Low Pay Commission report on non-compliance with the minimum wage

Up to 1 in 5 minimum wage workers may actually be paid less than what they are legally entitled to.

Read the Low Pay Commission’s new report for details. Read the report here. 

• Underpayment is highly seasonal throughout the year. It is highest immediately after an uprating of the minimum wage, when as many as 1 in 5 low-paid workers (those paid at or below the National Living Wage) aged 25 and over may actually be paid less than they are entitled to. This may affect between 305,000 and 580,000 workers.
• In the 3 to 6 months that follow an uprating of the minimum wage, levels of underpayment fall significantly. We estimate that underpayment fell to 13% of workers paid the National Living Wage (NLW) aged 25 and over 6 months after the NLW’s introduction. This is slightly lower than the 14% of workers underpaid 6 months after the uprating of the National Minimum Wage (NMW) to £6.50 in October 2014.
• Underpayment of the National Living Wage and Minimum Wage is very difficult to measure. Statistics are difficult to interpret and the worst cases of exploitation of workers are almost certainly hidden.
• A large number of salaried workers (those who are paid monthly and don’t have a stated hourly rate) are paid less than the minimum wage. They make up 11% of people paid at the NLW but 44% of those paid below it.
• Recent developments in the Government’s enforcement of compliance, and communications regarding the National Living Wage have led to real successes – record numbers of underpaid workers and arrears have been identified. Government enforcement investigations found arrears of £10.9 million for 98,000 workers in 2016/17 compared to £3.3 million for 26,300 workers in 2014/15. But there are areas where the Government could go further. The Low Pay Commission (LPC) makes several recommendations in this regard.

Commenting on the report, Chair of the Low Pay Commission Bryan Sanderson said:

‘The Low Pay Commission has always had a strong interest in compliance with the minimum wage rates it recommends. There is, after all, little point in having a minimum wage if workers do not receive the correct rate.

‘With more workers than ever paid the minimum wage or close to it, more people are at risk of being underpaid. Our analysis finds that up to 1 in 5 people who should be paid at least the minimum wage may in fact receive less. This equates to between 305,000 and 580,000 workers at its highest point, though it is a difficult thing to measure.

‘The LPC welcomes the recent increases in funding for HMRC’s enforcement of the minimum wage, and recognises the progress it has made. However, we also think there is more the Government could do to identify non-compliance and stop it happening in the first place. In our report we lay out recommendations for ways the Government could go further.’

Important aspects of the report include:

• At its peak in the year between 305,000 and 580,000 workers are paid less than they are legally entitled to. The range of estimates reflects the fact that the data sources have significant limitations that make measuring underpayment difficult. The report is based on data from the Annual Survey of Hours and Earnings, the Labour Force Survey, HMRC enforcement data, and evidence from stakeholders.
• A large percentage of non-compliance is ‘frictional’, meaning that it takes time for some employers to start paying the new minimum wage rates after they are introduced. Levels are at their highest immediately after an uprating and decline by around half over the 3-6 months that follow.
• It is likely that a significant amount of non-compliance occurs in the informal economy, with the most serious cases involving organised crime and forced labour. These cases are not captured by official data.
• The majority of underpaid workers are female, part-time and hourly paid, but this is driven by the characteristics of minimum wage workers as a whole.
• Women make up two thirds of underpaid workers in the earnings data but a lower share of those who make a complaint about underpayment. However, in HMRC’s investigations, two thirds of underpaid workers are women. This suggests that as HMRC shifts away from complaint led cases to pro-active investigations this is helping to address imbalances across groups.
• Salaried workers (those who are paid monthly and do not have an hourly rate of pay) make up 11% of people paid at the NLW but 44% of those paid below it. This is likely to be because neither these workers or their employers are tracking the hours they are working.
• 31% of underpaid workers do not work in traditionally low-paying occupations, making them difficult forthe Government to target.
• As more workers are covered by the National Living Wage and minimum wage, more will be at risk of being underpaid. As the NLW rises, the LPC estimates that HMRC will have the job of policing the pay of 3.3 million workers by 2020, up from 2.3 million now.
• Real improvements in enforcement activity have already been delivered with a shift to more proactive investigations and more use of ‘self-correction’ resulting in higher arrears and more workers identified by HMRC. Once an underpayment has been found HMRC can ask employers to ‘self-correct’ for the rest of their workforce by checking if others have also been underpaid.
• The LPC argues that the Government could go further in a variety of areas.
• The Government should fully evaluate its communications campaign around the 2017 NLW and NMW upratings. Awareness of the minimum wage can contribute to increased compliance.
• The LPC recommends improved guidance around the technical errors employers have made so that others can learn from their mistakes.
• Naming of employers found to underpay could be made a more regular and predictable occurrence to build on the momentum the policy has acquired.
• Publicising the increase in enforcement activity could help increase employers’ awareness of the risk of being found not to comply with the minimum wage. Using ‘nudges’ like a ‘tick box’ declaration on payroll software where an employer is asked to confirm that staff are paid the minimum wage could also be helpful.
• The LPC recommends that HMRC establishes information systems that allow Government to learn as much as possible about the nature and extent of non-compliance from the cases it investigates. It could also gather intelligence from other parts of Government, for example working with the Jobcentre Plus Jobmatch Team to identify online job adverts that appear non-compliant.

Notes:

1. The Low Pay Commission is an independent body made up of employers, trade unions and experts whose role is to advise the government on the minimum wage. The National Living Wage is the legally binding pay floor for workers aged 25 and over. The other minimum wage rates comprise: the 21-24 Year Old Rate, the 18-20 Year Old Rate, the16-17 Year Old Rate, and the Apprentice Rate.
2. As well as recommending rates of the NLW and NMW, the LPC makes policy recommendations regarding its operation, including on the topic of non-compliance.
3. The members of the Low Pay Commission comprise:
   • Bryan Sanderson, Chair
   • Sarah Brown, Professor of Economics at the University of Sheffield
   • Kay Carberry, TUC
   • Neil Carberry, Director of Employment and Skills, CBI
   • Clare Chapman, Non-Executive Director & Remuneration Committee Chair at Kingfisher PLC
   • Richard Dickens, Professor of Economics, Sussex University
   • Peter Donaldson
   • John Hannett, General Secretary, Usdaw
   • Brian Strutton, General Secretary, BALPA
4. The LPC will soon recommend NLW and NMW rates to the Government to apply from 1 April 2018. The LPC’s report will be published when the Government announces the rates. The current National Living and Minimum Wage rates are shown in the table below.
5. The National Living Wage is different from the UK Living Wage and the London Living Wage, which are currently £8.45 and £9.75 respectively. Differences include that: the UK Living Wage and the London Living Wage are voluntary pay benchmarks that employers can sign up to if they wish, not legally binding requirements; the hourly rate of the UK Living Wage and London Living Wage is based on an attempt to measure need, whereas the National Living Wage is based on a target relationship between its level and average pay; the UK Living Wage and London Living Wage apply to workers aged 18 and over, the National Living Wage to workers aged 25 and over. The Low Pay Commission has no role in the UK Living Wage or the London Living Wage.
6. The Department for Business, Energy and Industrial Strategy (BEIS) is responsible for minimum wage compliance and enforcement policy and HMRC enforces the NMW Act on behalf of BEIS.
7. Workers can complain about underpayment and seek redress by contacting ACAS, which operates the Pay and Work Rights Helpline. The phone number of the Helpline is 0300 123 1100.

Current NLW/NMW rates