Wider Payment of the Living Wage in Scotland – Issues for Consideration

5 The Views of Scottish Government Contractors

5.1 This chapter presents the findings from the in-depth interviews with Scottish Government contractors. It begins by exploring Scottish Government contractors' awareness and overall perceptions of the Living Wage before going on to examine the perceived benefits and costs of promoting Living Wage through public contracts. It then examines Scottish Government contractors' attitudes towards the use of procurement processes to encourage the implementation of the Living Wage and their suggestions for how this could be supported.

Awareness and overall perceptions of the Living Wage

5.2 Almost all Scottish Government contractors had at least heard of the Living Wage prior to being interviewed. Most had read, seen or heard stories in the media about the Living Wage, with some commenting that they perceived an increased focus on the Living Wage in media stories in the past year or so. Some also mentioned having received information directly from the Scottish Government or local authorities.

5.3 Further, some Scottish Government contractors had held formal discussions, either at boardroom level or with Trade Union representatives, about the Living Wage and its implications for their organisation. A small number had been involved in implementing the Living Wage in other parts of their organisation to respond to private sector client expectations or to comply with the London Living Wage.

5.4 Overall perceptions of the Living Wage among Scottish Government contractors were largely positive, although the extent of support for a wider implementation of the Living Wage varied. Among those contractors who expressed greater support for the Living Wage, this was based on a view that it was a "fairer" or "more equitable" rate of pay than the minimum wage because it was linked to "real world conditions" rather than an arbitrary amount set by Government, which is how they perceived the minimum wage.

"The minimum wage, to me, [is] more about business trying to keep [wages] as low as possible so they can carry on as they want to. The Living Wage feels as though it's more linked to what's actually happening in terms of [real world costs]."
(Scottish Government contractor, 51-250 employees)

5.5 However, some Scottish Government contractors expressed the view that, although they supported the Living Wage in principle, there was a need to consider and address the implications of increasing employees' pay. These implications, which tended to be focussed on increased financial costs to their organisation, are discussed in greater detail later in this chapter.

Perceived benefits of implementing the Living Wage

5.6 Scottish Government contractors' perceptions about the potential benefits of implementing the Living Wage were broadly similar to those held by Living Wage employers.

5.7 With regards to benefits, the general perception among Scottish Government contractors was that implementing the Living Wage would bring benefits to both the organisation and its employees.

5.8 There were three main ways in which Scottish Government contractors felt organisations could benefit from implementing the Living Wage. Firstly, there was a view that implementing the Living Wage could result in greater employee engagement, resulting in improved staff retention, reduced absenteeism and improved workplace atmosphere. Some, particularly those working in the catering and facilities management industries, felt that staff would often leave to join another company for marginal differences in pay and that implementing the Living Wage may help to mitigate this risk. Indeed, in some cases, Scottish Government contractors felt that the potential to reduce recruitment costs and increase productivity would help to offset the increased costs of paying the Living Wage, though this view was not widely held.

5.9 Secondly, there was a perception that offering a higher wage would enable organisations to attract higher calibre employees, though this was dependent on the industry in which contractors operated. On the one hand, those in the third and public sector felt that offering a Living Wage would "level the playing field" with private sector companies who tended to offer higher salaries, meaning public and third sector organisations would have a better chance of attracting higher calibre employees. On the other hand, those in the catering and facilities management industries said that vacancies were already vastly oversubscribed, which they attributed to the current economic climate and higher levels of unemployment, resulting in them being able to select the best candidates.

"[If the Living Wage is implemented] it means that people can move for career advancement rather than [if one company] is paying a little bit more than the other. So, I think that, it creates a mutual environment really for small organisations to recruit and retain staff."
(Scottish Government contractor, 11-50 employees)

"At the moment, recruitment is not a problem; we will fill a job on the same day as we advertise it. So, we don't think that there is pressure in the job market at the moment, but the job market is a tough place, so it is easier to recruit. Five or six years ago it was difficult for us to recruit but the world is different place to what it was then."
(Scottish Government contractor, More than 250 employees)

5.10 Thirdly, a common view held by Scottish Government contractors was that being seen as a Living Wage employer would be beneficial to their reputation, particularly among public sector clients. They felt that paying the Living Wage demonstrated that they were a socially responsible organisation and were contributing to the benefit of society and were, ultimately, aligned with the values of public sector clients.

5.11 With regards to the potential benefits to employees of implementing the Living Wage, a commonly expressed view by Scottish Government contractors was that the implementation of the Living Wage could:

• Improve morale among employees, which could, in turn, lead to greater levels of job satisfaction and engagement among employees who received pay increases. However, some contractors were more sceptical about the impact on staff morale and engagement, often making the assertion that other working conditions had a greater influence on job satisfaction than pay. Further, some felt that any improvement in staff engagement would be a temporary boost following implementation which would be less pronounced once the Living Wage became "the norm"
• Contribute towards improving the general health and wellbeing of employees. This view was predicated on the belief that, by being paid a wage that enables employees to support themselves and their families adequately, employees would be less concerned about "making ends meet" and less likely to need more than one job or to rely on the state to subsidise their earnings, which would have a positive impact on their physical and mental wellbeing.

"If people feel better about their work, [they tend to be] less stressed. Stress is a contributory factor to many other illnesses and killers [and], for that matter, [the Living Wage could have a] beneficial effect on society [if] people to feel better about being valued at work."
(Scottish Government contractor, 1 - 10 employees)

Perceived barriers to implementing the Living Wage

5.12 Scottish Government contractors expressed a number of concerns about the potential financial cost of promoting Living Wage through public contracts. Again, there were some similarities between the concerns identified by contractors and those identified by Living Wage employers, though contractors displayed deeper concern about these issues than employers. Further, many contractors went on to say that, in order for the benefits of implementing the Living Wage to be realised, such concerns would have to be addressed.

5.13 The prevailing view among Scottish Government contractors was that it would be difficult for many companies to absorb the additional cost of paying the Living Wage. Contractors working in smaller companies and those operating in industries with low profit margins, such as catering, facilities management and retail, expressed greater concern about the financial implications of paying their staff the Living Wage. Some larger contractors also highlighted that six- and seven-figure increases in wage costs would be required to implement the Living Wage across their businesses.

5.14 Some of the concerns expressed by Scottish Government contractors in relation to wage costs were similar to those held by Living Wage employers (discussed in chapter 4), namely regarding the potential inflationary impact on wages across the organisation and the potential for some employees to lose out on tax credits as a result of earning higher wages.

5.15 Further, some Scottish Government contractors felt that widespread implementation could result in the Living Wage being used as a "wage floor" by organisations to depress wages within industries. A view shared by several contractors was that some organisations would offer the Living Wage "as standard" rather than offering an appropriate wage based on an assessment of the specific requirements of a job. In particular, such contractors were concerned about the recruitment of young people, interns and trainees, whom they felt would be most likely to be offered the Living Wage rather than higher wages that match the responsibilities associated with a specific role.

"If you announce a minimum wage [companies] will think it's a guidance, so [companies] think that's what you pay, rather than taking into account what the job is worth. [Companies will] think that's what you pay and don't give too much thought to the value of the job."
(Scottish Government contractor, 11-50 employees)

Views about potential impact on employment of young people

5.16 A further aspect explored among Scottish Government contractors was the potential impact on the recruitment of younger people if the Living Wage was implemented. On the whole, most contractors felt that the implementation would have little impact on the recruitment of young people. Some said they already pay young people at, or above, Living Wage levels, while others felt that graduate and apprenticeship schemes were key parts of their business that they would continue to run.

5.17 However, Scottish Government contractors expressed two main concerns about the blanket application of the Living Wage across all age groups. Firstly, some felt that, when considering how much young people are paid, it was important to look at the wider investment in young people by companies, such as the cost of training and providing opportunities to gain experience. Consequently, they felt that implementing the Living Wage may result in some companies reducing their investment in providing training to young people.

"Well, we would have to look at [paying young people the Living Wage] very carefully, because part of the whole apprenticeship idea is that you are putting management resources into the skills, knowledge and development, of that individual, so there is another cost in terms of time for the managers who are involved in that. We would need to look at [the costs] very carefully."
(Scottish Government contractor, 51-250 employees)

5.18 Secondly, there was a broader concern expressed by some Scottish Government contractors about the "appropriateness" of paying young people at Living Wage levels. This view was predicated on the belief that many young people live at home and, therefore, don't need a Living Wage to survive, as many of the subsistence costs the Living Wage is designed to cover will already be addressed through the household income of their parents.

"I think [the Living Wage should] apply to people who are supporting themselves, but I think [there is a need to] think about the circumstances and what's appropriate. The principle of the Living Wage is to support people to have a certain standard of life, whereas youngsters who are in that transition period between home and the work are achieving that balance and it's not about taking advantage of them, it's about [paying them] an appropriate level."
(Scottish Government contractor, 11-50 employees)

5.19 However, a minority were of the view that paying younger people a Living Wage would have a positive impact by improving the attractiveness of work, which could act as an incentive for younger people to choose work over benefits.

Views about the use of procurement to encourage implementation of the Living Wage

5.20 Scottish Government contractors were asked about their views on the potential for the Scottish Government to use procurement processes to encourage the payment of the Living Wage. On the whole, Scottish Government contractors were supportive of the principle of using public sector procurement to promote the Living Wage. A number of contractors felt that, if the Scottish Government was serious about promoting the Living Wage, then procurement policies were the most effective way of encouraging companies to adopt. Indeed, some Scottish Government contractors commented that incorporating the Living Wage into procurement practice would help to "level the playing field" and enable contracts to be judged on quality and their contribution to society as opposed to cost. It is important to note that EU law limits the possibility of this as an approach, as any requirement on contractors to pay their employees a living wage set higher than the UK's National Minimum Wage is unlikely to be compatible with EU law.

"[Incorporating the Living Wage into procurement] recognises the appropriate costs, so it looks at the real value [of the tender], so it creates an even playing field between those organisations that are socially minded and those who would seek to create a price advantage by paying less."
(Scottish Government contractor, 11-50 employees)

5.21 Some Scottish Government contractors were more sceptical about the use of procurement to promote the implementation of the Living Wage. Three main reasons for this scepticism were offered. Firstly, there was a concern about the financial implications of higher wage costs, and a view that using the procurement process would favour larger companies, as they would be better placed than smaller companies to absorb these additional costs. Secondly, Scottish Government contractors had concerns about a potential "domino effect" occurring if organisations in a supply chain all implemented the Living Wage, which could impact exponentially on the price of goods and services. Thirdly, some felt that focussing on the Living Wage was too arbitrary, and that it should be considered alongside wider packages offered to employees, such as uniforms, meals and employee benefits.

5.22 In relation to the challenge of absorbing higher wage costs, some contractors said that, in the current economic climate, prices and profit margins on contracts were being "squeezed", as both public and private sector clients seek to reduce costs. They felt that profit margins on many contracts were already tight, making it more difficult for businesses to absorb any increase in staff costs.

"[Our organisation] can't afford to [increase staff costs] because the margins are typically [very low] and the Scottish government are, in these times of austerity, always looking for savings to their contracts. So, it's a bit of a vicious circle where no one really wants to pay it and no one can pay it and that's the difficulty."
(Scottish Government contractor, More than 250 employees)

5.23 A further view held by some Scottish Government contractors was that price was often the deciding factor when contracts were awarded, which meant there was a danger of organisations becoming uncompetitive if staff costs increase as a result of implementing the Living Wage. They felt there was a danger of being undercut on price by competitors who did not implement the Living Wage, and that organisations paying the Living Wage would lose out.

5.24 As a result of the pressures on contract margins, the predominant view among contractors was that increases would, ultimately, have to be passed on to clients.

"We have to work with our client, but we have a commercial organisation to operate and will seek some recovery of [increased costs] from our client. There is clearly a cost implication to [implementing the Living Wage] and we need some contribution by the client towards [covering those costs]."
(Scottish Government contractor, More than 250 employees)

5.25 A small number of Scottish Government contractors felt that they would be able to absorb the additional costs of implementing the Living Wage provided that cost increases could be offset elsewhere; for example, by seeking efficiency savings elsewhere in the contract, or through realising lower recruitment costs as a result of improved staff retention.

Actions suggested by contractors to support the use of procurement to encourage payment of the Living Wage

5.26 In order to address concerns, Scottish Government contractors identified a range of actions that could be undertaken to support the use of procurement to encourage implementation of the Living Wage. These actions tended to be focussed on addressing concerns about the financial impact of implementing the Living Wage, and ways of ensuring that companies are prepared for the transition.

5.27 With regards to addressing concerns about the financial impact, the predominant view among contractors was that the Scottish Government should help to subsidise increases in wage costs, primarily by paying for these costs as part of the terms of the contract. This was perceived as important, particularly in the short term, to enable organisations to implement the Living Wage while still protecting profit margins on contracts. There was a view held by some contractors that increases in the cost of public contracts would be offset by savings accrued from lower spend on tax credits and benefits, and from higher tax intakes, as a result of employees being paid higher wages.

5.28 Alternatively, some contractors suggested that the Scottish Government could subsidise the implementation of the Living Wage through offering grants or tax breaks to contractors, particularly small companies, to help them absorb the initial cost of implementing the Living Wage. Contractors cited examples of schemes designed to tackle unemployment - such as the Community Job Fund, which encouraged companies to take on more employees ‑ as ways in which subsidies could be delivered.

"In terms of the transition, [the Scottish Government need] to make sure that potential bidders are not disadvantaged [and] but one approach could be [to offer] tax concessions to companies to adopt a Living Wage."
(Scottish Government contractor, More than 250 employees)

5.29 There was a feeling that businesses needed time and help to implement the Living Wage, and that this could be achieved through:

• Encouraging payment of the Living Wage in public sector contracts, but not making it mandatory. Contractors felt that organisations bidding for contracts should receive additional points when assessing tenders if they can demonstrate that they pay the Living Wage, rather than being excluded for not paying it. It was felt that this would encourage companies to implement the Living Wage in order to gain extra points, while not excluding those who were unable to afford to implement the Living Wage.
• Working in partnership with contractors. The prevailing view was that, while there was support for the Living Wage, contractors' concerns would need to be addressed in order to ensure that organisations were prepared and to minimise disruption to the tendering process. Some contractors suggested that industry bodies could help to promote the Living Wage and ensure that a uniform approach is adopted within industries.
• A staged implementation beginning with larger contracts before filtering down to smaller contracts. There was a perception that larger contracts offered greater profit margins and businesses would be better equipped to absorb financial costs. The implementation of workplace pensions, in which the requirement to pay pensions is staggered over time depending on company size, was often cited as an example of how this might be achieved.
• Providing clarity in the tendering process about whether payment of the Living Wage is mandatory, voluntary or even considered at all. A small number of contractors felt that there was currently a lack of clarity about the role that the Living Wage currently plays in awarding contracts and that greater clarity was needed to help contractors when costing and submitting bids.
• There was a general feeling that the Scottish Government could do more to raise awareness among contractors about the Living Wage in general and its role in procurement decisions specifically. When asked how the Scottish Government might support businesses, contractors suggested a number of methods, including:
  • Providing information about the Living Wage, how it is calculated and what implementation entails through promotional campaign or formal government channels, e.g. Business Gateway or Scottish Enterprise.
  • Making use of local government and non-departmental government bodies who deal directly with contractors to provide information and support. This was seen as particularly important for Third Sector organisations, which rely heavily on local government contracts for revenue.
  • Organising workshops with contractors to provide information and advice on best practice for implementing the Living Wage.

5.30 Regardless of the method chosen, many contractors felt that the Scottish Government should, where possible, provide robust evidence on the impacts on contractors of implementing the Living Wage, and advice on addressing barriers to implementation.