Economic Theory

Minimum wage underpayment: is the problem exaggerated?

HMRC has just published a new list of 25 employers who have failed to pay the National Minimum Wage. This is part of a ‘naming and shaming’ exercise under a policy announced last year. Most media reporting of these delinquent employers has been limited to listing their names and the amounts by which they had underpaid workers, in most cases fairly small amounts. There has been little attempt to explain what exactly these employers were guilty of, and most sources have reported the government spin uncritically. The existence of what the TUC has called ‘minimum wage crooks’ has been taken to justify the increases in fines for underpayment pushed by Liberal Democrats and proposed in the Queen’s Speech.

In most areas of labour market regulation, individuals seek redress against employers through tribunal claims. Minimum wages are different: HMRC has powers to investigate situations where they suspect underpayment. They may act on the basis of confidential complaints via a helpline; through information provided by third parties such as unions or other employers, or because the pattern of tax payments suggests possible abuse. When some underpayment is found, as it is in just under half of the cases investigated, employers must pay the outstanding amount and are also liable to a fine. Last year £4.6 million was recovered for 22,000 workers.

But are large numbers of employers evading the minimum wage? I am unconvinced. A study by the National Institute of Economic and Social Research last year suggested that the incidence of underpayment has been exaggerated, and certainly the number of cases that have come to the notice of HMRC seems very small in the context of total employment approaching 30 million.

The amounts of underpayment uncovered by HMRC are also small: on average about £205 per worker. Moreover a bit of digging around on local newspaper sites suggests that the offences of many of those named by HMRC on this occasion and in the previous listing earlier in the year are far from serious. An artist in residence at a school disputed the terms of her payment. Some young workers were wrongly classified as interns. Accurate records of travelling time between jobs were not kept. Apprentice rates were applied incorrectly. Deductions for clothes, tools or accommodation were wrongly applied. Insufficient payments were made for training time. A hairdresser and an electrician were involved in separate cases where disputed payments were not made for college fees.

It appears that at least some of those named did not know that what they were doing was wrong and had no intention to break the law, which is difficult to understand for a lay person. Despite the TUC rhetoric they are not ‘crooks’ guilty of sustained attempts to cheat their employees. Seven out of the 25 named had underpaid by less than £300.

It is unclear what useful purpose is served by publicising these cases. Anonymised details could be made public to indicate the sort of problems involved in implementing minimum wages and to warn others.

None of these people was convicted in an open court of law but rather were subject to an administrative procedure. Almost without exception those named are small businessmen and women whose businesses and standing in their communities can be seriously undermined by publicity of this kind.

If we have minimum wage laws they must be respected. But they should be clearer, and it is not apparent why they should have a special enforcement procedure when other employment laws rely on individuals to seek redress.

I do not think that naming and shaming is a good idea in this area: the whole business looks to me like bullying little people, particularly since I see that two larger employers (a Premier League football club and a recruitment company) who had underpaid were not named, despite the sums involved being much greater. Perhaps they had better lawyers.

And the evidence of underpayment highlighted by HMRC does not yet seem a firm basis for increasing fines on employers.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.