Don't forget the Social in ESG

Lawmakers, investors, shareholders and governments around the world are pressuring businesses to incorporate Environment, Social and Governance (ESG) practices into their operations and strategies, and this focus is only going to grow. Moreover, consumers are weighing in, sharing their experiences and opinions about companies via social media and then making buying decisions accordingly. Social responsibility, reputation, leadership and corporate transparency have never been so important.

For the food and beverage sector much of the focus is on environmental issues whether related to packaging, the sourcing of raw materials or energy efficiency of production plants.

However, the social element and particularly the social consequences of low pay is also an important area. Ensuring a “fair wage” is beneficial for employee engagement and well-being, particularly when many workers have been on the front line ensuring that food production is maintained during the pandemic, but is increasingly also important to customers and investors. This means firms evaluating their own wage practices but also considering practices within the supply chain.

At the most basic level, compliance with legal minimum wage obligations is essential.

From 1 April 2021, the national living wage (NLW) in the UK has increased by 2.2% from GBP8.72 to GBP8.91 per hour. It is also extended to those aged 23 and 24 as well as those aged 25 and over for the first time. This followed a rise by 6.2% in April 2020, the largest-ever yearly NLW increase, with the Government’s target being for the NLW to reach two-thirds of median earnings by 2024.

Many firms in the food and beverage sector rely heavily on low-paid workers to fulfil their business needs. In the current economic conditions, some will find the rise in NMW rates difficult to sustain. As the NMW rises, firms will have to ensure that they stay compliant with NMW legislation. There are tricky areas of the rules that can be overlooked, including the treatment of breaks, team meetings, salary sacrifice schemes, deductions to cover employer costs and setup and shutdown time outside of core working hours, particularly if staff are required to change into uniforms for food safety reasons.

HM Revenue & Customs (HMRC) enforces the NMW and NLW. HMRC can carry out investigations on employers at any time where there is a complaint by an employee or HMRC considers there to be a risk of non-compliance. Financial penalties can include a fine equivalent to 200 percent of the underpayment (subject to a maximum of GBP20,000 per worker) in addition to back pay for up to six years. There have been significant delays in ongoing investigations during the pandemic while HMRC resources have been focussed elsewhere but we are starting to see increased activity and employers should expect further reviews following the recent increase.

The naming and shaming scheme resumed in 2020 after a pause from 2018 while an evaluation into its effectiveness was carried out. While the process for naming and shaming has been reformed with the aim of ensuring only the worst offenders are targeted, a number of food and beverage companies featured amongst those named in the most recent list. It is, therefore, likely to remain a sector under scrutiny from HMRC.

There is also a range of criminal penalties, primarily where employers have knowingly breached the rules. These have been applied rarely to date, but the rules have been in place for many years and breaches have been well publicised. Arguing that you did not know you were in breach may therefore become more difficult.

Compliance with the NMW should be a key concern for all companies operating in the UK. Some employers who have for years paid well above the NMW may now be closer to non-compliance. Given the current economic climate, it may be tempting to not conduct a full review of NMW compliance. However, the ever-increasing scrutiny from HMRC and the growing risk of non-compliance means that an assessment may be necessary.

However, this is the absolute minimum obligation on employers and is unlikely to be sufficient to meet the social aim of ensuring fair pay which is increasingly important to consumers.

Notwithstanding above inflation increases to the NLW in recent years, this remains below the real living wage (RLW). This is a voluntary rate championed by the Living Wage Foundation which is independently calculated according to the cost of living, based on a basket of household goods and services. This currently stands at GBP9.50 per hour across the UK (GBP10.85 per hour in London).

Studies consistently show that consumers are prepared to pay more for sustainable and responsible brands but this is just one of a number of areas driving an increase in costs and a key question is “how much?” In reality, increased costs will continue to put pressure on businesses and some careful balancing will be required.