6 01 March 2017
Finance and Performance Committee
16 February 2017
Report no: FPC2017/1/83
Living Wage Considerations for Hutt City Council
Purpose of Report
1. To provide Council with an understanding of the Living Wage and options and steps for the possible implementation of a Living Wage at Hutt City Council.
2. To seek recommendations from the Committee regarding the possible implementation of a Living Wage.
That the Committee recommends that Council:
(i) notes the information in the report;
(ii) recommends that Council EITHER:
a. not adopts the Living Wage at Hutt City Council; OR
b. adopts the Living Wage
for Council employees with effect from
c. adopts the Living Wage for Council employees meeting specified criteria only, with effect from 1 January 2018;
(iii) recommends that Council EITHER:
a. not adopt a Living Wage policy at Hutt City Council in respect of direct contractors to Council; OR
b. adopts a policy whereby contractors applying a Living Wage approach are given a weighted preference during Council tender processes; OR
c. requests officers to conduct a thorough investigation into the potential costs and benefits of enforcing a Living Wage approach with significant direct contractors for service to Hutt City Council.
The Living Wage Movement
3. The Living Wage Movement is modelled on living wage movements in other cities around the World.
4. Living Wage Movement Aotearoa New Zealand brings together community/secular, union and faith-based groups to campaign for a Living Wage.
The Living Wage
5. The Living Wage Movement Aotearoa New Zealand defines the wage as: ‘The income necessary to provide workers and their families with the basic necessities of life. A living wage will enable workers to live with dignity and to participate as active citizens in society.’
6. The original Living Wage identified in December 2012 and announced in 2013, was constructed through independent research by the Family Centre Social Policy Research Unit led by Mr Charles Waldegrave and Dr Peter King.
7. The Living Wage rate is based on a rate in the market. A full review every five years will involve analysis of the movements in expenditure items, wages and inflation to check that the annual increases remain realistic, robust and true to the Living Wage definition.
8. The original New Zealand Living Wage rate of $18.40 per hour was publically announced in February 2013.
9. The recalculated Living Wage hourly rate for 2016, which came into effect on 1 July 2016, is set at $19.80 per hour. This is an increase, in line with the average movement of wages, of 55 cents on the 2015 rate.
10. The rate is based on research into the needs of a model family of two parents (working 60 hours a week) and two children.
11. The living wage is $4.55 per hour more than the government minimum wage of $15.25 per hour.
12. As of 1 April 2017 the government minimum wage will rise to $15.75 per hour.
13. Council estimate the Living Wage may increase to be around $20.20 per hour in 2017/2018 based on Council staff inflators. Annual adjustments to the Living Wage are announced in February each year.
Accredited Living Wage Employer
14. The criteria to be an accredited living wage employer is:
a. all directly employed workers are on the living wage;
b. all indirectly paid workers employed by contractors, delivering a service to the business/ organisation on a regular and on-going basis, are either on the current Living Wage or on milestones agreed as part of the Licence;
c. employers have provided workers with access to a union; and
d. workers terms and conditions have not been reduced due to being on the Living Wage e.g. reduction in hours or other benefits.
15. The Living Wage Licence lasts for 12 months – licence fees currently are $2,500 for our sector and our organisation size.
16. Once the licence has been signed and fees paid you will be recognised as a Living Wage Employer and licensed to use the Living Wage Employer Mark.
17. The Living Wage Movement has confirmed the full list of accredited employers as at July 2016, with a total of 58 organisations earning the recognition.
Submission to the Hutt City Council – Hutt Valley Living Wage Network
18. A submission on the Hutt City Council proposed Annual Plan 2016-2017 was given by the Hutt Valley Living Wage Network to the Community Plan Committee meeting on 17 May 2016.
19. The Network called on Council to include the following in the Annual Plan 2016-2017:
a. support for the principle of a living wage;
b. have an understanding of the impact of low pay and inequalities in our community;
c. to then work together with the Hutt Valley Living Wage network to examine the feasibility of introducing a living wage for employees of Hutt City Council, Hutt City Council Controlled organisations and those organisations that directly contract to Council for regular and ongoing services; and
d. actively support and encourage Hutt employers to become living wage employers.
20. According to the submission there are currently three living wage employers in the Hutt Valley. Two of these employers are community organisations, Hutt Union and Community Health Service and Common Unity, and one small business enterprise - Fresh Desk.
21. At the Community Plan Committee meeting the Mayor requested that the Chief Executive prepare a report for Council to consider in relation to the Living Wage. A decision was later made to prepare and present the report after the fast approaching election. This was to avoid the possibility of the matter being debated twice (both before and after the election) as a result of changes to Council’s elected members.
22. This report has been prepared to coincide with the first meeting of Council’s newly established Finance and Performance Committee.
The Living Wage debate
23. The level of the Living Wage is calculated to ensure that a particular level of disposable income can be met from a combination of after tax income and available government assistance.
24. However, the extent to which the employer, or the social welfare system, should be responsible for adequate living standards is contentious.
25. On the Living Wage Aotearoa website ‘the movement believes it is the responsibility of employers to pay wages at a level that allows people in full-time work to support themselves and their families. This is a matter of human dignity. It is only in recent years that it has become acceptable in countries such as England and New Zealand for employers to pay very low wages, in the expectation that these will be topped up to a somewhat livable level by governments. This means that taxpayers are subsidising wages to the tune of billions of dollars for profitable enterprises.
26. The Movement is not aware of anyone who would prefer to be paid a low wage and then deal with a government agency to receive a top-up of that wage, rather than simply being paid enough to live on by the employer. While the Movement believes it is a fundamental obligation of employers to pay wages on which people can live, we accept the reality that the free-market model presents many with a challenge in doing so. That is why the accreditation system for Living Wage Employers is a voluntary programme.’
27. Contrasting this point of view, on RNZ's Sunday Morning programme, Mr Eric Crampton, who is an economist and the director of the New Zealand Initiative, said among developed countries New Zealand already had the highest minimum wage in relation to the average wage.
28. Mr Crampton said it was unreasonable to set the minimum wage high enough for people to live off it without any subsidy.
"I don't think that there is any problem that is solved by the minimum wage that is not better solved through things like wage subsidies and Working for Families," he said.
The minimum wage was poorly targeted and welfare systems were better placed to support lower-income workers, he said.
"We should look at where the burden of supporting lower productivity or lower income workers should fall," he said.
"Should it fall on the employers and customers of firms that supply goods and services that are produced by lower income workers? Or should it fall on the tax base more broadly?”
"We've got a tax system that's progressive - it tries to spread the burden to where it can be afforded. When we instead put that burden onto employers of lower productivity workers, we knock them out of work."
29. Council’s Senior Research and Policy Advisor has conducted a literature review on the Living Wage and summarised his findings attached as Appendix 1 to the report.
30. The Treasury made a Living Wage information release in November 2013. That report is attached as Appendix 2 to the report. The report forms some strong conclusions, such as: “The Living Wage is therefore not well targeted at low income families with children.” However the weekly income of these types of household would still increase under the Living Wage calculation.
31. Additional information related to the Living Wage is available online. Selected information in support of the Living Wage can be found on livingwage.org.nz/information. The Taxpayers Union has just released a report entitled “Best of Intentions, Worst of Results”, which highlights some negative effects and can be found at taxpayers.org.nz.
The Living wage and government assistance
Working For Families
32. Working for Families makes it easier to work and raise a family. It pays extra money to many thousands of New Zealand families and is available for:
a. almost all families with children, earning under $57,000 a year;
b. many families with children, earning up to $74,000 a year;
c. some larger families earning more; and
Working for Families is delivered by Work and Income and Inland
33. The Living Wage interfaces strongly with Central Government income support measures such as Working for Families. A paper prepared by New Zealand Treasury on the Living Wage estimates that over and above standard PAYE and ACC taxes, a further 50% of the cost to ratepayers of implementing the living wage flows directly to central government by way of benefit and income support abatements, and additional GST. The extent to which rates funding for the Living Wage flows to Central Government rather than the individual is determined by each person’s circumstances. The more abatement of income support they incur, the less net benefit they personally receive from a headline wage increase. Single and young people receive less income support than workers with dependents, and therefore suffer less abatement.
34. There is no way for Council to target Living Wage income increases to those most in need without the introduction of an intrusive personal circumstances questionnaire. This is not recommended due to privacy concerns and the extent to which officers would need to make value judgments about individual living situations.
Council’s current remuneration practices
35. Council’s Remuneration Policy states that Council is committed to ensuring its remuneration practices are competitive in the market to attract and retain the best people, while also being affordable to Council.
36. Council offers employees remuneration which is competitive against other organisations and consistent with the worth of their role to the organisation. This also recognises the contribution of employees to the achievement of the organisation’s goals and objectives.
37. Remuneration systems and structures take account of remunerations levels and practices outside Council, but are based also on the need for internal consistency and relativities.
Living Wage – Financial Impact
38. Payroll data for all Council employees irrespective of employment type (full time, part time, or casual), was analysed for a 12 month period. This provided an estimate of cost to Council if the Living Wage had been paid to employees who were paid less than the Living Wage.
39. Inclusive of holiday pay and Kiwisaver, but excluding employer ACC obligations (this would be an additional 1%), the additional direct cost to Council would have been $470k. This is before considering the issue of pay relativity which is estimated would cost a further $100k to address. The total cost to Council if the Living Wage had been paid for all employees is therefore estimated to be $570k.
40. A breakdown of the cost by employment type detailed below shows casual employees working an average 8.5 hours a week, with an average age of 22 and average employment tenure of 19 months (1.6 years), would account for $245k (52.2%) of the additional direct cost.
41. From an Activity perspective, Pools would incur $256k (54.6%) of the additional direct cost.
42. Breakdowns of the cost per Activity by employment type are provided in the following tables;
How should the Living Wage be funded?
43. Wages are an operating cost and should be funded as such and not from additional debt. Any additional costs not able to be recovered from user-charges would need to be added to the General Rate requirement. If no additional income is recovered from increased activity revenues, rates would need to increase on average by about 0.6% plus GST to fund all of the additional cost.
44. In the following paragraph the impact to Community Services, and in particular increased user charges for swimming pools, is considered.
Impact on Community Services
45. The majority of the budget impact for Council staff would be felt in the Community Services Group – in particular within the Leisure Active and Libraries divisions. Museums and Parking Services budgets would also be impacted, albeit to a lesser degree.
46. Our swimming activities would face the largest impact. Annual cost implications based on payroll figures for Swimming Pool Activities would be $280,000 in additional costs. When taking wider relativity payroll issues into account this would probably be about $350,000 per annum. This would either be an additional cost to ratepayers or passed on in increased user charges.
47. To recover this additional cost in user charges would require an average estimated price increase of around 15% across the board e.g.:
48. The above scenario also assumes that a significant price increase wouldn’t have a material impact on visitor numbers and participation. Having ‘no’ impact would be extremely unlikely.
49. Activities such as fitness gyms and swimming lessons operate in a market environment and therefore this level of increase would make these services uncompetitive. An example of this would be the recent Request for Proposal completed for Huia Gym. If the living wage was used in the operating model proposed by Council, profitability would reduce by approximately $90,000 per annum making it more likely that an outside contractor would have been selected to run this operation.
50. For Fitness Suite Operations and also arguably ‘learn to swim’ operations, attempting to recover the additional cost of a living wage through increased user charges would effectively result in a non-competitive model.
Effect on Council-Controlled Organisations
51. Council’s 100% controlled subsidiaries have the following employee numbers being remunerated below the Living Wage:
Seaview Marina Limited – one employee
Urban Plus Limited – no employees
Community Facilities Trust – no employees
52. Living Wage Aotearoa New Zealand is calling for workers whose wages are funded by public money to receive a living wage as well as large enterprises that can afford to do so.
53. Whilst this is their main aim they encourage employers to also extend this to contractors who deliver services on a regular and ongoing basis. This is done through the procurement process whereby the tenderer would have to assure the customer that their staff were being paid a living wage.
54. This is a requirement for an ‘accredited living wage employer’. Officers recommend that Council only consider extending Living Wage requirements to contractors if and when the Living Wage has been fully applied to Council employees. At that point further work could be done evaluating likely impacts.
55. To place Living Wage requirements on contractors in advance of full implementation at Council would appear hypocritical.
56. An alternative option for Council would be to place importance on Living Wage adoption during tendering, without stipulating that it is essential for potential contractors. This could be done by applying a Living Wage weighting to tender evaluation formulae in a similar way as may be applied favouring local businesses and businesses with other beneficial practices relating to Health and Safety, environmental issues, etc.
57. The purpose of Council is defined in the Local Government Act 2002 as:
10 Purpose of local government
(1) The purpose of local government is—
(a) to enable democratic local decision-making and action by, and on behalf of, communities; and
(b) to meet the current and future needs of communities for good-quality local infrastructure, local public services, and performance of regulatory functions in a way that is most cost-effective for households and businesses.
(2) In this Act, good-quality, in relation to local infrastructure, local public services, and performance of regulatory functions, means infrastructure, services, and performance that are—
(a) efficient; and
(b) effective; and
(c) appropriate to present and anticipated future circumstances.
57. There are two major concerns with implementing a blanket living wage. The first is that Council has a duty at law to its ratepayers to pay no more than is strictly necessary for service.
58. The second is that it could be challenged as being beyond the powers (“ultra vires”) of Council. The main challenge would be that Council implementing the living wage would not be the “most cost-effective” way of fulfilling its purpose and therefore beyond its legal powers.
59. For this reason, Council would need to be satisfied it could justify why the implementation of a living way would be the most cost-effective method of fulfilling its purpose. It would need to do this by identifying benefits (for example, improved quality or effectiveness) that justified the additional cost.
60. This means, when considering whether to implement the living wage, Council would need to consider all the available options. This would include paying the living wage as one option and not paying the living wage as another. Council would need to be satisfied that it had enough other information when making the decision to conclude that paying the living wage was the most cost-effective of the two (or more) options (ie. more cost effective than not paying the living wage). It would need to do this by reference to clear additional benefits that outweigh the additional cost. To be clear, this task goes beyond simply identifying practical benefits from paying a living wage. Council must be satisfied that those benefits outweigh the extra cost involved and make paying the living wage the most cost-effective option available. If this is not done, the decision will be at risk of losing a judicial review.
61. From a legal risk perspective, the best way to implement a living wage is on a case-by-case basis. This allows all the relevant information to be considered and a decision to be made on whether the benefits outweigh the additional cost enough to make paying the living wage the most cost-effective option.
62. It is easier to justify a living wage for Council staff. This is because Council has an obligation to be a good employer under the Local Government Act 2002. This goes some way to balancing the additional cost involved.
63. It is difficult to envisage a blanket policy to require external contractors to pay a living wage that would meet the test in the Local Government Act. This is because the benefits the living wage is trying to produce, such as greater productivity and better service outcomes, will already be built into procurement and the contracts. If Council requires the living wage to be paid to contractor’s employees, in almost all cases this will simply result in increased cost, without the benefits that could justify a requirement for the living wage to be paid. This may not be true in every single case but the implementation of a blanket policy would not allow for a case-by-case analysis.
64. In making this recommendation, officers have given careful consideration to the purpose of local government in section 10 of the Local Government Act 2002. Officers believe that Council needs to carefully consider the information and options before it, to ensure the decision made falls within the scope of section 10.
Policy Research Paper
Treasury Living Wage Information Release November 2013
Author: Jo Beck
Divisional Manager Human Resources
Author: Bradley Cato
Reviewed By: Joycelyn Raffills
General Manager, Governance and Regulatory
Approved By: Tony Stallinger