Exclusive: Ed Miliband will block cheap foreign staff loophole if Labour wins in 2015

A Labour government will clamp down on British businesses using cheap foreign labour, Ed Miliband will pledge today, as he gives a warning that the arrival of migrant workers from Romania and Bulgaria could make the cost of living crisis worse for Britons.

If Labour wins in 2015, the Government would work with businesses to close a European Union loophole which allows companies to undercut staff legally by paying agency workers lower wages. The loophole has allowed major firms in the food, packaging and call-centre sectors to employ workers, often from abroad, on lower rates. While the loophole is legal, companies who use it have been accused of acting unscrupulously by failing to protect the job security of their staff.

Writing in The Independent on Sunday, the Labour leader says it is right to address "understandable" fears about immigration, while maintaining Britain's position as a country that "reaches outwards to the world". Addressing "anxiety" about immigration means changing a British economy "hard-wired into a cycle of low wages, low skills, insecure jobs and high prices that is tearing into the living standards of ordinary families", he says, rather than erecting a "fortress" around Britain.

In 2011, the EU Agency Workers Directive was introduced granting rights for equal pay and conditions for agency staff across Europe. But under a loophole known as the "Swedish derogation", negotiated by the Stockholm government because Sweden relies heavily on agency staff, companies anywhere in the EU have been able to employ agency workers on cheaper rates.

Mr Miliband promises that a Labour government would end the practice by amending the way the directive and its clauses are interpreted in the UK. Figures show that about 300,000 workers in Britain, many of whom are from overseas, are paid below the minimum wage."

He says: "This cost of living crisis is the most important context for the debate about immigration. It understandably makes people more fearful of the change that immigration brings. When millions of workers already have low pay and poor job security in Britain and we add high levels of low-skilled migration, mostly from within the EU, some benefit but some lose out. Unless we act to change our economy, low-skill immigration risks making the problems of the cost of living crisis worse for those at the sharp end. It isn't prejudiced to believe that."

He adds: "There is a loophole in the laws around agency work which allows firms to avoid paying agency workers at the same rates as directly-employed staff. This loophole is being used in sectors where levels of employment from abroad are high, such as food production, and now account for as many as one in six of those employed by agencies.

"The next Labour government will work with British business to close this loophole and ensure that agency workers cannot be used to undercut non-agency staff."

Mr Miliband's announcement, his first major policy pledge of 2014, comes less than a week after workers from Romania and Bulgaria were allowed to come freely to Britain to work, a landmark which has heightened fears over immigration.

On the eve of the changes, David Cameron announced tougher measures for migrants, including a three-month ban on their claiming benefits, and restricted access to NHS care. With the rhetoric over immigration becoming tougher, and fears within Conservative and Labour high commands that both parties will lose votes to Ukip in the European elections in May, Mr Miliband has been forced to distance himself from the last Labour government's decision to allow Eastern European migrants unfettered access to Britain in 2004.

The agency workers pledge is likely to be welcomed by the TUC, which has been campaigning for the loophole to be closed. Mr Miliband says businesses fearful of the policy should "understand that Britain can only maintain the open economy it needs to succeed if there is also proper protection to stop this very openness fuelling a race to the bottom".

Labour sources said that closing the loophole would not require a change in any EU treaties but could be done by changing the way the UK interprets the Agency Workers Directive.