The apprenticeship levy: practical considerations for employers

The levy, which is charged at a rate of 0.5% of payroll costs for UK employers with a pay bill of over £3 million, will have a significant impact on both the HR community and managers. Employers can expect to see changes to the way in which they contract with new apprentice employees, how they may wish to use the levy to train their exiting staff, as well as the potential for more young people to enter the workforce.

With the cost of university ever increasing, the apprenticeship route gives individuals an alternative route to attaining qualifications while earning at the same time. The government has also committed to raising training standards, while simplifying the administration of apprenticeship programmes for employers.

The introduction of the levy will give employers a platform from which to audit their training needs, and to see where skill gaps lie within the business and the extent to which apprenticeships might be used to plug those gaps. The funding can also be used to re-train existing employees. There is also the potential for employers to get out of the levy more than what they put in, as the government is topping up the employer contribution to be used for accredited training by 10%.

However, the fact that levy funds can only be used for approved training also creates some issues for businesses, including that it does not cover the ancillary costs associated with apprenticeships and the fact that at least 20% of an apprentice's time must be spent out of the business on training.

Although all UK employers must contribute to the levy, only those with English employees will be able to use the funds in the manner described below. This is because training is a devolved matter. The levy will indirectly fund apprenticeship programmes in Scotland, Wales and Northern Ireland through an increase to the block grant settlement for the devolved administrations.

How does the apprenticeship levy work?

The levy effectively operates as a tax on all employers operating in the UK with a pay bill of over £3 million - less than 2% of all UK employers, according to the government. The levy is charged at 0.5% of total payroll cost, but employers will receive an annual £15,000 off-set against the cost of the levy. For example, an employer with an annual pay bill of £100m would be expected to pay £485,000, or £500,000 less the £15,000 annual allowance.

For corporate groups, the payroll threshold and annual allowance will apply to the group of companies rather than the individual employer.

Employers that meet the payroll threshold will be charged the levy irrespective of any sector or industry training board levies that already exist, for example the Construction Industry Training Board (CITB) or Engineering Construction Industry Training Board (EICTB) levies. Both of these bodies have indicated their intention to continue with their levies, which can be used for a wider range of training requirements.

The levy will be paid directly through PAYE to HM Revenue and Customs (HMRC), normally through the employer's usual payroll and accounts system. Once the payment is made, it will be topped up by the government by 10% and credited to the employer's digital account. For every pound paid in, an employer will effectively get £1.10 to spend on accredited training in England. The balance will appear in the employer's account at the end of the month following payment of the levy.

What does the levy cover?

Once registered on the website, employers will be able to access their digital account through a government website. They will be required to accept an agreement with the Skills Funding Agency before they are able to spend the funds in their account on training, and they will be notified in their account when this agreement is available.

Once the agreement is accepted, employers will be able to go a number of things from their account:

• amend or add information about apprenticeships or training;
• authorise payment to the training providers they are using;
• view payment activity and account balance;
• pause or stop payment to one of their training providers.

Employers can only use the funding in their account to pay for training offered by one of the apprenticeship training providers certified by the government. It can be used towards training any eligible learner, whether a school leaver or an existing employee.

The fund can be used to pay for accredited apprenticeship training schemes as well as the costs of any assessments or certification. It cannot be used to cover the wages paid to apprentices; any direct or indirect supervision costs; any additional ad-hoc development training courses; or any travel or other expenses related to attendance at training courses.

Levy funds must be used within two years or they will expire. As such, there is a built in 'use it or lose it' provision.

Apprenticeship contracts

An apprentice can be either an existing employee or a new recruit, but must be hired for a real job. The apprenticeship must last for at least 12 months, and 20% of the apprentice's time must be spent in off-the-job training.

To be able to draw down the levy, the apprentices must be engaged using the form of contract specified in the 2009 Apprenticeships Skills Children and Learning Act (ASCLA).The contract must follow a prescribed format set out in the ASCLA, include a statement that the law of England and Wales applies and set out the qualifying apprenticeship framework. It must also be signed by the apprentice.

Unlike the traditional apprenticeship contract, the contractual relationship established by an ASCLA contract is similar to that of a typical contract of employment. A traditional apprenticeship contract has very limited formalities and commits the employer to more of a teaching and instructing role. However, these contracts provide a much higher degree of protection to the apprentice, particularly against dismissal.

Employers with apprentices in Scotland and Northern Ireland may come across a third type of contract: a modern apprenticeship contract. This is a three-way agreement between the employer, the apprentice and the training provider, where the employer provides on-the-job training and experience while the college provides the training.

Employers may wish to consider the following practical issues in their apprenticeship contracts and review the drafting in their contracts appropriately:

• mobility: doe the contract allow for the fact that the apprentices may be required to move regularly between their place of employment and where their training takes place;
• training costs: does the contract allow the employer to recoup the costs of training if, for example, an apprentice leaves 12 months into a three-year apprenticeship contract? Section 13 of the Employment Rights Act 1996 gives the employer limited rights to recover some of that money through deductions from salary;
• termination: an employer's ability to terminate an apprentice who is not performing properly is limited, due to the 'hybrid' status of apprenticeship contracts as contracts for both employment and training. Employers may wish to incorporate some express wording about the circumstances in which it can exercise a right to terminate in the apprenticeship contract.

Once the apprenticeship comes to an end, choosing not to re-engage the apprentice as an employee will be seen in the eyes of the law as a dismissal for 'some other substantial reason'. The usual consultation and notice provisions applicable to dismissal will apply here, but there will be no liability for redundancy payment.

HR managers will need to be aware of and be trained about the differences in treatment between apprentices and employees more generally. Aside from the legal risks, managing what is likely to be a younger, less mature workforce with significant training needs will require a difference in approach.

Recruitment

Assuming most employers are going to try to get as much benefit from the levy as they can, we can expect to see a pretty fundamental shift in employers' approach to recruitment over the next few years. Recruiting younger people, in many cases straight from school, is very different to more traditional routes for recruiting post-graduates or even people later in their career, from competitors and from other companies.

Employers will have to think about where and how to advertise these roles; and to ensure their recruitment strategies are fit for purpose for a future that is likely to involve far more apprentices than in the past. On a more positive note, increasing apprenticeships will give employers that have traditionally recruited from universities the opportunity to increase socio-economic diversity in the workforce with very little effort.

Ed Goodwyn and Matt McDonald are employment law experts at Pinsent Masons, the law firm behind Out-Law.com.