Waging War on Non-Compliance

11/05/2016 09:00 | Updated 11 May 2016

Big policy wins - those that shift the argument among politicos and have a real impact on people's lives - are few and far between. Ask commentators to name the biggest success in recent decades and the National Minimum Wage (NMW) would be a top choice. So much so that last summer the Conservative chancellor raised the bar further by announcing a new National Living Wage (NLW) that will make the UK a world-leader on minimum pay levels.

The ongoing success of the minimum wage rests on strong compliance. Worrying then, is a report published today by the National Audit Office (NAO) that concludes we have no accurate picture of overall levels of NMW underpayment. This means that we just don't know whether welcome recent enforcement efforts are having the desired effect. With the NLW introduced just last month and rising steeply over the parliament, the NAO's intervention comes at a crucial moment for the UK's wage floor.

Our compliance-blindness is a genuine concern as the best estimates we do have suggest that underpayment is far too common. For example, the NAO highlights our assessment that 160,000 workers in the care sector alone may be underpaid by an average of £815 each year - a huge hit to their livelihoods. This is the result of falling budgets, rising service demand and the common practice of only paying 'contact' hours (excluding travel and 'sleep in' shifts, for example). While the challenges and complex working arrangements in social care single it out as a compliance blackspot, it's likely that there are other sectors where we remain even more in the dark.

Not knowing where we stand on minimum wage non-compliance today makes it hard to assess what the future holds. However, it's likely the challenge is set to grow, for three reasons:

First, the escalation of the NLW means that far more people are set to be earning the higher wage floor. We estimate that the number of employees on the legal minimum will rise from 1.4million in 2014 to three million by 2020. This compression at the minimum heightens this risk that increasing numbers fall below it, and the higher rate increases the temptation for employers to circumvent it.

Second, the introduction of the NLW only for over-25s in addition to all existing NMW rates means an increasingly complex minimum wage architecture. There are now five different legal minimums employers need to comply with and it's unclear whether increases in each will move in harmony. This enhances the risk of underpayment arising from confusion and error, rather than wilful law-breaking.

Finally, this higher and more complex wage floor structure is being built in an increasingly disaggregated jobs market. The growing use of time-and-task-based working patterns in sectors like care; the blurring of lines between employee jobs, self-employment, and agency working; and the well-publicised rise of the 'gig economy' are signs that the world of work is changing. Understanding how and to whom the legal wage floor applies is going to get more complex.

The challenge of non-compliance may be opaque, but it's looming larger than ever. However, this shouldn't lead to gloom. The NMW's successful record, and the energy and resource that have been channelled into enforcement offer grounds for optimism. Indeed, HMRC's enforcement budget increased by a whopping 43% last year and the government recently doubled the penalties imposed on underpaying businesses.

To set us on the right path in a changing landscape, further increases in enforcement resources will be necessary, alongside a more proactive approach to investigations and new publicity efforts. And to underpin all this we require a more accurate picture of compliance levels. Shining the light on illegal pay and effectively tackling it are essential actions for those who want to protect and uphold one of the most successful policy projects of our time.