One in eight chance of getting caught flouting NMW

Companies that fail to comply with national minimum wage (NMW) rules face only a one in eight chance of being caught by HMRC, while the detection rate for small businesses is likely to be far lower

With NMW rates set to rise by 6.2% in April to £8.72, analysis by the Resolution Foundation think tank shows that the chance of getting caught is slim and is calling for tougher action on under payments as it says the current enforcement and penalty regime does not provide sufficient deterrence and warns that non-compliance is on the increase.

The Resolution Foundation says that while reported minimum wage non-compliance fell consistently between 1999 and 2015, levels of under-payment have 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 under-paid in 2016 – a figure that has since risen to over one in four workers last year.

It argues that while HMRC is catching more non-compliant firms with a record 1,456 firms identified in 2018-19, and issuing higher fines with a record £14.1m of penalties in 2017-18, the economic incentives for firms to comply with the law are still far too low.

The report said 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% cent of the wage arrears owed.

The Foundation argues that given this level of penalty, companies would have to believe they had a one-in-two chance of being detected for this to be an effective deterrent against minimum wage underpayment.

Even if HMRC levied the full 200% penalty on firms, a detection rate of at least one-in-three would be needed to act as an effective economic deterrent.

In reality, under-paying companies face a one-in-eight chance of being caught by HMRC, and the detection rate for small businesses is likely to be far lower, Resolution Foundation said.

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 welcome introduction of the NLW in 2016 has led to a worrying rise in minimum wage underpayment. 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 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 by encouraging HMRC to take a tougher line with minimum wage offenders, and being given the power to levy larger financial penalties.’

HMRC has been contacted for comment.

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