10 May 2017
Report no: HCC2017/2/136
Living Wage - Next Steps
Purpose of Report
1. To provide Council with draft options for a Remuneration and Employment Policy under the Local Government Act 2002, that addresses paying the Living Wage to Council employees, for their approval.
2. To provide an update on progress with discussions around how Council can require Council contractors to pay the Living Wage to their workers.
It is recommended that Council adopts the Living Wage Policy, attached as Appendix 1 to the report, which allows the Living Wage to be paid to employees on a case-by-case basis.
The Living Wage
3. Staff prepared an extensive report on the Living Wage and its implications for the Finance and Performance Committee of Council. For completeness, that report is attached as Appendix 2 to this report.
4. In summary, 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.’
5. 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.
6. 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. The rate is based on research into the needs of a model family of two parents (working 60 hours a week) and two children.
7. The original New Zealand Living Wage rate of $18.40 per hour was publically announced by February 2013.
8. As of 1 April 2017 the government minimum wage rose to $15.75 per hour.
9. As of 1 July 2017 the Living Wage will rise to $20.20 per hour. Annual adjustments to the Living Wage are announced in February each year. Importantly, if Council adopts a Living Wage, it will not be bound to these increases each year unless it seeks accreditation status.
Hutt City Council Meeting of 14 March 2017
10. At the Hutt City Council Meeting of 14 March 2017, the following decisions arising from the meeting were as follows:
Minute No. C 17101 (3)
Resolved “That Council agrees in principle to the Living Wage.”
Resolved “That Council instructs the Chief Executive to produce a draft remuneration and employment policy under the Local Government Act 2002 that addresses paying the living wage to Council employees, for consideration by Council by 1 July 2017.”
Resolved “That Council requests that the Chief Executive continues to work with the Living Wage – Hutt Group to investigate further how Council contractors can apply the Living Wage to its workers by 1 July 2017.”
11. In the extensive paper provided to Council’s Finance and Performance Committee issues were raised in regards to the payment of the Living Wage. These included:
a. An economist’s view on where the burden should fall on supporting lower productivity or lower income workers (refer paragraph 27 and 28 of the Finance and Performance Committee paper)
b. The Treasury opinion on the Living Wage not being well targeted at low income families with children (refer paragraph 30 of the Finance and Performance Committee paper)
c. The Living Wage and government assistance (refer paragraphs 32, 33 and 34 of the Finance and Performance Committee paper).
d. Financial implications and relativity matters (refer paragraphs 38 and 39 of the Finance and Performance Committee paper)
e. How the living wage should be funded (refer paragraph 43 of the Finance and Performance Committee paper and also referred to in paragraph 59 of this paper)
f. Impact on Community Services (refer paragraphs 45, 46, 47, 48, 49, 50 of the Finance and Performance Committee paper).
12. Officers note that should the living wage be applied as a blanket increase then further work would need to be done to justify this for all employees to determine if there would be any benefit in doing so and that the outcome may be that there are no tangible benefits to be gained. (see paragraphs 38 and 39 of this report).
13. Officers are concerned that the implementation of the living wage, be it a blanket increase or a case by case increase, does lead to treating employees differently at remuneration review time. Any living wage increase on an annual basis (after having assessed affordability etc.) would become automatic and those employees would effectively not be subject to our normal remuneration review criteria, a component of which is performance.
14. While Officers agree that paying a living wage will likely increase the calibre of the candidate pool for a role, this may mean that lower skilled workers who are often younger workers may therefore miss out on opportunities.
15. Officers note that after a period of time there may be a request by external parties to show proof of productivity gains, or similar, as a result of implementing the living wage. Should this occur and the results show no increase to productivity then this may reflect badly on Council. However regardless of this, the hourly rate would remain the same and could not be reduced once in place.
16. Officers note that should the living wage be implemented and, after assessing on a case by case basis casual employees or other groups of employees were excluded, then this may lead to dissention between workers and goes against our one team approach.
17. Officer recommend a cautious approach to assessing the application of the living wage on a case by case basis ensuring we also take into account Hutt City Council’s internal remuneration policy and practices (see paragraphs 35, 36 and 37 of the Finance and Performance Committee paper).
Remuneration and Employment Policy
18. Under clause 36A of Schedule 7 of the Local Government Act 2002 (the Act), Council may adopt a Remuneration and Employment Policy.
19. Clause 36A reads:
(1) A local authority may adopt a policy that sets out the policies of the local authority in relation to -
(a) employee staffing levels; and
(b) the remuneration of employees
(2) A local authority must review a policy adopted under this clause at intervals of no more than 3 years.
20. Clause 36A(1)(b) specifically allows Council to adopt policies in relation to remuneration levels.
21. A ‘Living Wage’ is not something that is specifically provided for in legislation or law. It is essentially an increase in the minimum wage an employer is prepared to pay its staff.
22. If Council does want to pay a living wage, the issue, in a local government context, is whether it is lawful. There are 2 main challenges to the lawfulness. First, the purpose of local government in section 10 of the Act provides that the purpose of local government is to:
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.
23. The challenge to the living wage that could be taken, relying on this section, is that it is outside the powers of Council to implement. This is because doing so would not be the “most cost-effective” option for Council. It obviously relies on Council not having done any background work to establish whether paying the living wage is the most cost-effective option.
24. Some legal opinions downplay the ability of section 10 to be used to mount a legal challenge. They read this section as more of a high level direction from central government to local government and not as something that can be used to mount a judicial review. This has yet to be tested in court.
25. Regardless, Council can be judicially reviewed for a variety of reasons, relating to its decision-making process and to the reasonableness of its final decision.
26. If Council was to increase the minimum amount it paid staff, purely to allow employees to have a better quality of life, it would open itself to the risk of legal challenge.
27. The Public Service Association (an employee union) engaged Matthew Palmer QC and asked him for an opinion on whether it was “prohibited” for a Council to pay its staff the living wage. This legal opinion eventually concluded that it was not prohibited for a Council to pay the living wage, but only after consideration of the benefits to the organisation that may result from paying the living wage. Mr Palmer said a “well-reasoned” living wage [policy] would be unlikely to be overturned by the courts. Even this most generous of legal opinions does not simply allow of living wage to be introduced as a purely welfare based policy. It still considers that the living wage should be tied to associated benefits and well-reasoned.
The legal advice
28. This is really the conclusion of all the legal opinions. The legal opinion Council has received from Simpson Grierson Lawyers is no different. That legal advice is in 2 parts, attached as appendices 3 and 4 to this report.
29. Its conclusion is that the level of risk associated with paying a living wage depends on the quality of the decision-making to implement it.
30. There is no risk associated with not paying a living wage.
31. It advises there is low risk associated a policy that directs Council to analyse the cost-effectiveness and pay the living wage on a case-by case basis.
32. The highest risk comes from adopting a policy that requires the Council to pay a living wage generally.
Most cost-effective not necessarily the cheapest option
33. One of the important things that was emphasised by the legal advice was that the most-effective option does not necessarily mean the cheapest option.
34. The advice notes:
Where there are genuine additional expected benefits from adopting a particular option, and that option happens to be a more costly option, then it is open to the Council to adopt it on that basis and the additional benefits are worth the additional costs.
35. There are three options:
a. Do not adopt the Policy and accordingly not adopt the proposal to pay a living wage (status quo); or
b. Adopt a Policy that broadly refers to the benefits of a living wage, and that requires a living wage to be paid to Council employees; or
c. Adopt a Policy that broadly refers to the benefits of a living wage, and that directs the living wage to be paid in circumstances where it can be shown to be the most cost-effective way for Council to provide a particular service.
No living wage
36. Not adopting a Policy is maintaining the status quo. There is no legal risk associated with this option. Council’s obligation to be a good employer does not require payment of a living wage as a minimum level of pay.
A ‘blanket’ living wage
37. Adopting a ‘blanket’ living wage policy that broadly refers to the benefits that may be associated with a living wage is the second option open to Council. The big issue with this option is that Council has not currently done any work to determine whether it has issues with its employees that may be remedied by the implementation of a blanket living wage.
38. If Council is minded to adopt a blanket living wage then the highest risk way of doing this would be to essentially ignore the requirements of the Act and implement this policy purely to improve the standard of living for its employees.
39. If Council was minded to consider adopting a blanket living wage then the ‘safest’ way to proceed would be to require further work to be done to justify this. This is because the work has not currently been done to link the possible benefits of paying a living wage to the actual situation of Council.
A case-by-case living wage
40. A Policy adopting a case-by-case approach to implementing the living wage is the preferred option. This would allow the work to be done by the CEO and staff, to justify applying the living wage. It could be done by reference to targeted classes of role or by reference to larger groups, for example ‘casual staff’.
41. The legal advice is that this approach would be the lowest risk, if Council did want to implement a living wage.
42. If Council chooses not to adopt a living wage policy or to adopt a ‘blanket’ policy, there are no major implications in terms of implementation, other than setting a date from when a blanket policy will be applied.
43. Should Council adopt the policy, the implementation will be conducted by Council Officers in accordance with the policy.
44. To address the legal risks the Council needs to establish a plausible assessment for cost effectiveness as a basis for introducing the living wage for its staff. This should include assessing the financial benefits to the Council (and therefore the Community) if the living wage was introduced. These might include productivity gains and reduction in turnover.
45. It is noted that currently the Council does not have an issue with turnover. Our turnover rate remains fairly steady year on year at around 10%.
46. Officers will develop assessment criteria which will address the question of cost effectiveness in the delivery of a service. This will include assessment of potential productivity increases, brand and reputation in attracting and retaining staff and reduced absenteeism.
47. SLT, together with Human Resources, will review the assessment results and report back to the Finance and Performance Committee with the outcomes for their feedback.
48. The assessment exercise will not be done until after the Council’s annual remuneration review for 2017 is completed in August. At that stage we will be able to confirm employees who remain under the Living Wage level.
49. The report back to Council’s Finance and Performance Committee will take place in September 2017.
50. Implementation of outcomes from the assessment exercise will be effective from 1 January 2018.
51. Living Wage Aoteroa 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.
52. 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 normally through the procurement process whereby the tendered would have to assure the customer that their staff were being paid a living wage.
53. This is a requirement for an ‘accredited living wage employer’. Officers recommend that Council only consider extending Living Wage requirements to contractors when the Living Wage has been applied to Council employees in accordance with the Remuneration and Employment Policy.
General report on progress
54. Jo Beck, Divisional Manager Human Resources and Bradley Cato, Solicitor met with Lyndy McIntyre and John Ryall from Living Wage Aoteroa to discuss the approach to investigating further how Council contractors can apply the Living Wage to its workers.
55. A report was provided by Living Wage Aoteroa outlining their views on how extending the Living Wage to workers employed via contractors at Hutt City Council could be approached. This report is attached as Appendix 5 to the report.
56. The Chief Executive and officers will continue to work with Living Wage Aoteroa to progress this work and present a plan back to Council’s Finance and Performance Committee in September 2017.
57. 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.
58. 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 relatively 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.
How should the Living Wage be funded?
59. 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.
Remuneration and Employment Policy
Finance and Performance Committee Report - Living Wage Considerations for Hutt City Council - 1 March 2017
Legal Advice - Part 1
Legal Advice - Part 2
Living Wage Aoteroa report - HCC Contractors
Author: Jo Beck
Divisional Manager Human Resources
Author: Bradley Cato
Approved By: Tony Stallinger