Covid has increased risk of minimum wage underpayment, advisory body warns

Complications of furlough and economic fallout of restrictions have hit low-paying sectors hardest, says Low Pay Commission

The coronavirus crisis has increased the risk of minimum wage underpayment, a government advisory body has warned, with the complexities of the furlough scheme creating a particular challenge for businesses.

A report by the Low Pay Commission (LPC), which advises the government on setting and enforcing the minimum wage, cautioned that business in low-paying sectors – including hospitality and leisure – were more likely to have furloughed workers and were more likely to be facing economical strain as a result of the virus, both of which increase the risk of underpayment.

The LPC also warned that because workers in these sectors were likely more concerned with keeping their job, they were less likely to challenge their employers on abuses such as earning below national minimum wage.

Bryan Sanderson, chair of the LPC, warned underpayment was a “serious threat” to successful minimum wage payment, and said the challenges faced by low-paying sectors would likely linger even as restrictions are lifted.

“The evidence we have heard from workers and employers alike over the past year leaves little doubt about the strains placed on low-paying sectors by the pandemic and the increasing risk of non-compliance,” said Sanderson.

“The effects of the pandemic will outlast the lockdown period and will require a disciplined but innovative management response.”

Get more HR and employment law news like this delivered straight to your inbox every day – sign up to People Management’s PM Daily newsletter

The report noted that the challenges of the pandemic have put the sector as a whole under pressure, with many businesses closed for months on end. Some, particularly SMEs, have had to accrue more debt than before, and there have been numerous changes to employment legislation for those taking part in the coronavirus job retention scheme (CJRS).

In every year to date, women were more likely to experience underpayment than men, the report said. Small business workers were also more likely to be underpaid than those in larger ones, and those working full time, permanent or salaried were also more likely to be underpaid than their part time or temporary counterparts.

However, the LPC said the introduction of the job retention scheme, which saw many furloughed workers legitimately moved onto 80 per cent of their pay, has made it difficult to assess the scope of underpayment during the outbreak.

The report said the number of workers who were being paid less than the minimum wage jumped from 345,000 April 2019 to 1.6 million in April 2020, according to the 2019/20 Annual Survey of Hours and Earnings (ASHE). However, the 2020 statistic included those workers who were legitimately underpaid through the furlough scheme.

By excluding furloughed workers from the data, the estimated rate of underpayment was lower, reporting that nearly 400,000 workers were paid less than minimum wage, but the report cited that this may have been underestimated.

The report also cited a Labour Force Survey (LFS) of workers that found there was a large rise in underpayment during April 2020. While this decreased over the rest of 2020, it remained substantially higher than 2019 levels.

Although this data was relatively inconclusive, the report said it did not rule out the increased risk of underpaid workers.

The report also said the job retention scheme could cause complications with workers’ pay and hours as companies exit lockdown restrictions.

The report noted that in low-paying sectors, more than half of the employment had been furloughed. Hospitality and leisure services saw almost 60 per cent of workers furloughed between February 2020 and February 2021.

Underpayment may be a significant risk during the easing of restrictions, and HMRC told the LPC it would document and study the changes between work, furlough and flexible furlough hours and wages carefully over the years to come.

The report said investigations into underpayment also slowed because of the pandemic. HMRC opened fewer arrear cases between April 2019 and April 2020 than the previous year, and said existing cases progressed more slowly, with the opportunity to visit premises and perform investigations severely limited because of pandemic regulations.