Tougher deterrents needed to end minimum wage underpayment

Sanctions for failing to pay staff the national minimum wage are not tough enough and there needs to be a greater risk of detection to incentivise organisations to remain complaint, a report has argued.

Although HM Revenue & Customs has levied millions of pounds in fines to organisations that have failed to pay staff the minimum wage, the current enforcement and penalty regime does not provide sufficient deterrence for firms contemplating underpayment, according to the Resolution Foundation.

While increases to the national minimum wage and national living wage are good for workers, it notes, such rises place pressure on organisations that employ staff at the wage floor. Its analysis suggests that there has been an increase in underpayment since the NLW was introduced in 2016 and underpayment could rise further when the government introduces new NMW and NLW rates in April.

Lindsay Judge, senior policy analyst at the Resolution Foundation, said: "The minimum wage has been one of the UK's biggest policy successes in recent decades, delivering much-needed pay rises to millions of low-paid workers. Its success is dependent on employers taking it seriously, with those firms paying it not being undercut by a minority that fail to do so.

"As the government plans to increase the legal wage floor through this parliament, it is essential to strengthen the incentives for firms to comply."

The Under the wage floor report notes that just one of the 141 firms found by employment tribunals in 2017 to have underpaid the minimum wage was subject to a financial penalty in addition to repaying the arrears owed.

It notes that HMRC's enforcement regime is more effective. In 2017-18 it identified 1,116 firms that were non-compliant, enforced repayment of arrears owed, and levied additional penalties of £14.1 million.

However, a quarter of underpaying employers were given the chance to "self-correct" and pay back arrears with no penalty, while half received a "prompt payment" discount, reducing their penalty from the maximum 200% of arrears to 100%.

The Resolution Foundation estimated that the average minimum wage law violation detected by HMRC in 2017-18 incurred a penalty worth just 90% of the value of arrears owed.

Based on this average fine, the think tank calculated that firms would need to believe they had a one-in-two chance of their underpayment being detected for this to be an effective deterrent. If the maximum penalty (200% of unpaid wages) is levied, there would need to be a one-in-three chance of being caught.

There also need to be more reputational and ethical disincentives, it argues.

Few directors have been prosecuted or disqualified as a result of NMW underpayment in the past 20 years, while the Department for Business, Energy and Industrial Strategy's "naming and shaming" scheme which exposes firms to reputational risk is currently under review and no firms have been named since July 2018.

The report recommends that the government:

  • raises the probability of detection of NMW underpayment;
  • toughens legal penalties; and
  • strengthens the risks of non-compliance for individuals such as directors.

Judge added: "The introduction of a new single enforcement body for labour market rules offers the perfect opportunity to toughen up the law. But while that may take years to get up and running, the government can act today by encouraging HMRC to take a tougher line with minimum wage offenders, and being given the power to levy larger financial penalties."