NMW enforcement: 500% of nothing is still nothing

On 28 December, as I was travelling to Wet Wales for New Year, Sarah O’Connor of the Financial Times – surely the best employment correspondent of recent years, who has now moved on to a wider investigative brief – reported the view that Sir David Metcalf, the Director of Labour Market Enforcement, has been expressing publicly for some time now: that the financial penalties imposed on employers for breaching the national minimum wage should be substantially higher.

“There’s a trade-off here, in that if you’ve got plenty of resources [to inspect employers] you don’t need high penalties, and if you haven’t got the resources then you’ve got to have a stronger penalty [as a deterrent],” said Sir David. “My own view is we’re low on both.”

As the Low Pay Commission notes in its September 2017 report, Non-compliance and enforcement of the National Minimum Wage, the financial penalties “are a key part of the enforcement scheme, making sure that underpaying employers are suitably rebuked, and acting as a deterrent to other employers”. And, since 2010, the penalties have been increased several times.

The current penalty rate is 200% of the total arrears owed to workers, up to a maximum of £20,000 per worker, but that rate only applies to underpayments made since 1 April 2016. For underpayments made between 7 March 2014 and 1 April 2016, the penalty rate is 100%, and for underpayments made prior to 7 March 2014 it is 50%. And the total penalty is then reduced by 50% for prompt payment (within 14 days).

Sir David told the Financial Times that, while he would call for more resources for the enforcement bodies in his forthcoming enforcement strategy, especially for the Employment Agencies Standards Inspectorate (EASI), he believes minister are unlikely to want to “pump vastly more money” into the enforcement regime as a whole. As a result, the financial penalties need to be higher.

“That’s the point about the trade off: If you have not got the resources then you need heavier penalties. For the life of me, I can’t see that double the wage arrears, given the probability of inspection is once in 500 years, is anywhere near enough”, Sir David said. “Five times” the wage arrears might be a better figure, he suggested.

And this was followed by a statement by Sarah that “the total amount of [financial penalties] in 2016-17 was £3.9m, much less than the £10.9m of wage arrears that were identified by HMRC.”

However, there is one simple reason for that glaring discrepancy, not noted by either Sir David or Sarah: no penalties at all were imposed in relation to £6.0m (55%) of the £10.9m. Because, as noted repeatedly [Shurely ‘boringly’? Ed] on this blog, that £6.0m was in fact identified by employers, not HMRC, under the self-correction mechanism quietly introduced by HMRC in 2015 – and self-corrected arrears attract no penalty. In other words, penalties were only imposed in relation to £4.9m of the £10.9m. And the total amount of penalties was £3.9m, rather than £4.9m or even £9.8m, because most of the underpayments were made prior to 1 April 2016, so attracted a penalty rate of 100%, or even just 50%, rather than the current rate of 200%.

In the case of Argos, for example, we know from press reports in February 2017 that the arrears for which the company was named & shamed by BEIS in August relate to underpayments that “date back to 2014”, when the penalty rate was 100% (or just 50%, for underpayments made before 7 March that year). Those February 2017 press reports further noted that financial penalties of “nearly £1.5m” had been imposed on Argos (reduced to “£800,000” because the company “paid up within 14 days”), and in August the company was named & shamed for having underpaid 12,176 workers a total of £1.46m.

Interestingly – to this wonk, at least – those February 2017 press reports also stated that Argos was having to pay a total of £2.4m of minimum wage arrears, not £1.46m, to “more than 37,000 current and former shop workers”, made up of “12,000 current employees and more than 25,000 former staff”. In other words, it looks as if Argos was found by HMRC to owe £1.46m to £12,176 current workers, for which the company was named & shamed by BEIS and hit with £1.46m of financial penalties, but also self-corrected (or, at least, self-identified) a further £0.9m of arrears owed to some 25,000 former workers.

We don’t know for certain, because the self-correction mechanism is shrouded in secrecy and BEIS has repeatedly refused to identify any of the 169 employers that we know – from the Answers to four parliamentary questions tabled by Caroline Lucas MP in relation to the last four rounds of naming & shaming – self-corrected (or, at least, self-identified) arrears totalling some £4.1 million, owed to 71,766 workers.

As noted previously [I’ve warned you about this. Ed], most if not all of those 169 employers are relatively large employers. And, by definition, they are the worst offenders. But they are not paying the full penalty rate (whether that be 200%, 100%, or 50%) on all of the underpayments that they have made to their workers.

So, push for higher financial penalties if you want, Sir David. But please do consider also whether it is fair that the biggest, baddest baddies get to pay no penalties at all on a proportion of the underpayments they have made to their workers, and then get to further reduce the penalty by 50% simply by paying promptly.

In the meantime, here’s a nice photo of an Andy Goldsworthy-style pebble tower I made on a beach in Wet Wales.

 

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About wonkypolicywonk

@wonkypolicywonk is a policy minion who has been lucky enough to work at Maternity Action, Working Families, Citizens Advice, the National Audit Office, the Law Society, and Amnesty International UK. He currently bangs his head on a desk in Parliament.
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