Miliband and No 10 in living wage legality scrap

Labour's bid to force contractors to pay their employees the living wage may be illegal, Downing Street has warned.

The claim earlier today began a confrontation between Labour and the government over whether making public sector contracts conditional on the living wage being paid is legal under EU law.

Labour hopes to expand the idea, which sees all their councils' employees receive an hourly rate set independently according to the basic rate of living in the UK, into the private sector. It wants to do so by insisting it is used by all companies reliant on public sector contracts.

The opposition cited the example of Islington council's grounds maintenance contractor Enterprise, which fully absorbed the £150,000 cost of introducing the living wage to all its workers to keep its £20 million contract.

"There are already scores of British businesses who are saying that the living wage makes sense from them because it improves staff retention and reduces absence rates," Ed Miliband said at an event promoting Labour's use of the living wage today.

"We will learn from them and find ways to help other businesses become living wage employers."

Downing Street questioned whether Labour's approach was legal, however.

"Forcing companies to pay a particular wage would not necessarily be consistent with EU procurement laws," the prime minister's spokesman warned.

Miliband responded quickly, saying Downing Street's view was "completely ridiculous" and suggesting it was seeking to cover its failure not to have done more on the issue in the last two-and-a-half years.

"They promised before the election that it is something that they took seriously – the prime minister made that promise – and nothing has happened," the Labour leader said.

"Actually what local councils are showing is that there are definitely ways of promoting the living wage and getting contractors to pay the living wage, which are absolutely within EU law.

"And frankly the mayor of London, Boris Johnson, is doing it, so if it's illegal, I'm afraid David Cameron is going to have to have words with him."

Johnson announced a significant increase in the living wage today, with the rate increasing by 25p to £8.55 in London and £7.45 outside the capital.

Green MEP Jean Lambert's office highlighted a 2009 European Commission response to her query about whether living-wage conditions can be included in the contract performance clauses of a public procurement.

The Commission said such a move is permissible "provided they are not directly or indirectly discriminatory and are indicated in the contract notice or in the contract documents".

The living wage can only relate to employees involved in the execution of the relevant contract and cannot be extended to other employees of the contractor, the Commission made clear.

Arguments over the legal basis of moves to force a living wage on the private sector appeared to form part of a broader government move to distance Whitehall from Labour's ideas.

The Department for Business, Innovation and Skills has warned the living wage "does not consider any potential adverse employment effects and – despite its name – is unlikely to be a well-targeted poverty measure".

Labour has pointed out that this clashes with David Cameron's comments on the living wage before the general election, when he described it as a "good and attractive idea".

Work and pensions secretary Iain Duncan Smith said his department paid the living wage and backed the idea, however.

He told BBC Radio 5 Live's Pienaar's Politics programme yesterday: "You can rest assured the government is very keen for us to make progress on this matter… I'm hopeful overall we'll make progress so that people on the lowest incomes meet that level.

"We are fully in discussion with those who have campaigned for it. We've got to be very careful this doesn't lead to people losing their jobs. That isn't something I want to happen."

No 10 said the Low Pay Commission had recently advised that the youth minimum wage should be kept at the same rate, citing the need to protect jobs.

"Requiring people to pay it would reduce the flexibility businesses have and could ultimately be bad for jobs," the prime minister's spokesperson warned.

Earlier Miliband met with the heads of the growing number of Labour councils which have become living wage employer status.

In a rare show of cooperation he was joined by his brother David to campaign for the scheme. Over the last 12 months Labour has increased the number of local authorities with living wage employer status from two to eight, while also adding Birmingham, Oxford and Preston.

"Britain needs a government that will work with the best of British business to build greater prosperity and share it more fairly," Miliband said.

"That is what One Nation is about. The living wage is an important part of helping to make that happen. It is an idea whose time has come."