Minimum wage non-compliance on the rise

9 January 2020

After falling consistently between 1999 and 2015, failure to pay the minimum wage is increasing, and fines for those underpaying are too low, according to new research by an independent think tank, the Resolution Foundation.

Available at https://www.resolutionfoundation.org/app/uploads/2020/01/Under-the-wage-floor.pdf, Under the wage floor: Exploring firms’ incentives to comply with the minimum wage highlights that non-compliance has been increasing since the introduction of the National Living Wage (NLW) in 2016.

Around one in five workers aged 25+ earning around the legal minimum were reportedly underpaid in 2016 — a figure that rose to over one in four workers last year.

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”.

The introduction of a new single enforcement body for labour market rules offers, she suggested, the perfect opportunity to toughen up the law.

However, that may take years to get up and running so Ms Judge has called on the Government to encourage HM Revenue & Customs (HMRC) to take a tougher line with minimum wage offenders, and to give it the power to levy larger financial penalties.

The report notes that, while HMRC has the power to levy penalties worth up to 200% of wage arrears for non-compliance, its issuing of arrears-only demands and early repayment discounted fines means that the average HMRC penalty in 2017–18 was worth around 90% of the wage arrears owed.

Given this level of penalty, firms would need to believe they had a one-in-two chance of being detected for this to be an effective deterrent against minimum wage underpayment.

The report shows however that, at the very most, under-paying firms face a one-in-eight chance of being caught by HMRC, and the detection rate for small firms is likely to be far lower.

This shows why both detection rates and penalties need to be increased, the Foundation argues.

Comment by Croner Associate Director Paul Holcroft

The law on minimum wages is highly complicated, and even the most well-intentioned employers can be caught out. Employers can struggle to understand that pay is broken down into several different elements which must be treated differently to ensure compliance.

Even HMRC has been known to get it wrong, which doesn’t instil much confidence in the small business owner.

I would suggest that time and effort be put into ensuring employers are given the best tools to pay their staff correctly rather than simply hiking up fines for non-compliance.