Higher fines needed to curb minimum wage breaches, says think tank

Resolution Foundation report also calls for government scheme that ‘names and shames’ underpaying employers to be better publicised

Employers should be subjected to substantially higher financial penalties for breaking minimum wage law, a think tank has said, arguing that the current policy of ‘naming and shaming’ firms is not enough to deter underpayment.

A report by the Resolution Foundation calculated firms that break minimum wage rules needed to be fined seven times the arrears owed in order to counteract the savings made by underpaying – more than three times the current maximum fine.

The think tank is also calling for more rigorous enforcement to increase detection of minimum wage breaches.

Hannah Slaughter, economist at the Resolution Foundation, said that reputation mattered for businesses and called on the government to bolster its naming and shaming programme. But, she said: “Naming dodgy firms only works when they are caught in the first place, so more widespread enforcement is needed.

“Fines are currently too low so there is little economic incentive for rule-breaking employers to change their ways,” she added.

The government’s Naming Scheme lists businesses that fail to pay the National Minimum Wage. The latest list, published in August this year, identified almost 200 UK companies that failed to do this, and owed a collective £2.1m to 34,000 workers.

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The Resolution Foundation report did find that sectors with more naming and shaming did tend to see a subsequent reduction in underpayment, but it argued that this impact was very small and concentrated in sectors where detection rates are already high.

The report also argued that businesses weren’t equally exposed to the reputational pressure that naming and shaming created, nor were they equally able to manage it. As such, the scheme was more likely to deter smaller firms.

It said the government’s naming and shaming policy could be strengthened with wider and more tactical publicity, arguing that this was unlikely to do firms long-term damage or cause significant financial losses.

“The most common criticism we heard of the naming and shaming list was that very few people had heard of it, suggesting that the current method of publishing on the government website, accompanied by a broad-brush press release, is not effective,” the report said.

“As well as raising the profile of the ‘naming and shaming’ regime, the government must introduce tougher financial penalties and more widespread enforcement to ensure that rule-breaking firms are caught and deterred.”

Tony Dobbins, professor of work and employment relations at the University of Birmingham, agreed that the naming and shaming scheme needed to be higher profile and accompanied by tougher enforcement and larger fines for breaches. “Evidently, there is still extensive non-compliance with laws like the National Minimum Wage Act, relating to low likelihood of detection,” he said. 

But, said Dobbins, there could also be much greater resourcing and provision of labour inspectors responsible for labour market enforcement, adding that the role of director of labour market enforcement remained vacant.

“More could be done to promote labour market regulations as a springboard for positive employment relations and a broader public good for society,” he said. “However, a deregulatory labour market flexibility agenda has been permitted to dominate discourse, contributing to a ‘race to the bottom’ in labour market standards.

“A different trajectory of seeing robust labour market regulations as encouraging good employment models is arguably required to support good employers and regional ‘levelling-up’ of decent work,” said Dobbins.

A spokesperson for the Department for Business, Energy and Industrial Strategy said: “Paying the minimum wage is a legal requirement, and we will not stand for those who fail to do so.”