NMW penalties, fair arrears, and Employment Agency Standards

• The TUC response
• Introduction
• New penalties for underpayment of the minimum wage
• Fair arrears
• Building awareness of the new minimum wage enforcement regime
• Enforcing the minimum wage through Employment Tribunals
• Employment Agency Enforcement Regime
• Employment Agency Penalties
• Lack of investigative Powers
• Conclusions and recommendations

The TUC response

Introduction

The Trade Union Congress is the national trade union centre. We have 59 affiliated unions representing 6.5 million people. This paper sets out the TUC's response to the DTI's consultation on the National Minimum Wage and temporary employment agency penalty and enforcement regime.

The DTI's proposals are intended to:

sharpen the incentive for employers to pay the minimum wage by imposing a penalty on all underpaying employers;

make minimum wage arrears fairly reflect the hardship that underpayment causes workers;

strengthen the penalty regime for offences committed against employment agency legislation and;

give clearer investigative powers to the Employment Agency Standards Inspectorate.

The TUC welcomes these proposals, which we believe will greatly improve the minimum wage enforcement regime and go some way towards tackling the abuses that are common amongst the less reputable temporary employment agencies.

Our response answers the specific questions set out in the consultation document, which are italicised in our response. We also identify some extra recommendations that the government should consider. Most importantly, we believe that stronger rights for temporary agency workers are urgently needed as well as better enforcement of existing rights. In addition, we argue that the government should increase the maximum fines for breaching the National Minimum Wage Act.

New penalties for underpayment of the minimum wage

The Government is interested in introducing a penalty for all employers found to be underpaying the minimum wage. Do you have any comments on this?

At the moment, there is no penalty for an employer who is caught underpaying who agrees to pay up either in the first instance when the matter is being discussed informally or even after HM Revenue and Customs have issued a formal enforcement notice. The first penalty only becomes due if the errant employer has not paid the arrears by 28 days after the enforcement notice was issued.

For those who fail to pay arrears in time, HMRC can issue penalty notices without having to go to court. The TUC welcomed the substantial increase in the penalty notice made earlier this year. Employers who do not pay up within 4 weeks of receiving an enforcement notice are currently subject to an immediate penalty of £224.70 (42 x the adult minimum wage). The penalty then increases by £10.70 (2 x the adult minimum wage) for each day that the arrears and penalties are not paid.

In addition, employers can be taken to court under clause 31 the National Minimum Wage Act, which sets out a number of offences; refusing or wilfully neglecting to pay the minimum wage, failing to keep records; keeping false records and delaying or obstructing enforcement officers in their duties. The maximum fine is £5,000 per offence. In practice, prosecution has only been only used against repeat offenders or to clarify points of law.

The current system has had some strengths, in that the lack of penalties at the early stage has encouraged employers to pay up quickly rather than arguing the case. However, there is now a strong feeling amongst unions that, on balance, the lack of immediate penalty is an incentive for employers to be careless or even to consciously try to avoid paying the correct rate.

The Low Pay Commission has accepted this view. Its earlier recommendation to this effect has been restated in its 2007 report:

'We recommend that, as a deterrent to non-compliance, the Government introduce a penalty to apply to any employer found to have underpaid the minimum wage [1] .'

The lack of immediate an immediate penalty for failing to pay the minimum wage contrasts starkly with the self-assessment income tax regime, to take just one example. Those who miss income tax deadlines are charged fixed penalties and no excuses are accepted. In such cases, the penalty is £100 per deadline missed, although for amounts of less than £100 the fine is equal to the arrears.

In addition, In where HM Revenue & Customs (HMRC) believes the £100 penalties are not sufficient to encourage someone to submit their tax return, they can impose a daily penalty of up to £60 per day, subject to approval by the Appeal Commissioners.

Are there any circumstances when you think that an automatic penalty for underpaying the NMW should not apply?

Do you have any views on whether there should be an upper or lower limit to the penalty options, and what the limit should be?

Taking this model into account, the TUC favours option C in the consultation document. We propose that employers who fail to pay the minimum wage should be subject to an immediate penalty of £100 per worker.

However, drawing again from the income tax model, there might be an argument for saying that for first offenders the penalty should not be greater than HMRC's estimate of the arrears.

Our proposals aim to balance simplicity with proportionality. The TUC's estimation is that the full penalty of £100 per worker would apply in the majority of cases investigated by HMRC, since the average amount of arrears recovered is £220 per worker. However, capping the penalty at the amount of arrears owed by first offenders would give comfort to any employer careless enough to accidentally underpay by a small amount.

Our proposal is that for penalties of less than £100 per worker, HMRC would be able to apply the penalty on the basis of their estimate of the arrears owed, so that employers could not delay the imposition of the penalty by arguing about the exact amount of arrears owing. HMRC would of course have to reimburse any overpayment once the case was concluded but it is likely that in practice they would soon be able to make their estimates accurate enough to avoid overcharging in the vast majority of cases.

This proviso would not apply in cases where employers are caught underpaying for a second time. The simple £100 per worker penalty would apply to all repeat offenders, no matter how small the amount of arrears owing.

The TUC's view is that the current enforcement notice system should remain in place and become the second stage penalty. Underpaying employers should be given four weeks in order to pay both the new initial penalty and the minimum wage arrears. For those who fail to pay within four weeks, the current penalty notice regime should continue to apply.

The current consultation also gives the Government an opportunity to review the fines that can be levied on those who persistently break the law or obstruct HMRC's investigators. Such a review would be timely, because although HMRC have generally chosen not to use the courts so far, this is set to change, since the enforcement agency has recently adopted a new prosecution startegy that will target persistent offenders and employers who are simply determined not to pay the minimum wage [2] .

The TUC argues that the current maximum penalty allowed by the law is not commensurate with the worst offences uncovered by HMRC. The maximum penalty of £5,000 [3] is very low indeed when compared with, say, the law that protects trademarks, where the maximum penalty is an unlimited fine and up to 10 years in prison [4] .

A sweatshop owner is likely to be treated far more harshly by the law for counterfeiting popular brands of shirts than for underpaying their workers.

To give a further example, the maximum penalty for failing to comply with the Information and Consultation Regulations is £75,000 [5] - 15 times the penalty for minimum wage offences.

A substantial increase to the current penalties in the National Minimum Wage Act is needed in order to redress this situation.

In addition, a high proportion of the minimum wage problems experienced by low paid workers involve employers keeping poor records. In many cases, this is due to employers deliberately trying to avoid paying the minimum wage. Although this is already an offence under the National Minimum Wage Act [6] , most cases are unsuitable for prosecution. It would therefore be worth considering introducing a fixed penalty for this offence.

Fair arrears

The Government is interested in introducing a new way to calculate fair arrears for all workers. Do you have any comments on this?

Some minimum wage cases involve arrears that stretch back over several years. In such cases, low paid workers have struggled to live on illegally low wages, whilst their employers have enjoyed the use of monies that should have rightfully gone to these hard-pressed workers.

In order to help to deal with this injustice, the Low Pay Commission recommended in its 2005 report that:

'The government should introduce interest charges on arrears arising from minimum wage underpayment [7] .

The DTI's consultation paper proposes three ways in which this problem might be addressed:

• Charge interest on arrears at a rate of 6% simple interest (eg interest that is not compounded) per annum, based on the mid-point of accrual.
• Calculate all arrears at the current rate of the minimum wage (rather than the rate that applied when the underpayment actually occurred).
• Introduce a increasing fixed payments that are triggered by a series threshold points against which the arrears are measured. For example, workers might be given an extra £10 for the first £100 of arrears, a further £10 for arrears up to £250, a further £20 for arrears up to £500 and so on.

Please indicate which option you prefer.

HM Revenue and Customs report that the average amount of arrears owing in a minimum wage cases is about £220 per worker. Fair arrears awards will be liable for income tax and national insurance deductions, which in most cases will amount to 33 per cent of the payment.

For the TUC, a very strong consideration is to avoid generating a liability for income tax self-assessment from these awards. Given that many of the fair arrears payments are likely to be quite modest, it would be foolish to take the risk of causing tax problems for the fair arrears worker [8] .

It appears that some of the fair arrear options must be ruled out because they cannot be constructed in a way that would avoid self-assessment liability without making amendments to the law on income tax and national insurance [9] . Given that most fair arrears awards are likely to be quite modest, the TUC is not convinced that this course of action is worth pursuing.

The only option that avoids tax and national insurance complications is that of charging all arrears at the current rate. The TUC therefore favours this option, which has the benefit of being relatively simple to understand and easy to calculate.

Building awareness of the new minimum wage enforcement regime

If the Government introduces fair arrears, do you have any comments on how awareness and guidance could be made available to workers and employers?

The TUC's goal is that all employers should pay the minimum wage when it is due. Since there will always be some employers who try to escape paying the due rate, and some who are simply careless, we need some improvements to the regime that will improve the incentives to pay the minimum wage at the proper time.

An important component in establishing the new regime will be to ensure that everybody knows about it in advance. The Government will need to work on raising awareness of the new enforcement model. The TUC and its affiliated unions will undertake to support this work by raising awareness through our own structures.

Enforcing the minimum wage through Employment Tribunals

Many workers with minimum wage problems are too scared to enforce their rights. Understandably, they fear that they will suffer some form of retribution from their employer. Although it is already illegal to subject a worker to detriment this right can only be enforced by taking an individual case to an employment tribunal. The TUC has requested on a number of occasions that the regulations should be amended to allow HMRC to pursue cases of detriment.

In addition, the fact that Employment Tribunals can only hear cases brought by individual workers is a strong barrier to enforcement, since most workers fear to be the first to submit an ET application. This is one reason why silence may reign even in workplaces where dozens of workers are being underpaid.

It would therefore be very helpful if workers and their trade unions could take representative and group cases [10] to Employment Tribunals, rather than every single underpaid worker having to submit a separate application.

Representative actions [11] and Group Litigation Orders [12] are already allowed in the courts in certain circumstances. It is therefore an anomaly that Employment Tribunals cannot hear representative actions and that their powers to manage group litigation are less extensive than those of the courts.

To facilitate good enforcement it is particularly desirable that trade unions should be able to bring cases to employment tribunals on behalf of groups of workers and that unions can be a party in such cases.

Making these innovations would greatly strengthen workers' ability to enforce the minimum wage and would help to overcome the very substantial difficulty in finding workers who are sufficiently brave to enforce their rights in the face of a hostile employer.

Employment Agency Enforcement Regime

The TUC welcomes the Government's acknowledgement that the current enforcement of existing employment agency standards is inadequate. However, we would state at the outset our view that the current framework of rights for agency workers is inadequate and that the best way to safeguard these vulnerable workers is to introduce equal treatment rights along the lines of those set out in the EU Temporary Agency Worker Directive and the Paul Farrelly Private Members Bill (re-scheduled now for 2^nd reading on 19 October 2007). We have outlined our views at length and provided supporting evidence in our submission to the previous consultation on agency workers which closed in May 2007 and so do not repeat them any further here. We simply reiterate that concentration on better enforcement of existing rights alone is inadequate; stronger and more effective enforcement needs to be considered in conjunction with a more comprehensive framework of rights, if the Government is serious about tackling vulnerability.

Nevertheless, the TUC believes that more effective regulation of Employment Agencies is needed as a matter of urgency. Although most of the larger employment agencies are keen to comply with employment law, our labour market intelligence strongly suggests that the number of rogue agencies has greatly increased in the last few years. The problem has been greatly exacerbated by growth in the number of employment agencies supplying migrant workers in the UK. A significant minority of these agencies have been willing to exploit their workers. This exploitation includes charging workers fees or bonds for their placements, making illegal deductions from pay, deliberately rationing work in such a way as to keep migrant workers dependant on the agency, arranging accommodation that is overcrowded or unfit for human habitation, failing to ensure that employers income tax and national insurance contributions are paid, denying workers statutory annual leave and holiday pay, insisting that workers put in illegally long hours and ignoring health and safety law. The problem is often exacerbated by a rapid turnover in company names that is intended to avoid regulation, and to some extent, by the deliberate use of agencies based in other EU member states for the same purposes.

The problem with abusive agencies is now widespread. In the light of this, it would certainly not be enough just to make a single change in the enforcement regime. The TUC argues that both a stronger prosecution regime and greater investigative powers for the EAS are needed There is also a need to ensure more effective cooperation between the different enforcement agencies such as EAS, HSE, HMCR to ensure for example, that any complaints which come to the attention of the EAS but fall outside of its remit are passed to the appropriate agency for investigation (and vice versa).

The TUC believes that better regulation of the entire agency recruitment sector is necessary and could be achieved with the introduction of licensing for all employment agencies, not just those covered by the Gangmasters Licensing Act and Authority.

Employment Agency Penalties

Do you consider that prosecutions under employment agency legislation should be capable of being tried in the Crown Court in the most serious cases?

Do you agree that the maximum penalty for such serious offences should be an unlimited fine?

Yes. The TUC endorses the above proposals and welcomes the Government's recognition that the current enforcement mechanisms are totally inadequate for dealing with the most serious breaches of employment agency legislation. As the consultation paper acknowledges, some agencies are 'determinedly non-compliant' and seek to exploit every possible loophole and the current penalties which are triable in a magistrates court only, are subject to a low ceiling on fines which do not provide an effective deterrent to the most serious offenders.

The consultation paper refers specifically to the inadequacy of penalties for those who have been prohibited from running an employment agency for up to 10 years. Where such a prohibition is breached, the maximum sentence is a level 5 fine (a maximum of £5,000). This is wholly inadequate and will not be an effective deterrent to an unscrupulous agency owner, who is running a highly profitable business (no doubt at the expense of vulnerable agency workers, through not paying the national minimum wage for example).

While the TUC supports the proposal to allow prosecution in the Crown Courts for the most serious offences, we believe that by itself this measure will be ineffective. The example given in the consultation paper, that of an unsuitable individual breaching a ban on them from running an agency, illustrates the problem well. In order for a prosecution to be brought in the first place (whether in a magistrates court as now, or a crown court as proposed) the offence needs to be detected. Under the current enforcement regime, this is unlikely to happen, there is no requirement on those who operate an employment agency to register or obtain a licence. The BERR Employment Agency Standards (EAS) Inspectorate is under-resourced and has very few inspectors to carry out its risk-based 'spot checks.' The Employment Agency Standards Inspectorate report for 2005/06 states that the Inspectorate employs only 12 field inspectors and not all of these are employed full-time. Whilst it is right to adopt a risk-based approach to inspection, with so few inspectors on the ground to carry out spot-checks, how likely is it in practice that rogue operators will be detected?

The TUC and the trade unions are particularly concerned that the EAS needs to provide a more timely response to complaints that recruitment agencies are breaching the provisions of Section 7 of the 2003 Conduct Regulations concerning the prohibition on supply of workers to cover the work of those engaged in official industrial action. In such situations a rapid and decisive intervention from the Inspectorate is required and we have concerns that this is not always the case. (For example we have been informed of concerns over the actions of the agency Reed, in the north of the country, in the current official industrial action by the CWU in Royal Mail. The GMB had similar concerns in a dispute with Asda in 2006.)

The TUC calls on the Government to introduce licensing of all employment agencies, not merely as now, those that operate in the sectors covered by the Gangmasters Licensing Authority (GLA). The current situation has resulted in a two-tier system, with rogue agencies leaving the GLA covered sectors as they cannot or will not comply with the ten Standards that have to be met to obtain and retain a GLA licence. Such rogues are likely to focus their attentions on the unlicensed sectors and to provide unfair competition, undercutting decent agencies that abide by the relevant law in these unregulated sectors. The BBC Radio 4 'Farming Today' programme on 18 July 2007 featured an interview with Mike Wilson, the Chief Executive of the GLA, in which he referred to the number of agencies that had been refused a license or had a licence revoked. He said that he could not be confident that those agencies had not simply transferred their operations to other sectors of the economy where they did not need a license to operate. In fact, he said that there was clear evidence that two agencies whose GLA licences had been removed had moved into unregulated sectors. At present they can do this entirely legally.

The TUC would also question the Government assertion that only a 'small minority' of agencies do not comply with agency legislation and mistreat their workers. What is this claim based upon? Given the inadequate resourcing of the EAS and the very limited number of inspectors currently employed, it is not possible to say with confidence that only a small minority of employment agencies fail to comply with the relevant legislation. The TUC's own research commissioned from YouGov, found that many respondents appeared unaware of the existence of the EAS, therefore they were not going to report any problems to the Inspectorate:

• 'There is absolutely no-one to complain to independently.'
• 'There should be an industry watchdog to keep an eye on equal opportunities and general behaviour.'
• 'Regulate the recruitment industry. There are too many recruitment agencies in operation and not all of them offer a good level of service.'

Source: YouGov poll of 2,495 workers who work or have worked for a private employment agency commissioned by the TUC. Survey carried out 4-10 May 2007.

Given the very insecure nature of temporary agency work and the possibility of placements being terminated at short notice or without notice (as again our YouGov survey showed) agency workers are likely to be very reluctant to pursue a complaint anyway. Agency workers are classed as workers rather than employees for the purposes of employment law and therefore are not in a position to claim unfair dismissal if an assignment is terminated because they have raised a complaint. The nature of temporary work makes it very difficult to prove this 'cause' and 'effect' in any case. Forty-six percent of respondents to our YouGov survey agreed with the statement that 'working through an agency makes it harder to complain if anything goes wrong at work', whilst only twenty-nine percent disagreed. Many spoke of the need to 'keep in' with their agency to secure future and more attractive placements and so were likely to be reluctant to complain. So the known offenders and reported cases of abuse are likely to be merely the tip of the iceberg.

The TUC therefore calls for the introduction of a system of licensing to cover all employment agencies, regardless of the sector they operate in. The GLA provides a possible model for this. Workers and labour users alike can check with the GLA that an agency is registered and that they are dealing with a legitimate operator which has signed up to abide by certain minimum standards.

The TUC understands that the industry body REC is not entirely opposed to the idea of licensing for all recruitment agencies. Although stopping short of full support for introduction at this point in time, REC acknowledges the necessity of addressing the 'activities of rogue labour providers that routinely exploit workers and undercut law-abiding agencies.' (REC Press release 30 July 2007.)

Do you consider that enabling such prosecutions to be tried in the Crown Court would have any implications for reputable agencies, and if so, what do you consider these implications would be?

More effective sanctions against the most serious offenders would be beneficial for reputable agencies, which presently suffer unfair competition from such agencies. Reputable agencies would have nothing to fear from these changes.

Lack of investigative Powers

Do you agree the EAS should have powers to seek financial information from third parties such as banks and financial authorities where an agency or individual is suspected of a serious offence under the Employment Agencies Act:

where a prosecution is under active consideration?

in any other circumstances (if yes please state)

Yes. The TUC endorses the proposal to amend Section 9 of the Employment Agencies Act 1973 to clarify powers available to EAS inspectors to be able to demand and secure copies of financial information from an agency or suspect directly, or from third parties such as banks and financial authorities. It cannot be right that unscrupulous agencies can use their deliberate failure to keep appropriate financial records to shield them from investigation and prosecution or to obstruct the EAS in their investigations. An agency that tries to prevent the EAS from taking photocopies of records, or from taking papers or generally being uncooperative in an investigation raises questions about what that agency has to hide.

The Consultation paper states that 'such a power should only be available where a prosecution was under active consideration.' The TUC would ask the Government to clarify what they mean by under 'active consideration.' Our concern is that the information that is being discussed here, financial data held by the agent or by third parties, may be vital in determining whether to prosecute and that to curtail EAS inspectors powers to demand access to such data, could actually impede investigation and successful prosecution. The TUC would suggest that the EAS should have the power to seek financial information of the sort described here where 'an agency or individual is suspected of a serious offence under the Employment Agencies Act' and the EAS believes that there is a case to be answered even if this is before actual prosecution is under active consideration. This is because the information sought might be vital in determining whether prosecution should take place. If the EAS delays in seeking the information or has no power to order disclosure, it may enable an unscrupulous agency or individual to destroy incriminating records in its possession.

What if any, implications do you consider the grant of such powers would have for reputable agencies?

As the initial Regulatory Impact Assessment attached to the consultation paper acknowledges, reputable agencies would have little to fear from the new investigative and prosecution powers and would actually stand to benefit, as they will not face competition from unscrupulous agencies that break the law.

Conclusions and recommendations

The TUC welcomes the proposals to improve the enforcement regime for the National Minimum wage by establishing a new penalty that will affect all emoployees caught underpaying. We also welcome the proposals to make arrears faire than at present by recognising the hardship caused to low paid workers by underpayment. We therefore recommend the following changes to the current minimum wage enforcement system:

• All employers caught failing to pay the minimum wage should be subject to an immediate penalty of £100 per worker;
• However, there might be an argument on the grounds of proportionality for ensuring that for first offenders the penalty can not exceed the total arrears per worker;
• the current penalty notice system that applies to those who fail to comply with enforcement notices should continue, and should be uprated in line with increases in the adult rate of the minimum wage;
• the maximum fine for minimum wage offences should be greatly increased; and
• all minimum wage arrears should be calculated at the current rate of the minimum wage no matter when they accrued.

The TUC also welcomes the proposals to strengthen the enforcement regime for Employment Agency Standards. The proposal to allow for offences to be tried in the Crown Court rather than the Magistrates Courts sends a clear message that more serious and deliberate evasion of the law on agencies will not be tolerated and will attract more serious and appropriate penalties. Similarly, the proposals to increase the EAS powers of access and inspection will enable them to do their jobs more effectively. The TUC supports the introduction of both changes.

However, the TUC considers that the proposed changes whilst welcome remain inadequate in the face of the limited resources currently devoted to the EAS, both financially and in terms of inspector numbers. The absence of licensing also limits the effectiveness of the enforcement mechanisms as there is no overall picture of who runs employment agencies and where. The TUC therefore recommends:

improved resourcing of the EAS and better coordination between the Inspectorate and other enforcement agencies - to increase the number of inspectors available to follow up complaints and carry out risk-based inspections. Also to publicise the work of the Inspectorate and its remit and in particular, the existence of the helpline. It would be helpful if the helpline's opening hours could be extended too, as it is only open between 9.30 and 16.30 on working days and many agency workers who work full-time and long hours may not be able to contact the helpline during the current opening hours.

Introduction of licensing for all employment agencies. The GLA provides a useful model. All agencies operating in the GLA sector must obtain a licence in order to operate legally and in order to obtain and retain the licence they must adhere to 10 GLA standards. Licensing enables labour users and workers to check that the agency they are using / working through is legitimate and has signed up to certain specified minimum standards. If they subsequently breach these, action can be taken and ultimately the agency can be prohibited from operation. Under our current 2-tier system, prohibition happens very rarely and there is every incentive for agencies that lose their licence in the GLA sector to move to the unregulated sectors. This clearly sends the wrong message: if it is unacceptable to exploit workers in agriculture, horticulture and shellfish industries, why is it deemed acceptable to do so in construction, social care, hospitality, cleaning or any other sector? The only effective way to tackle the rogues is to ensure licensing applies across the board.

The TUC's believes that ensuring that employment agencies are properly regulated and that agency workers have decent rights are essential conditions for the construction of a fair and efficient labour market. Employers and reputable agencies, as well as the workers concerned all lose out when rogue agencies cheat their workers.

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[1] 'National Minimum Wage: Low Pay Commission Report 2007', LPC 2007, P.xxv

[2] 'National Minimum Wage Annual Report 2005/2006, DTI/HMRDC, 2006, p30.

[3] National Minimum Wage Act 31.9 sets a maximum fine of scale 5 - currently £5,000.

[4] The Copyright Etc, and Trade Marks (Enforcement) Act 2002, section 6 provides these penalties on indictment. The maximum sentence for a summary conviction is 6 months in prison.

[5] Information and Consultation Regulations 2004, Section 23:2.

[6] National Minimum Wage Act 1998, section 31:2

[7] 'National Minimum Wage: Low Pay Commission Report 2005', LPC 2005, P.xxii

[8] For example: average NMW = arrears £220; mid-point accrual = £110; 6% interest applied to £110 = £6.60 gross fair arrears award; net fair arrears award after 33% tax and NI deductions = £4.40.

[9] 'National Minimum Wage arrears - income tax and national insurance implications', DTI, June 2007.

[10] Representative action - where one or more persons represents another or a group of others on a claim (known as a 'class action' in the USA). Group action - where there are a large number of claims with common or related issues in fact or law. These may be case-managed to ensure greater consistency and save costs.

[11] Civil Procedure Rules, parts 19.6/19.7

[12] Ibid, parts 19.10-19.15