Are tougher sanctions for NMW breaches and HMRC enforcement of holiday pay on the horizon?

The Director of Labour Market Enforcement (DLME), Sir David Metcalf, has released his strategy for tackling worker exploitation in the UK. 

The DLME co-ordinates the resources of the three main enforcement agencies - HMRC, the Gangmasters and Labour Abuse Authority (GLAA), and the Employment Agency Standards (EAS) - to prevent employers from breaching workers’ rights. 

The DLME’s strategy document follows hot on the heels of the Taylor Review and the resulting consultations announced by the Government.

Penalties for National Minimum Wage non-compliance to be increased? 

A key component of tackling worker exploitation is enforcing National Minimum Wage / National Living Wage (NMW/NLW) compliance. Currently, employers who fail to pay NMW/NLW are required to repay arrears of pay for up to six years, fined up to 200 per cent of any underpayment, and be named and shamed. 

The strategy document suggests that the current level of fine is not high enough to act as a sufficient deterrent and should be increased, perhaps even linking it to the employer’s annual turnover (much like the fines imposed by the Health & Safety Executive and the Information Commissioner’s Office when GDPR comes into force).

From our experience, this seems a step too far. Quite rightly, workers should not be exploited by unscrupulous employers seeking to gain an advantage over the competition or increase their profits. However, there are many good employers who have found themselves to be non-compliant through error rather than deliberate evasion. If fines are increased, there should be an opportunity for good employers to reduce those increased penalties if they can demonstrate they were trying to do the right thing but made a technical mistake. HMRC makes the case that this exists through the option of allowing employers to self-correct NMW underpayments for a proportion of their workforce, for which no penalty applies. However, the application of self-correction is unclear and lacks consistency in its application because it is the discretion of the NMW inspector dealing with the case whether to allow self-correction. 

Statements of terms to make reference to worker rights and who to make a complaint to

Supporting, in part, the Taylor Review’s recommendation that all workers be provided with a statement of terms, the DLME goes further and suggests they should also include references to worker rights and the agency to whom complaints concerning breaches of employment law should be reported to. The concern is that many workers are unaware of their rights or are afraid to raise unlawful practices with their employers. 

Holiday pay to come under HMRC enforcement?

The latest statistics suggest that in 2017, approximately £1.8bn of holiday pay went unpaid. As a result, the DLME’s strategy recommends that enforcement of holiday pay should be the responsibility of HMRC or another government agency. The Taylor Review put forward the same proposal and, given the success HMRC is having in recovering arrears of pay for workers concerning underpayments of NMW, this might be taken forward by the government. However, enforcing compliance with the continuing evolvement of holiday pay case law from Europe and the fact-specific nature of some of the cases is likely to place too great a burden on HMRC unless its inspectors are appropriately trained and resourced. Employers must also have confidence in a system which applies the law consistently and correctly. We have already seen several areas of NMW compliance (pay averaging being one) where the law is ambiguous and HMRC has taken a narrow interpretation, catching employers out and in the unfortunate position of being named and shamed because of a technicality.

However, with the recent abolition of employment tribunal fees resulting in a significant increase in employment tribunal claims (latest statistics indicate a 90 per cent increase), one wonders whether the government will be tempted to bring this under the remit of HMRC to reduce the burden on an already creaking tribunal system which is currently seeking to recruit 54 employment judges.

For more information on National Minimum Wage compliance and how this may impact your organisation please contact Charlie Barnes or your usual RSM contact.