How to tackle low pay and worker exploitation

24 Jul 2018 By Tom Kerr Williams

Tom Kerr Williams explains what HR professionals need to know following a recent report on enforcement of labour market regulations

Sir David Metcalfe, the UK’s first Director of Labour Market Enforcement, has published his strategy for 2018/19. Metcalfe’s recommendations come in response to a public consultation launched last year and are aimed at ensuring labour market laws and regulations are being fully enforced. 

The paper is broad ranging, with 37 different recommendations, but particular focus is given to the enforcement of National Minimum Wage (NMW), payment of holiday pay and eradication of modern slavery. 

National Minimum Wage (NMW)

Metcalfe believes current deterrents for employers are not sufficient to discourage minimum wage breaches. He therefore recommends:

  • an increase in the NMW penalty (currently 200% of any underpayment). While no precise recommendation is made, he expressly notes the percentage of global turnover approach taken elsewhere;
  • non-compliant employers should be charged a fee for enforcement intervention to recover the costs associated with the investigation; and
  • greater use of prosecution under the regulations.

The strategy paper also suggests changes in approach by HMRC and the Department for Business, Energy and Industrial Strategy (BEIS) as enforcers of NMW, including improving education and support for employers to reduce accidental breaches; improved guidance and clarity on technical areas; and reserving naming and shaming for serious (ie, not inadvertent) breaches.

Employers are seeing real challenges posed to them as a result of HMRC’s current approach to enforcement, which doesn’t differentiate between inadvertent failures and unscrupulous underpayment. Employers would therefore benefit from clearer guidance as to the approach to be taken on certain points. Clarification of the law is also welcome and BEIS are expected to launch a consultation in this area later in 2018. Clarity might also increase individual enforcement, taking some of the strain off HMRC.

Given the number of major employers being taken to task by HMRC, all employers should be reviewing their current pay structures and seeking advice on whether they are compliant. If problems can be rectified before HMRC become involved then penalties (at whatever level) can be avoided.

Holiday pay

Metcalfe recommends that HMRC, or another appropriate state body, be granted the powers and remit to take responsibility for the enforcement of holiday pay for all workers, including mechanisms to recover holiday pay arrears. Given the numbers involved, this would elevate holiday pay compliance to a board-level issue.

As for NMW, clarification of the current rules is a vital first step. Holiday pay requirements remain uncertain, with complex legal challenges having reached both the Supreme Court and to the European Court. Without clear answers, the body given powers of enforcement will face as many frustrated employers as HMRC has in enforcing NMW, and the burden on business will be huge.

At present, many employers have decided to take a balanced approach and await challenge from employees. This approach may now need to change. If holiday pay is to fall within the remit of HMRC (or similar) then underpayments, penalties and naming and shaming will follow. All employers would be wise to think now about their approach to holiday pay compliance and ensure they understand the level of exposure so they can act quickly if Metcalfe’s recommendations are adopted.

Leveraging the supply chain

Metcalfe recognises the power of those well-known brands at the top of the supply chain to influence those from whom they buy. He wants to make this formal and share responsibility for compliance between the supply chain employer and purchasing entity at the top of the chain. This is radical and mirrors a recent approach by trade unions, which have long recognised the benefit of applying pressure in the supply chain to influence others above and below. Sir David’s most forward thinking recommendation is a temporary embargo of ‘hot-goods’ to disrupt supply chain activity where non-compliance is found.

As things stand, large employers should consider a supply chain audit to ensure compliance with applicable labour rules. Both contractual provisions and proactive steps would be sensible to ensure that evidence of compliance can be demonstrated if/when any recommendations are implemented.

Tom Kerr Williams is a partner in the employment team at PwC

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