4Effective enforcement
52.The Immigration Act 2016 introduced the role of Director of Labour Market Enforcement, to “improve the effectiveness of the enforcement of certain employment rights to prevent non-compliance and the exploitation of vulnerable workers, via an intelligence-led, targeted approach”.106 The Director sets the strategy of the three major enforcement bodies: the Employment Agency Standards Inspectorate, the Gangmasters and Labour Abuse Authority and the HM Revenue and Customs National Minimum Wage enforcement team. He also reports on their effectiveness. Combined, the three bodies examined nearly 4,000 potential cases of abuse in the labour market in 2015–16.107
53.The Taylor Review made a number of recommendations for improving the enforcement of employment rights. The majority of these fall within the scope of the employment tribunal system, some of which have been superseded by the July 2017 Supreme Court judgment ending the current tribunal fees regime.108 The enforcement of other rights falls within the remit of the Director. We have focused our attention on areas where immediate action by the Government can have the greatest impact.
Deterrence
54.The Director of Labour Market Enforcement’s first strategy set out the principles of effective enforcement, including the importance of the deterrence effect.109 For penalties against non-compliance to be effective, the expected level of penalty must be set at a point which genuinely deters companies from non-compliance.
55.Where penalties are available for breaches of employment rights, they vary, based on the offence committed, from small civil penalties to imprisonment. For the NMW/NLW, non-payment incurs a maximum fine of only twice the wage arrears owed, an average maximum fine of just £220.110 Sir David explained that such small fines were ineffective given the very limited enforcement resources:111
If you take HMRC and the minimum wage, there are 1.3 million firms with employees. They took 2,600 cases last year. That means the average firm can expect an investigation once every 500 years.
Without larger fines, or a vast increase in enforcement action, unscrupulous employers minded to abuse minimum wage laws have a low risk of being caught and face inconsequential punishments if they are. Sir David was clear on the choice: “if you don’t have enough enforcement resources, then the punishments should be larger”.112
56.Employers caught not paying the minimum wage and owing over £100 are eligible to be “named and shamed” by HMRC. This recognises that some employers are more likely to respond to potential negative reputational impact than simple financial deterrents.113 Sir David told us there was of a lack of evidence on the financial impact of naming. He argued, however, that given some major firms and representative bodies are “very apprehensive about naming and shaming [ … ] it does work because these firms are jealous of their reputation”.114
57.The Taylor Review considered fines and naming as tools to improve compliance with employment rights. It recommended penalties where companies have failed to follow rulings, and a naming and shaming scheme for employers who do not pay tribunal awards within a reasonable time”.115
58.Sir David told us that the Department for Business, Energy and Industrial Strategy was “reasonably hostile to extra regulation” in the form of higher fines and penalties.116 Sir David argued, however, that his views were compatible for support for business, in that they would promote “a level playing field”.117 We agree. Higher penalties for non-compliance should not be seen as a burden for business, but as a means to support the majority of businesses who are compliant. Punitive fines could also provide valuable additional resources to support enforcement agencies and employment tribunals.
59.Compliance with the law is a minimum standard that any employee or consumer should expect from a business. We agree with the Taylor Review that businesses who choose not to comply should face significant penalties to their finances and reputation, as punishment to them and a deterrent to others. Punitive fines and a robust enforcement regime that is fair, and perceived to be fair by the public, the vast majority of businesses and their workers, would increase the public’s confidence in the role of business in society. We recommend that the Government brings forward stronger and more deterrent penalties, including punitive fines, for repeat or serious breaches of employment legislation, and expand “naming and shaming” to all non-accidental breaches of employment rights by businesses and supply chains.
Proactive enforcement
60.The Taylor Review recommended that company owners take greater responsibility for people who work in their supply chains.118 Sir David told us that “non-compliance is absolutely rife in the garment trade in Leicester” and that closer working between the enforcement agencies and other bodies could have an impact there.119 Both Matthew Taylor and Sir David said that transparency in supply chains would put increased pressure on companies at the head of the chain to ensure their reputations are not damaged.
61.In his evidence to the Committees, Sir David said that while major firms themselves are generally operating legally, they have a tendency to “wash their hands of what goes on” in their supply chains. He told us that he is considering how the head of a supply chain or brand might be considered “jointly liable” for abuses further down the chain, as occurs in Australia, Canada and parts of Europe.120 He argued that the threat of reputational damage to major firms, through “naming and shaming”, could provide incentives for them to better police their own supply chains. Sir David also drew our attention to the embargoing of goods from non-compliant businesses by HMRC as a potential “very strong incentive”121 for retailers to promote compliance in their chains.122
62.Sir David explained that there was a trade-off between enforcement resources and powers. Existing limited resources allocated to enforcement bodies for policing minimum wage compliance, for example, were adequate provided they were combined with stronger enforcement powers.123 He used the further example of the EAS inspectorate:124
They only have a £0.5 million budget. They have 11 staff, only nine inspectors, and there are 18,000 employment agencies. I am not going to come in calling for more resources just like that, but there is a trade-off. If you don’t have enough enforcement resources, then the punishments should be larger.
63.Expanding enforcement activity, without diverting resources from existing activity, will however require more resources. Sir David explained that his office, to date, “just have not had the time or the resources” to carry out intensive “deep dive” sectoral enforcement. Similarly, increased action in supply chains and adaptation to ongoing innovation in the gig economy will inevitably be resource-intensive. Recent answers to Parliamentary Questions also raise concerns that enforcement agencies are being resourced well below their intended staff complement. In April 2017 HMRC had 83 vacancies in a NMW staff team that had 399 staff in post.125
64.We welcome the creation of the Director of Labour Market Enforcement role and of Sir David’s work setting a strategy for better enforcement. Sir David highlighted the challenge of getting the necessary approval for his strategy from both the Home Secretary and the Secretary of State for Business, Energy and Industrial Strategy, departments that “do not always see eye-to-eye”.126 Ensuring that companies operate within the law should be welcomed across Government, as indeed it will be welcomed by reputable, law-abiding businesses who seek to compete on a level playing field.
65.We welcome the Government’s establishment of a Director of Labour Market Enforcement. The enforcement agencies he oversees must have adequate resources to take a more proactive approach to identifying and deterring abuses. We recommend that the Government provides the Director of Labour Market Enforcement and the main enforcement agencies with the resources necessary to undertake both reactive and proactive roles, including deep-dives into industrial sectors and geographic areas, and supply-chain wide enforcement actions. Where extra resources are needed, they should be funded through higher fines on noncompliant organisations. We also recommend that the Government sets out, in response to this report, how it intends the powers and resources of the Director of Labour Market Enforcement will develop over the next five years.
106 Home Office, Immigration Act 2016 Factsheet – Labour market enforcement, September 2015
107 Director of Labour Market Enforcement, Informing Labour Market Enforcement Strategy 2016 to 2017: Introductory Report, July 2017, p18
108 R (on the application of UNISON) v Lord Chancellor, [2017] UKSC 51
109 Director of Labour Market Enforcement, Informing labour market enforcement strategy 2018/19: Summary of Issues, July 2017, p4
113 Department for Business, Energy & Industrial Strategy and HM Revenue & Customs, National Minimum Wage Enforcement Law: Enforcement, July 2017, p16
115 Taylor Review, p63
118 Taylor Review, p52
17 November 2017