According to research published by the Resolution Foundation, an independent think tank, the minimum wage needs to be enforced more rigorously in order to reduce rising levels of underpayment by employers.
The report, entitled “Under the wage floor”, says that although rates of non-compliance fell consistently between 1999 and 2015, they have been increasing since the introduction of the National Living Wage in 2016.
With the minimum wage set to rise twice as fast as average earnings over this parliament, and the number of workers covered set to more than double, the Foundation says that firms’ economic incentives to comply with the minimum wage need to be in the spotlight again.
While acknowledging that most firms want to pay the minimum wage and that HMRC is catching more non-compliant firms and is issuing higher fines, the report explores whether those fines offer a sufficient deterrent.
For instance, although HMRC has the power to levy penalties worth up to 200 per cent of wage arrears for non-compliance, the average HMRC penalty in 2017-18 was worth around 90 per cent 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 to be an effective deterrent against minimum wage underpayment. Even if HMRC levied the full 200 per cent penalty on firms, a detection rate of at least one in three would be needed to act as an effective economic deterrent.
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, says the Foundation.
“Under the wage floor” says that government plans announced in the Queen’s Speech to create a new Single Enforcement Body offers a perfect opportunity to toughen up minimum wage compliance before millions more workers are affected by it.
However, the report also argues that the government should provide extra enforcement teeth now by increasing the powers of HMRC to levy greater financial penalties, particularly on firms committing more serious offences.
Iain Birrell, of Thompsons Solicitors, commented: “The Royal Statistical Society’s 2019 statistic of the year was that 58 per cent of those in relative poverty live in a working household. The fact that earning a wage does not necessarily mean an escape from poverty gives some real-world context to the analysis in “Under the wage floor”.
“Calculating the minimum wage is complicated, and innocent mistakes can be made, but many employers deliberately underpay and others have deliberately convoluted employment and pay structures which only increase the risk of underpayment. We entirely agree with the report’s conclusion that ‘it is clear that the current NMW penalty and enforcement regime provides insufficient deterrence for firms contemplating underpayment.’
“Any employer who games the system for competitive advantage is committing wage-theft and it should be treated accordingly.”
To read the report in full, go to: https://www.resolutionfoundation.org/app/uploads/2020/01/Under-the-wage-floor.pdf