This year we celebrate 20 years of the UK National Minimum Wage (NMW), which came into force in 1999 at £3.60 an hour. It is easy to forget just how controversial its introduction was. Many thought that it would force the low paid out of work. This has not been the case: over the last 20 years, the NMW has increased pay for the lowest paid without damaging employment. Pay for a full-time worker on the minimum wage is £5,000 a year higher in real terms than it would have been without it.
However, there are a number of workers who receive less than what they are entitled to. We cannot be complacent. Specifically, we cannot let the success of the minimum wage be undermined by those who pay workers less than the legal wage floor. Regrettably there are some employers who seek to flout the rules. Others fail to understand their obligations.
The Low Pay Commission has recognised this from the start, as we heard at a recent event to mark the NMW’s 20th anniversary. Former commissioners reflected on how the remit of the LPC did not originally include looking at compliance and enforcement. The remit was to advise on the rate itself. However, because they saw it as an intrinsic aspect of the policy, the original Commission closely monitored how far the newly introduced rate was observed in the real world, as well as the government’s enforcement of it. Since 1999, the Commission has reported on compliance and enforcement each year alongside its NMW rate recommendations.
The importance of focusing on compliance and enforcement is brought home by the findings of our latest report, which uses official statistics as well as evidence from stakeholders and the government, to reflect on the policy responses to non-compliance.
Worryingly, underpayment of the minimum wage appears to be on the rise, and has been since the National Living Wage (NLW), the higher rate for workers aged 25 and over, was introduced in 2016. In April 2018, 439,000 people were paid less than the hourly minimum wage they should have received. Of these, 369,000 were workers aged 25 and over paid less than the NLW—23 per cent of those paid at or below the rate (which was £7.83 in April 2018 but went up last month to £8.21).
This is an increase of 30,000 underpaid workers on 2017, or a 2 percentage point rise in the share of workers entitled to the rate who are not receiving it. It is hard to ascertain the precise nature of this underpayment, but we found that 135,000 workers were paid below the 2016 NLW rate of £7.20 an hour. For a full-time worker this is at least £1,000 over the course of a year.
Businesses have coped with the minimum wage in different ways: adjusting hours, changing pay structures, increasing prices and squeezing profit margins. However, the above figures reveal another possible adjustment on the part of some businesses, namely underpaying their workers.
The responsibility for enforcement of the minimum wages lies with HMRC. We are pleased that HMRC has made real progress since the government increased the enforcement budget, with a record number of workers identified as underpaid, arrears repaid, and fines levied on non-compliant employers in 2017/18.
But other important measures—for example, the numbers of cases opened and closed by HMRC—stood still, and the overall figures were driven by a relatively small number of cases. The LPC welcomes the government’s continued focus on minimum wage enforcement, but we note the ongoing challenge in making sure resources are targeted as effectively as possible.
In the report we recommend ways the government could improve enforcement. Firstly, we think it is important that the government invest in developing better measures of non-compliance. Our estimates are derived from official data, so will not be an exact reflection of the extent of the problem, not least because they do not capture any abuse outside the formal economy.
Beyond that, our recommendations focus on ensuring as many employers as possible comply with the minimum wage in the first place, and making it easier for workers to enforce their rights. We recommend that the government invest in both communications to workers and guidance for employers. We urge the government to work with unions, Acas and other bodies to build confidence in the complaints process, including the procedure for third-party complaints. We also think that the government should restart its regular naming rounds of non-compliant businesses, which have helped publicise the issue.
The minimum wage has been a great success story over the last 20 years, but to ensure it can continue to have a positive impact, we need to maintain the momentum that is building behind minimum wage enforcement. Better enforcement alone will not stop the rise in non-compliance—we need to ensure employers understand and carry out their responsibilities. Not only will workers then benefit from rising minimum wages, but employers will know that they are not being undercut by unscrupulous competitors.
