concerns reported in the survey responses echoed those previously highlighted in relation to paying the rLW generally, such as the potential additional cost to the business. Maintaining differentials between grades was a common concern in relation to young people/apprentices and other staff.

All of our workforce are above the real Living Wage with the exception of our apprentice - if we put him on the real Living Wage this would bring him closer to our fully qualified employees and would create a unrest within the rest of the workforce. Private sector, 10-49 employees

Some respondents in the survey felt it was appropriate that young people/apprentices were treated differently in their organisation as they were considered to be in a “training grade”.

Real Living Wage creates a challenge in recognising experience and development when starting an apprentice or young person compared to people who have worked for a number of years. 3^rd sector, 1-9 employees

This view was also expressed in some interviews and that short term lower wages should be balanced against longer term skills investment.

Responses to FWF Real Living Wage Requirement

In response to the FWF requirements relating to the rLW, interview and survey respondents highlighted a range of actions they either had taken or were anticipating taking in future:

• Reducing the recruitment of young people/apprentice
• Not applying for grants
• Choosing to apply for an exception in relation to meeting the rLW condition
• A mixture of the above

The amount of funding for training for apprentices in Scotland was highlighted during interviews as low relative to the cost of training an apprentice on-site, and also lower than equivalent funding in England.

Reducing Recruitment of Young People/Apprentices

In both the survey and interviews, some organisations had or anticipated they might need to reduce the number of apprentices in the future.

We are less likely to take on young workers as a result of having to pay rLW. We are more than happy to recruit young workers and invest in training and development but we can't afford to pay them rLW on top of their training and support costs. 3^rd Sector, 10-49 employees

Budget pressures - In order to pay rLW for apprentices we have had to reduce the number of apprentice vacancies so that we can sustain paying at this level. The hourly rate for apprentices has increased from £5.90 per hour to £12 per hour which is a significant increase on our salary budgets. 3^rd Sector, 50-249 employees

Summary

Similar to paying the rLW generally, there were a range of benefits articulated for young people/apprentices being paid the rLW. There were differing view expressed as to whether young people/apprentices should be differentiated from other staff as they were “in training” – some supported this idea while others felt the rLW should be paid regardless of age. Similar challenges to those expressed regarding paying the rLW generally were also highlighted in relation to young people/apprentices, such as increasing costs and maintaining grade differentials. Reducing recruitment of young people/ apprentices was an anticipated consequence of moving to payment of the rLW.

5.1.2 Requests for Real Living Wage Exceptions

A small number of survey respondents had been granted an exception. Of these, some were now paying the rLW to apprentices, were working towards implementing the real Living Wage or were considering a longer-term strategy to deliver the rLW requirement. Others were reviewing their ability to take on apprentices or felt at present it was unsustainable for the business to pay the rLW to apprentices/young people but did not provide any further information on anticipated action.

Some employers who were interviewed reported they had applied for and been granted an exception regarding payment of the rLW to apprentices and young people aged under 18. In future, anticipated approaches included not going ahead with a planned expansion in the number of apprentices or reducing the number of apprentices. Some employers were simply unsure of how they might approach apprenticeships in future.

One Enterprise Agency who was interviewed had received a much lower level of exception applications than it had anticipated. It was unclear the reasons for this.

5.2 Effective Voice

The effective voice condition requires all organisations with a workforce to demonstrate, before they can access a grant, that all workers employed within that organisation have access to effective voice channel(s). Organisations with 21 and over employees are required to provide evidence of at least one channel at both levels (individual and collective), while organisations with fewer than 21 employees are only required to provide evidence of at least one individual channel but are encouraged to evidence both elements where they can. The guidance includes examples of both collective and individual voice channels, but it is neither exhaustive nor prescriptive.

Effective voice was a term not always recognised by survey respondents. Some respondents to the survey from private or third sector organisations were unclear what this was or how this could be implemented in their organisation.

Others asserted they already had established practices to ensure employees had effective voice.

We have always applied an effective voice since our inception in 2009. Having varied viewpoints and opinions to create and run projects and programmes brings obvious positive impacts including a more rounded and thought through approach to work and staff well-being and satisfaction. 3^rd Sector, 1-9 employees.

Everyone has a say in our organisation. Private Sector, 10-49 employees

Some employers who responded to the survey reported they had tried to implement effective voice but had faced poor engagement from staff. The reasons underlying this poor engagement were not provided.

Employers (both interviewed and surveyed) identified positive benefits relating to employees having an effective voice in their organisation. Respondents to the survey highlighted a range of positive impacts of applying the effective voice condition on their organisation. These could be grouped into four themes – organisational communication and culture, worker morale and job satisfaction, business/organisation performance, and recruitment and retention.

Improved information sharing and problem solving for the organisation and improving our positive culture. We have a strong history of loyalty of staff but effective voice enables us to continually improve performance and increase connection to the organisation. Options for collective bargaining are increased. 3^rd Sector, 10-49 employees.

Organisational communication and culture – respondents highlighted that workers understood organisational aims, worker needs were better understood and there was better engagement, collaboration, openness and transparency.

Worker morale and job satisfaction – respondents mentioned improved morale and job satisfaction, workers feeling heard, valued and included, and increased engagement and commitment

Business/organization performance – greater innovation and problem solving, better decision making, better identification of potential improvements and risk, and enhanced reputation

Recruitment and retention – some respondents felt it made them a more attractive employer and led to lower staff turnover.

Challenges

When asked about challenges in applying effective voice, there were a range of views expressed. Some survey respondents reported there were no challenges and found it easy to meet requirements, often because this was part of their organisational culture and they had well established effective voice structures in place. For those respondents who did identify potential challenges, these can be grouped into three themes – resources, people and prescriptiveness of the requirements.

Resources – respondents highlighted time, cost, capacity and managing change.

Capacity due to being a very small staff team, taking sufficient time to do this well means other things get missed. 3^rd Sector, 1-9 employees

People – getting buy in from workers and senior management, maintaining confidentiality in small organisations and not simply creating a forum for negativity/complaints.

Prescriptiveness of the requirements – some survey respondents felt the effective voice requirements were designed with a large organisation with a standard business model in mind and lacked flexibility. Potential difficulties were highlighted for smaller organisations in terms of proportionality and resources, for organisations who employ seasonal staff for relatively short periods, where staff were across more than one site or were employed on a range of working hours e.g. split shifts and where multiple unions were represented in one organisation.

Staff not particularly interested even with the offer of pay for participation. And with split shifts etc it is difficult to bring everyone together. It needs tailoring to seasonal businesses too where employees will be employed for a maximum of 7 months. Private Sector, 1-9 employees

Some organisations highlighted that while they had not introduced new effective voice channels, it did give an opportunity to formalise prior practices and gave them assurance that they were doing the right things.

Effective voice has been embedded naturally in the organisation for a number of years, however it has been a positive experience to formalise this. 3^rd Sector 10-49 employees.

The process to sign off effective voice statements was not always well understood, and some deviations from the FWF guidance were noted during the interviews. One misunderstanding which was raised in interviews was that trade union recognition was required. Enterprise agencies who were interviewed said they had encountered this view among their clients.

In addition, some public sector organisations who were interviewed highlighted difficulties in getting their effective voice statements signed off by trade unions – one reported a trade union had refused to sign as they had not felt that the employee voice was effective. These issues were also highlighted by some survey respondents who felt trade unions were leveraging their position regarding effective voice to put forward additional asks.

Some public bodies interviewed expressed frustration at the requirement to prove effective voice, given that the Scottish Government and the grant-funding agencies already know they have collective bargaining and mechanisms for individual voice and perhaps some differentiation between types of grant applicants could be applied. This view was also expressed by some survey respondents. ^[20]

Summary

Understanding and experiences of implementing “effective voice” varied. For those that recognised the concept, there were a range of potential benefits and challenges highlighted. Similar to payment of the rLW, effective voice was seen by some as embedded in the organisational culture. Costs attached to implementing effective voice related to resourcing (time and capacity). Some challenges were highlighted relating to the process of evidencing the effective voice requirements.

5.3 Impacts by Size, Sector and Location

The survey and interviews demonstrated that there is a huge amount of complexity in relation to meeting the requirements of the rLW and Effective Voice conditionality elements of FWF. For some organisations, these are not simply requirements to be met but a fundamental part of the business ethos and identity.

From the evidence gathered, challenges in implementing the rLW conditionality for the whole workforce are likely to be greater when:

• Businesses operate on low margins, particularly those where a significant proportion of their staff are on low pay
• The pay differentials between staff at different grades is small and there are knock on effects for the salaries of other employees from raising the wages of those earning least, in order to maintain those differentials
• The size of the increase in the rLW is much larger than pay rises for the rest of the workforce, or greater than anticipated which meant they were not fully budgeted for
• There are existing wage structures in place through sectoral or occupational agreements

In relation to implementing effective voice conditionality, additional challenges may exist for:

• Smaller organisations, both in terms of resourcing and evidencing the requirements
• Small to medium organisations who operate across different sites including rural areas, those who employ seasonal staff or have staff employed on a range of working arrangements e.g. split shifts
• Larger public bodies, specifically around sign-off of effective voice statements.

5.4 Impact on Grant Applications

Survey respondents who had not applied for grant funding since the new requirements for rLW and effective voice were introduced were asked why this was. The most common reason was that there were no grants relevant to their organisation, though being unable to fully meet the rLW requirement for apprentices or for all employees were also mentioned.

Some employers interviewed said they were choosing not to access grants rather than attempt to meet the conditions. This was also the experience of one Enterprise Agency who felt that many grant applicants who didn’t meet the rLW condition were choosing not to attempt to meet it.

Some organisations who were interviewed felt the costs associated with implementing the rLW were unaffordable to them, so would either be unable to apply for grants or that they would need to seek an exception if they did.

The enterprise agencies have confirmed that based on the information they have available, there is no evidence to suggest that there has been a reduction in the volume of grant applications since the introduction of the conditionality. (This was a concern for some stakeholders at the early implementation stage.) So, while its introduction may have led to some organisations not applying for a grant, there continues to be a high demand for grant funding and there has not been a material impact on the number of grants awarded and any reduction could not be attributed to the introduction of conditionality. It was noted however, that there could potentially have been a more marked reduction in the number of applications had the option to request a limited exception to meeting the rLW condition not been available.

5.5 Impact on Grant Funders

Grant funders who responded to the survey were asked to identify any challenges in applying the rLW and Effective Voice requirements to their grants. Some respondents reported no challenges while other felt they were not yet in a position to say as had not experienced any applications with insufficient evidence or a request for an exception. Where challenges were highlighted, these included bureaucracy and the additional administrative burden, a lack of knowledge of FWF on the part of applicants and that guidance was not clear enough – both for grant applicants but also grant funders. A lack of clear guidance was also mentioned specifically in relation to exceptions – both in granting and obtaining those.