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Employment Protection (Variation Of Limits) Order 1977

Volume 387: debated on Thursday 1 December 1977

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5.5 p.m.

rose to move, That the draft Employment Protection (Variation of Limits) Order 1977, laid before the House on 14th November, be approved. The noble Lord said:

My Lords, I beg to move that this Order be approved. The order is submitted for your approval in accordance with Section 86 of the Employment Protection Act 1975. That section requires the Secretary of State for Employment to carry out each year, beginning with 1977, a review of the limits to certain payments made under the Employment Protection and Redundancy Payments Acts. The limits relate to guarantee payments to workers on short-time and temporary lay-off, and to the weekly earnings limit laid down for the purpose of calculating redundancy payments, unfair dismissal awards and certain debts in relation to the insolvency provisions of the Employment Protection Act.

Three factors are to be taken into account in the review

"the general level of earnings obtaining in Great Britain at the time of the review; the national economic situation as a whole; and such other matters as he thinks relevant".

If the Secretary of State, in the light of his review, considers that any of the limits should be changed he must prepare and lay before each House the draft of an order giving effect to his decision which is subject to the Affirmative Resolution procedure. If he considers that any of the limits should not be varied he must lay before each House a report stating his reasons.

The 1977 review has now been completed. My right honourable friend in another place has decided that all but two of the limits covered by the section ought to be changed and those decisions are set out in the order now before your Lordships and in the report laid at the same time. If the order is approved both in this House and in another place, the changes to the limits will come into effect on 1st February 1978. That is the earliest date on which any change to the guarantee pay limits could take effect, and it will allow time for industry to be alerted to the new limits.

I turn now to the first set of limits covered by Section 86. They concern the guarantee payments provision of the Employment Protection Act 1975 (Sections 22 to 28) under which an employee put on short-time or temporary lay-off is entitled to a guarantee payment for a complete day without work. These payments are subject to three limits on the amount and duration of guarantee payments, all of which must be covered by the annual review. One limit is concerned with the monetary amount and two with duration. The last two are in terms of, first a specified number of days in what is known as a " relevant period " for which an employer must make guarantee payments, and, secondly, the length (and therefore the starting dates) of the relevant periods themselves. At present the monetary limit is £6, the specified number of days is the number of days per week, not exceeding five, worked by an employee under his contract of employment, and the relevant periods are the quarters commencing 1st February, 1st May, 1st August and 1st November. In other words, employees are at present entitled to guarantee payments of up to £6 per day for a maximum of five workless days per quarter.

In reviewing these limits, the first of the three factors which must be taken into account is the general level of earnings obtaining in Great Britain at the time of the review. It is the year-on-year increase in the general level of earnings which is, of course, most relevant in the context of an annual review of the guarantee pay limits. The most up-to-date and comprehensive indicator available at the time of the review related to the year-on-year figure for the whole economy at August 1977, which was published in the October issue of the Department of Employment Gazette, as 7·2 per cent.

The second factor to be taken into account is the national economic situation as a whole. The Government continue to give priority to the attack on inflation and unemployment. Additional costs to employers which might have to be passed on in higher prices must therefore be kept as low as possible. Moreover, the more an employer has to pay out in guarantee pay the greater the risk that he might consider redundancies as an alternative. Both these considerations militate against any increase to the guarantee pay limits which increase the cost of statutory guarantee pay by more than the rate at which earnings are increasing.

But there is a further consideration to set against these. In relation to the third factor—that is, whether other relevant matters should be taken into account—my right honourable friend has had regard to the fact that some workers are now less well off with statutory guarantee pay for the first live workless days per quarter than they were when they could claim unemployment benefit for those days. This is due mainly to the fact that guarantee pay is subject to tax whereas unemployment benefit is not. The rules for claiming unemployment benefit however are complex. They were designed primarily for the needs of the wholly unemployed and provide inter alia that unemployment benefit is not normally paid for the first three workless days of a spell of short-time or lay-off. Because of this the Department of Employment estimates that only a very small percentage of all the workers on short-time are, in fact, affected by this problem. On its own it would not justify a high across-the-board increase in the monetary limit to guarantee pay. But it does indicate that priority should be

given to increasing the monetary limit rather than the limits on duration.

These three factors have led my right honourable friend to decide to increase the monetary limit to guarantee pay, and to increase it by slightly more than would be indicated by the general level of earnings alone. Noble Lords are therefore being asked to approve an increase of 60p on the £6 limit. So far as the other two guarantee pay limits are concerned, there are separate reasons for not changing them, which are set out in the report laid before your Lordships. It would be premature to change the limits after only nine months' experience of statutory guarantee pay, as they need to be considered in the light of the voluntary arrangements made in industry.

Having dealt with the case for an increase to the guarantee pay limits, I shall now move on to the second and third set of limits referred to in Section 86. These are the weekly earnings limits as applied to the insolvency and unfair dismissal provisions of the Employment Protection Act and to the calculation of a payment under the Redundancy Payments Act. I think it will make it easier to understand if I start with the limit under the Redundancy Payments Act, as it was from this Act that the figure of £80 was adopted in 1975 for the insolvency and unfair dismissal provisions of the Employment Protection Act.

When the earnings limit was first set at £40 in 1965 it was intended to allow the total pay (excluding overtime) for the bulk of the working population to be taken into account in calculating their redundancy payment, while at the same time excluding the higher pay of top managers and executives. This exclusion protected the fund against disproportionate claims in respect of the highest paid earners who frequently enjoy the protection of private redundancy arrangements.

In August 1974, the limit was increased to £80 and restored very broadly the earnings coverage of the scheme to its original level. After taking into account the fact that earnings have risen substantially since August 1974, and the national economic situation as a whole—that is the need to keep additional costs to a minimum both for employers and to the Redundancy Fund—we have reached the conclusion that an increase from £80 to £100 would be reasonable.

I think it would help if I attempted to explain very briefly the way in which a redundancy payment is calculated. A scale provides for each year of service to be worth either half a week, one week or one and a half weeks' pay according to age. At present earnings in excess of £80 must be disregarded. As the maximum service which may be taken into account is 20 years, the maximum current redundancy payment is £2,400—that is, 30 weeks at £80—the entitlement, for example, of a man aged 62 with not less than 20 years' service and earning at least £80 a week excluding overtime. The increase in the limit to £100 will, therefore, increase the maximum payment to £3,000.

As the earnings limit stands at present, it cuts across the top end of the earnings of many workers, including the higher paid manual workers—who in general are skilled workers. It is estimated that over 25 per cent. of full-time men are earning over £80 a week and the limit we are proposing will give full earnings coverage (excluding overtime) to approximately 87 per cent. of all men (97 per cent. manuals and 71 per cent. non-manuals.) Nor have the ladies been forgotten. The fact is that women tend to earn less on average than men. Therefore, this means that the percentage of women's total earnings covered by a £100 limit will be higher than that for men.

I think it important for us all to be clear about what this change will mean in terms of hard cash. The average redundancy payment is currently of the order of £650. We estimate that it would increase by approximately 5 per cent. Employers will be able to recover 41 per cent. of the additional cost from the Redundancy Fund. The additional cost to the fund is estimated at approximately £4 million for the next financial year, and this can be met without any increase in the amount which employers are required to pay in order to finance the fund.

The additional cost to those employers who are required to make redundancy payments to employees earning more than £80, will be relatively small on average. On the other hand, it will bring a useful improvement in benefit for the higher paid redundant worker. I am sure that none of us here today would regard it as fair to exlcude part of the earnings of at least 25 per cent. of the working population simply because they happen to be earning more than £80aweek. Indeed, for those employers who have introduced more generous schemes than that provided by the Redundancy Payments Act, under which the whole of the additional cost is borne directly by the employer, the increase in the limit could well bring some financial benefit. In such cases where the statutory benefit can be offset against the private scheme, the larger amount of rebate from the Redundancy Fund which will now be payable in respect of those employees who were earning more than £80 a week, will actually result in a decrease in cost to the employer.

As I mentioned earlier, the earnings limit also applies to the unfair dismissal provisions. Section 75(4) of the Employment Protection Act provides that an £80 limit shall apply in the calculation of the basic award of compensation for unfair dismissal. Because this award is intended to reflect the amount of redundancy payment which would have been received by an employee if he had been fairly dismissed on redundancy instead of being unfairly dismissed, it follows that this limit should remain in line with the redundancy payments earnings limit.

It is also the case that the amount which a tribunal may award where the employer has refused to comply with an order for reinstatement or re-engagement is subject to an £80 weekly earnings limit under Section 72(8) and has, therefore, to be reviewed also. There are no substantial reasons for allowing this limit to get out of line with the limit for redundancy payments. If it is right, as we think it is, to maintain the link between the Redundancy Payments Act and the basic award of compensation for unfair dismissal, it is sensible to keep the limits in step throughout the unfair dismissal provisions and to adopt £100 a week also for the purposes of Section 72(8). The additional cost to public funds of an increase in the limit as it applies to unfair dismissals will be very small. It will be picked up by the Redundancy Fund under the insolvency provisions only where the employer is insolvent and therefore unable to pay.

Finally, I would mention the figure of £80 referred to in Section 64(5), which applies under the insolvency provisions of the Employment Protection Act 1975 to claims for arrears of pay, pay in lieu of notice and holiday pay. Given the close link between redundancy and insolvency it was natural to adopt the same weekly earnings limit in 1975. It makes equally good sense today to keep this in step with both redundancy payments and the unfair dismissal provisions, and here also we are proposing an increase to £100. It is estimated that the additional cost to the Redundancy Fund for the financial year 1978/79 of an increase in the insolvency provisions limit to £100 is approximately half a million pounds.

If I may sum up very briefly. The effect of the present order is to increase from £6 to £6·60 the monetary limit for guarantee pay, and from £80 to £100 the weekly earnings limit used for the calculation of a redundancy payment and for the purposes of the unfair dismissal and insolvency provisions of the Employment Protection Act 1975. These increases are submitted for noble Lords' approval, take full account of the statutory criteria laid down in Section 86, and will, I hope, commend themselves to your Lordships as being a reasonable outcome of the first statutory review of limits under that section. I beg to move.

Moved, That the draft Employment Protection (Variation of Limits) Order 1977, laid before the House on 14th November, be approved.—( Lord Wallace of Coslany.)

5.20 p.m.

My Lords, the noble Lord, Lord Wallace of Coslany, has given us a brief and welcome hiatus between the problems of semi-aquatic rodents and those of broadcasting. The noble Lord's statement was very detailed. Indeed, I should really have liked to have had a copy of his statement in order to give it perhaps the detailed consideration it merits. It seems to me that in general what this order provides us with is an instance of indexation; of indexing the financial provisions of a particular piece of Government benefit to around 10 per cent. Does this indicate that the Government are beginning to look favourably in general on indexation as a method of fighting inflation? If so, will the noble Lord indicate what other dispositions of public money may be indexed?

I think that the noble Lord mentioned in his statement that the Chancellor is raising guaranteed payments above the general levels of price rises. But surely, unless I have mistaken him, this is not the case since these provisions are roughly, if my calculations are right, within the 10 per cent. general limit whereas actual price inflation is running at around 14½ per cent. The noble Lord mentioned top salaries and said that earnings have risen substantially since 1974. That is, of course, true of the higher working wages over £80 a week, if you like, but certainly not true of top salaries. We had in your Lordships' House yesterday my noble friend Lord Boyd-Carpenter's Question on the salaries of heads of nationalised industries who, if I remember, were not even getting 10 per cent. as of yet.

I would ask the noble Lord not in respect of this order but in respect of its renewal at a later stage to ask the Chancellor to look at this in respect of redundancy payments again in the spring Budget, because at the present rate we shall have to look at it rather more than once a year. I understand that the noble Lord mentioned the Redundancy Payments Fund and said that 41 per cent., I think, was recoverable by employers. But is it not the case that employers have to contribute to the funding monies as well, and is this altogether fair?

If he could, I should like the noble Lord also to give us a notion of the overall estimated cost of the present order. I would this afternoon of course prefer to be debating how we could fight unemployment rather than how we are coming to learn to live with its effects. One of the disquieting features of our contemporary life is that we seem to be adjusting to inflation as well as trying to fight it, and learning to adjust to high levels of unemployment as well as trying to fight them.

Since in my view we shall not see unemployment below 1 million for a decade or so, and since the achievement of single-figure inflation, even if it does occur, will no doubt be hailed by the present Government as a triumph, I suppose that there is not much else that we can do other than adjust. Too many chances for a short and severe programme for fighting inflation have been lost, and too many soft options have been taken. We, on this side, do not oppose this order, except to say that its very necessity is an admission of how relatively badly we, as a nation, are doing in combating inflation and in combating the high levels of unemployment which inflation engenders.

5.25 p.m.

My Lords, we on these Benches would also like to thank the noble Lord, Lord Wallace of Coslany, for the clear way in which he has sought to introduce this order. I think I now understand a little better the reasons for it having to do, as the noble Earl also seems to think, with the general concept of indexation. We had a lot to say in criticism of the Redundancy Rebates Act when it was before your Lordships earlier this summer. Of course we have noted with particular interest the increase in the limit on the amount of a week's pay for the purpose of calculating redundancy payment from £80 to £100. I shall not weary your Lordships by rehearsing the arguments that we adduced at the time for criticising the Redundancy Rebates Act except to say that one was that we felt it was not a reasonable use of the Redundancy Fund that it should effectively be used to reduce, as was the case, the public sector borrowing requirement.

I do not know whether it is an altogether fair question to put to the noble Lord, Lord Wallace, and I am sorry to say that I have not given notice of it to him, so I shall quite understand if he cannot answer it, but it would certainly be helpful to us to know, since at the time of the passage of the Redundancy Rebates Act there had been a substantial increase in the Redundancy Fund, how the balance in that Fund now stands, or how it will stand after effect has been given to this order.

As I understand it anyway, an effect of the order will be to increase the amount of contribution to be made by the Government to increased redundancy payments to be made by employers. In those circumstances, the strictures which we made at the time of the passage of the Redundancy Rebates Act do not, as we see it, apply. We are therefore content that this order be approved.

My Lords, there is one question which I should like to ask the noble Lord, and which I am afraid will display a great deal of ignorance on my part. He referred once or twice to insolvency. Can he refresh my memory in a sentence or two as to what happens in the event of 100 per cent. redundancy due to the employer either going into voluntary liquidation or going bankrupt?

5.28 p.m.

My Lords, in reply to the noble Viscount who has just spoken, this was a short, quick question. On the spur of the moment I cannot give him an adequate answer. I shall endeavour to have it in hand before the debate is finished. If we are not successful, I shall give it to him in the House's usual fashion.

The noble Earl, Lord Gowrie, referred to indexation. I should like to clear up this position. The answer on indexation is that it is not indexation. The Minister has to have regard under Section 86 to, among other things, the general level of earnings. There is no general intention to use the index link. He referred to my right honourable friend the Chancellor of the Exchequer taking note of certain things. That note will be passed to my right honourable friend, but of course the noble Earl will not expect me to stand at this Box and try to answer for the Chancellor of the Exchequer. That is the last thing on earth that I should like to do at the present time.

So far as price inflation is concerned, to which the noble Earl referred, there is no attempt to keep in line with this because the Act expressly requires the review to bring increases of guaranteed pay in line with the general level of earnings. Guaranteed pay is in fact a form of pay and because it is expressed as an absolute sum there must be a device to raise it with pay.

As I expected, the noble Lord, Lord Rochester, referred to the previous debate on the rebate order. I cannot at the moment give him the effect of these new provisions on the fund but I can tell him that, as at 25th November 1977, the fund's total was £24 million. As for the vexed question—and I appreciate it is a vexed question—of the 41 per cent. rebate, as I promised when the ' order was before the House, it will be reviewed. It has of course been operating for only three months. I can guarantee that there will be a review, but, as the noble Lord will expect, I cannot guarantee the result of that review.

Since speaking I have been given the figures of the total cost. The overall cost will be approximately £4·5 million on redundancy, and so on, and £3 million on statutory guaranteed payments at current levels of short time; on average, about £7 million overall. On the question of the rebate, it is true that employers provide the money for the fund, which, as I say, is in surplus to the tune of £24 million now, but to abolish the employers' contribution would be wholly against the basic concept of the scheme and there is no prospect of a change. The only possible prospect of any change is a review in due course and a possible upgrading to 50 per cent. or something of that order, but I am not making a forecast and to do so would be too dangerous at this stage. I hope I have covered most of the points that have been raised and, if I have not covered that of the 100 per cent. redundancy, I will have the matter looked into and send the noble Lord concerned an adequate answer.

On Question, Motion agreed to.