Arrears payable in cases of non-compliance

Question proposed, That the clause stand part of the Bill.

We now come to the provisions that deal with the minimum wage, which are important. We touched on the minimum wage when discussing clause 7, and clause 8 deals with minimum wage arrears.

It might be helpful to the Committee if I set out the difference between how arrears are dealt with now and how we intend to deal with them in future under the provisions in clause 8. Let us consider the case of a mythical minimum wage worker who finds that they have been paid less than the minimum wage over a period of two or three years. As hon. Members will know, the Low Pay Commission recommends the rate of the minimum wage and, since its inception, it has increased year on year. My Sunday Mirror told me a couple of weeks ago that, if there is a change of Government in future, that could change. It said that senior Conservatives have said that the minimum wage will whither on the vine. Ten years on, perhaps that was a revealing insight into Conservative party thinking. It is certainly not how the Government think. Under us, the minimum wage has increased both in line with average earnings and in relation to prices.

The Minister has made a rather serious allegation. Will he provide us with the details of the people who said that? He says that they were senior Conservatives.

I think we began proceedings by saying that written evidence would be put in front of the Committee. If the hon. Gentleman wishes me to furnish him with a copy of the Sunday Mirror, I will be very obliged to do so.

I am grateful to the Minister. He has now put my mind at rest by saying that it was in the Sunday Mirror. That makes it all clear.

I will leave that point.

In practice, the minimum wage has tended to be uprated year on year on the basis of recommendations from the independent Low Pay Commission. Currently, workers who find themselves being underpaid and therefore have minimum wage arrears discover that, when they report that and it is found that they have been underpaid and are entitled to arrears, they receive the minimum wage at the rate that was in operation at the time of the underpayment. In other words, they get their back pay, but lose out on the upratings that have taken place in the meantime. Such underpayments serve as inadvertent and unintentional loans from employees to employers. The clause will change that.

The Low Pay Commission has expressed concerns on this matter over the years. It expressed particular concerns in its 2007 report. We consulted on whether arrears could be calculated in a fair way, to take account of the depreciation in value of those arrears as a result of the uprating of the national minimum wage. The overwhelming majority of respondents agreed with the aim of making  arrears fairer for workers in that way. The majority of those who expressed an opinion were in favour of calculating arrears by reference to the current rate of the minimum wage.

At this point I tread carefully, Mr. Bercow. I will attempt to take the Committee through the equation on page 6 of the Bill under clause 8. As hon. Members will see, the equation is A over R1, multiplied by R2. A is the amount of money calculated to have been underpaid to the worker, and R1 is the rate of the minimum wage at the time of the underpayment. For example, if the underpayment happened last year and the worker was underpaid for one hour, the £5.52 that was earned would be divided by the rate at which the minimum wage was paid, which was £5.52 per hour. That calculation reaches a time of precisely one hour. R2 is the current rate of the minimum wage. The formula takes an amount that somebody has been paid at the minimum wage and turns it into an amount of time in hours, based on the rate of the minimum wage at that time. In order to ensure that the fair arrears apply, that time is multiplied by the rate of the minimum wage at the time the incident is reported or found out. In the case of our mythical worker who was underpaid by £5.52 last year, they would then receive £5.73 as the fair arrears. That is the rate of the minimum wage since it was uprated.

The new method of calculating arrears is much fairer. Despite my poor teaching skills it is relatively simple, in that the concept changes an amount of money into an amount of time and multiplies that by the current rate of the minimum wage. It secures a measure of justice for workers who, as we agreed in discussion of clause 7, are often living at the margin and certainly cannot afford to lose out by giving what are, in effect, interest-free loans to their employers.

Will it be the point at which the claim was submitted, at which the judgment was awarded or at which an agreement was reached that will determine the rate used? That is important, because there could have been a change in the rate. In the unlikely event that the commission should decide on a reduction in the minimum wage—or in the even less likely event that the Tories should get in and reduce it, or do something of that order—what would be the safeguard that the formula would never result in a lesser sum? Theoretically, at least, the formula could result in that outcome.

The rate that would apply would be the one in force at the time the judgment is given. My hon. Friend is right: sometimes these things can take time to come to fruition. He asked what would happen if the minimum wage were to fall. There will come a point in the next couple of years when the voters can take that into account. They have seen what was written in the Sunday Mirror—there is a record to look at—and that may be part of their decision. The provisions ensure that if the minimum wage were to fall, employers could not argue that they should pay back arrears at the lower current rate. Clause 8 provides that the current rate is used if it is higher than the rate that was in force when the underpayment was made.

The formula is a relatively complicated sledgehammer to crack an important nut, but the nut needs to be cracked. On the definition of the pay  reference period, would a claim over two or three years during which there were several historic minimum wage rates require a number of claims? If we follow the statute verbatim, whatever that may be, mutatis mutandis, one may be forced to use only one historic rate, but several historic rates would need to be taken into account to get the right answer. Does the statute, when modified, achieve that?

No, I do not think that separate claims would be required if someone were underpaid over three or four years. As I said, in the equation on page 6, R1 is the rate at the time they were underpaid. So if someone was underpaid for 10 hours’ work three years ago and then for another 10 hours’ work two years ago, each incident would be converted into a proportion of time, and all of it would be multiplied by the current minimum wage rate. Separate claims are not needed for each year. Simplicity is important. One of the advantages of the minimum wage is that it is clear and simple to understand.

That brings me to the point made by the hon. Member for Solihull about interest. It was argued when we were consulting on fair arrears that perhaps interest should be charged on top of the calculation that I have set out. However, if we were to do that, workers would be required to complete self-assessment returns for tax due on the additional element of arrears, or interest. It is not sensible to put minimum wage workers in the position of having to fill in a tax return for what would be relatively small sums of interest when we can deal with the heart of the problem through a simple, fair arrears calculation. This is a highly legitimate issue to raise, and it has been of concern to the Low Pay Commission. Through clause 8 we will ensure fair arrears for people who are underpaid the minimum wage.

There has been a great deal of discussion this morning about various clauses. This clause will be an important measure of justice for some of the lowest paid people in the country, and I commend it to the Committee.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Clause 9 ordered to stand part of the Bill.