Attachment 5

Living Wage Aoteroa report - HCC Contractors

Extending the Living Wage to workers employed via contractors at Hutt City Council

Workers employed via contractors are part of the Council workforce. As the Living Wage concept gains momentum, local authorities overseas and in New Zealand are exploring how to extend the Living Wage to these workers.

Hutt City Council’s vision is to: make Lower Hutt a great place to live, work and play. A city where our people are proud to live, where working and investing is a smart choice, and where there’s always something for our families to explore.

Paying the Living Wage is consistent with this vision, as the Living Wage provides the income necessary for workers and their families to participate in society. It is also consistent with Council’s commitment to see children and young people as an asset in helping communities achieve their full potential, as it is a step Council can take to reduce child poverty in the city.

There are numerous arguments for including contract workers in the implementation of the Living Wage. Apart from the fairness issues and taking a lead in addressing poverty and inequality in Hutt City, if the Living Wage is limited to directly-employed staff, that will incentivise the outsourcing of services.

Council has voted to support the Living Wage in principle. Extending the Living Wage to workers employed via contractors ensures that Council takes a “whole of council” approach. As there is no distinction to the public over whether the person cleaning the HCC facilities is employed by a private contractor or directly by HCC, the same standards should apply.

Benefits of extending the Living Wage to workers employed via contractors

Substantial research has been done on the benefits to employers, including the benefits to both employers and clients in extending the Living Wage to workers employed via contractors.

One of the most recent reports on the benefits of paying the Living Wage is a 2015 report by the University of Strathclyde (Glasgow), which highlighted clear evidence demonstrating how UK employers paying the Living Wage benefit from improved staff morale, retention and productivity.

The report, which was commissioned by Barclays, uses case studies demonstrating business benefits and examples of how to mitigate associated costs. Strathclyde Business School academic Dr Andrea Coulson was the primary author of the report.

Key findings include:

· Implementing the Living Wage encourages businesses to re-evaluate their approaches to staffing and payment, leading to more effective and efficient working patterns in the long term

· Implementing the Living Wage encourages businesses to re-evaluate their business model, leading to more effective and efficient working patterns in the long term

· Increased skills development among existing staff

· Increased staff performance and job satisfaction

· Increased staff retention

· Long-term reputational benefits for Living Wage employers

Dr Andrea Coulson said: “The report highlights detailed case study evidence of how costs of adopting the Living Wage are being mitigated and value created for employers, their employees and on-site contract staff.”

Jenny Stewart, Head of Infrastructure and Government at KPMG, said, “KPMG has been firmly committed to the Living Wage principle for many years. We have been paying the Living Wage to our own staff since 2006 and ensuring it is paid by sub-contractors since 2007. We have seen the benefits.

Facilities Management staff satisfaction levels are higher than before and as a result the business has become more efficient. During the first year of implementation, turnover in our cleaning staff dropped from 44% to 27%. Absenteeism has also since dropped by 10%. Our suppliers are also benefiting from being associated with Living Wage and are now experiencing greater numbers of applicants to fill vacancies then previously.”

Since rolling out the Living Wage to all full-time staff and suppliers, including on-site contractors, KPMG has seen an increase in employee motivation, higher employee retention, and reduced absenteeism. This in turn has resulted in lower recruitment costs, more opportunities for staff development and the opportunity for KPMG to mitigate costs by broadening responsibilities of current staff. The firm has also seen improvements in bottom line performance in both financial and non-financial indicators such as employee engagement and overall customer satisfaction levels.

There is a large body of evidence of the benefits of paying the Living Wage, including to workers employed via contractors.

A 2006 review of the published US literature (Thompson and Chapman, 2006) indicates that the majority of studies found that: (1) the Living Wage had a low or moderate impact on municipal budgets; (2) that workers and their families benefited with few if any negative effects; and (3) that employers benefited from decreased labour turnover and increased productivity.

The low impact on costs was found to be partly a product of the bidding process whereby contractors were expected to bear some of the costs. Moreover, even if the costs were passed on to consumers, they were found to be relatively low in relation to the existing costs of the service. In addition, most of these studies have reinforced the long-established relationship between increased wages and reduced labour turnover (see for example, Greenwald and Stiglitz, 1988).

The implementation of the Living Wage at San Francisco International Airport, which directly affected 5,400 low-wage workers, resulted in 1,550 fewer turnovers per year. Turnover rates amongst security screeners dropped from 94.7% to 18.7% (lifting wages from US$6.45 to US$10). In the qualitative interviews deployed in the research at the airport some of the employers also reported increased work performance, employee morale, customer service and a reduced rate of disciplinary hearings as a result of the living wage (Reich et al, 2005).

In the UK, there has been growing anecdotal information to make similar claims. It is argued that raising wages to the level of the Living Wage reduces employee turnover while increasing motivation at work.

As Mayor Boris Johnson put it in the opening to a 2009 Greater London Authority Living Wage report: “Paying the London Living Wage is not only morally right, but makes good business sense too. What may appear to be an unaffordable cost in a highly competitive market should more often be viewed as a sound investment decision. I believe that paying decent wages reduces staff turnover and produces a more motivated and productive workforce.”

A 2008 study of Queen Mary, a college of the University of London, which moved to pay its cleaners the London Living Wage, outlines the benefits. Although in this case, the cleaners were brought in-house, the results of the study are relevant to contract workers.

The study, led by Professor Jane Willis, Professor of Human Geography at the university, showed that, after they were lifted to the Living Wage, the cleaners had higher levels of morale and job satisfaction, worked more productively and completed a broader range of tasks. The authors concluded: “The research has revealed that the move has stimulated improvements in the job quality, productivity and service delivery, with very little increase in costs.”

A report on the impact of the London Living Wage was commissioned and published by the Greater London Authority, and conducted by London Economics, in 2009. Researchers interviewed representatives from 11 employing organisations that had moved to the Living Wage and found that the: “most significant impact noted was recruitment and retention, improved worker morale, motivation, productivity and [the] reputational impacts of being an ethical employer” (London Economics, 2009). The study found that more than 80% of employers believed that the living wage had increased the quality of the work. For understandable reasons, much of the research was based on managers’ opinions and beliefs about the impact of the living wage, with little consistent statistical data across the employers.

Paying a Living Wage can and should ensure staff, whether they are directly-employed or employed via a contractor, are well-trained and skilled to do their work. It provides an opportunity to require contractors to ensure all their staff are working towards or have formal qualifications (such as ITO qualifications). This is more achievable with a stable and long-serving workforce.

With reduced turnover and training, a skilled, qualified and experienced workforce will perform better and provide better service delivery for HCC and the community. For example, skilled, trained and experienced cleaners will achieve a better result and therefore HCC property and grounds will look better and people using the facilities will be more satisfied. This will also reduce the likelihood of infection and increase the safety of council facilities and grounds.

It is superficial to argue that these are benefits solely for the contractor and not the client. A more stable, productive workforce with greater morale will provide a better service for the Council and ultimately the people of Hutt City. Below are some of the many benefits of adopting the Living Wage with the contracted workforce:

Cost of implementation of the Living Wage

Employers and governments are often concerned that paying the Living Wage will be expensive, but

in the context of local government the costs of implementing the Living Wage for workers employed via contractors can be staggered considerably as wages would be adjusted as existing contracts come up for tender or renegotiation. Further, since the firms that bid for contracts themselves are often able to absorb some of the costs of instituting the Living Wage, less financial burden should be passed on to the local government authority to pay.

Given the many local authorities that have introduced the Living Wage around the world, there is a large body of literature on the costs and benefits of doing so. International experience has been that initial estimates of the cost of implementing the Living Wage are almost always higher than what eventuates. For example, when Los Angeles introduced the Living Wage in 1997, it was predicted to cost somewhere between US$30-40 million. However, the total increase to labour costs was $US2.5 million.^{^[i]}

In the US, the longest-running Living Wage ordinance has been the city of Baltimore, which adopted the ordinance in 1994, and has been widely studied. The first study was undertaken in 1996 by the Preamble Centre for Public Policy, showing that in the first year nominal contract costs rose by 0.2%, but after adjusting for inflation costs declined by 2.4%.

A 1999 study by the Economic Policy Institute of the Baltimore ordinance found that nominal contract costs for the city rose just 1.2% - lower than inflation during the same period – and concluded that the budgetary impact of the ordinance had to date been minimal.

A 2003 study surveyed administrators in 20 cities and counties that had adopted living wage ordinances since 2001, concluding that in most municipalities, “contract costs increased by less than 0.1% of the overall local budget in the years after a living wage law was adopted.”

A University of Massachusetts study of three New England cities confirmed the general finding that modest costs can be expected, identifying unit-cost bidding as the kind of bidding process more likely to lead to cost increases.

There are many reasons that costs often end up much lower than estimated. As many of the services councils provide are now procured from private firms (who rely on low wage labour), some of the costs can be absorbed by the firms themselves. Secondly, there are significant benefits associated with implementing a living wage, with regard to lower staff turnover, absenteeism, and boosted productivity.

Wellington City Council

Given that Wellington City Council has already begun to implement the Living a Wage for workers employed via contractors in the WCC workforce, and the Mayor has set out a plan to progress this in the 2017/18 Annual Plan, it is worth looking closely at the WCC experience.

This has been a staged process. In July 2013 WCC voted to support in principle becoming a Living Wage Council and requested officers to develop a framework providing for the phased implementation of the Living Wage for directly employed staff, staff employed by CCOS and those employed by contractors.

In December2013 the new council reaffirmed their commitment to become a Living Wage Council.

In January 2104 WCC moved nearly 500 directly employed staff to the (then) Living Wage of $18.40. Soon after the parking wardens, who were employed via a contractor, were taken in-house and lifted to the (then) Living Wage.

In consultation on the 2014 Annual Plan, over 80% of submitters supported the Living Wage proposal to pay all staff, including those employed by contractors, the Living Wage.

The 2015 Long Term plan included $750,000 over two years tagged to lift workers employed by contractors to the Living Wage.

In October 2015 Council voted to award the contract for security and noise control services on the basis of the Living Wage.

In August 2016, around 60 WCC security guards and cleaners moved to $18.55 as a result of the commitment to the Living Wage. They continued to be employed via contractors.

The 2017 WCC draft Annual Plan includes the following section:

A Living Wage Council

The minimum pay rate for all employed by Wellington City Council, its Council Controlled Organisations and contractors will be the official New Zealand Living Wage rate.

This completes the journey begun in 2013 when council committed itself to paying the Living Wage and sets Wellington City Council on a path to be the first accredited Living Wage Council in New Zealand.

Specifically, this policy will see council adopt the official New Zealand Living Wage rate (as commissioned annually by Living Wage Movement Aotearoa) as a minimum pay rate for;

(a) All staff currently included in the council’s Living Wage programme (specifically; directly employed staff, CCO employees and contractors covered by the Recon security and Spotless Cleaning contracts).

(b) All staff working for contractors delivering services on behalf of council, to be included as contracts come up for renewal or tendering (this specifically excludes those only providing goods).

Once a framework has been established to implement this policy council will seek official accreditation as a Living Wage Employer.

The Wellington Mayor, Justin Lester, was reported in the New Zealand Herald^{^[ii]} as saying: “We wanted a prudent budget, a budget that was affordable, but that also ensures we treated our staff well."

He said previous experience showed paying a living wage could save money. When the Wellington City Council stopped contracting for parking wardens and instead employed them directly at a living wage rate, they saved overall.

"Because previously the contractor was taking the majority of the benefit from the contract, and not the staff," Lester said. "We've had greater loyalty from staff, reduced turnover, and increased services, at a lower burden for ratepayers."

Legal issues

In a legal opinion dated 27 September2013. Dr Matthew Palmer stated:

“My opinion is that the Local Government Act does not prohibit a local authority or Council Controlled Organisation from paying its employees, or requiring its contractors to pay their employees, a living wage. My opinion is based on material that explains the economic justification of a living wage in terms of associated productivity gains. Pursuing such a policy would be consistent with the purpose of local government which includes cost‐effectiveness and provision of good quality services. In particular, I consider that it would be valid for a local authority to exercise its power to set remuneration policy under the Local Government Act by adopting a living wage policy.”

Proposal for HCC to move forward

There are a range of ways of extending the Living Wage to workers employed by contractors and these options could be assessed on a case-by-case basis.

· The In-Sourcing Option

One option is to bring contracted services in-house and directly employ the workforce on at least the Living Wage rate. This is what the Wellington City Council did with its parking services, which used to be run through the Australian Tennix Company with the parking officers sub-contracted to security company Armourguard. When the Wellington City Council decided to bring this service in-house it had a number of objectives including maintaining or increasing the parking income stream, developing a greater service culture from front line workers, integrating the service with other council services and the successful introduction of parking technology to improve the turnover of carparks and to ease the pressure of traffic being blocked by illegally parked vehicles.

· The Comprehensive Option

This option would involve the Council requiring all Council and CCO contractors to lift their pay rates for Hutt City Council work to no less than the living wage from an agreed date with Hutt City Council meeting the cost (there are provisions for this in some contractor collective agreements, with provisions saying if a client of the contractor provides funding to lift wages for their worksite then that will be immediately passed on to the wages of that employee for the period in which they are working at that site). This could be done in stages

· The Competitive Tendering Option

This option would examine contracts as they approach expiry and look at re-tendering each contract or groups of contracts (if greater value could be gained through tendering for groups of services such as could possibly be done with the Fulton Hogan and Higgins contracts that come up in June 2018) on the basis of the payment of the contractor workforce on no less than the living wage.

This would mean that all tenderers were competing on level terms as far as minimum wage rates were concerned, but may want to get more competitive prices through using more advanced technology, greater work productivity or reduction in contractor overheads or profit.

· The Preferred Contractor Option

This option would mean the Council picking one or more of its contractors (eg the 30 September 2017 contract for the playgrounds or the Spotless or OCS cleaning contracts) and agreeing to extend its contract length conditional on the contractor agreeing to enter into a transparent process of negotiation on the sharing of the cost of moving its employees to no less than the living wage rate. Transparency would involve the contractor being prepared to reveal all of its costs, including numbers of employees involved in Hutt City Council work and the numbers and hours of those workers who are employed on less than the living wage. The negotiation trade-off would be the benefit to the contractor of getting a longer extension to the contract against its financial contribution to the cost of the living wage minimum for employees engaged in Hutt City Council work. The benefit to the Council would be to get a better paid and more productive contractor workforce, to get a better understanding of the costs of carrying out the work of the contractor and to reduce the cost of implementing the living wage. The success or otherwise of this process would then lead to other contractor arrangements if appropriate.

These options are not just about setting a living wage floor for workers engaged on Council services. They are also about the Council taking a greater interest in the efficiency of how services are packaged and the quality of the service being delivered. For instance, between the Council and its CCO it engages two cleaning contractors and an environmental waste contractor, when one contractor may possibly do all three services at a lower price. It is these questions that are posed by an examination of living wage policies.