Call for tougher fines of employers who underpay staff

Publicly naming businesses who underpay or exploit workers encourages other firms to comply with labour market rules, but tougher financial penalties and better detection of those breaking the law are still essential, according to a new report.

The report No shame, no gain? from the Resolution Foundation think tank finds that the Government’s ‘naming and shaming’ of firms underpaying the minimum wage does have a deterrent effect and that sectors with more naming do tend to see a subsequent reduction in underpayment.

However, it says this impact is very small and concentrated in sectors where detection rates are already high. The Foundation says it could be strengthened with far wider and more tactical publicity – only one-in-five of the firms interviewed had heard of the policy.

It adds that while smaller businesses are more likely to break the rules – with minimum wage workers in micro-businesses 37 per cent more likely to be underpaid the minimum wage compared to those in the largest businesses – they are less likely to get caught and named for doing so.

Also while public naming is more associated with bigger, well-known firms, those companies tend to be better able to manage the effects of a scandal. For instance, Primark’s and Tesco’s share prices were unaffected by being named and shamed. However, the report says the reputational damage that negative reviews, online publicity or gossip can do to a small business could be more marked.

However, the Foundation’s study finds that it isn’t the fall-out from customers that businesses fear most, but the impact that reputational damage can have on their relationship with other firms in their supply chain who might be reluctant to work with them after hearing negative reports.

Nevertheless, in terms of changing customer preferences, the report suggests bad publicity is unlikely to do firms long-term damage or cause significant financial losses.

Increasing the impact of a reputational hit on non-compliant firms matters, the Foundation says, because the Government has said it will not increase the financial penalties imposed on businesses when they break labour market rules. But the report estimates that a firm underpaying the minimum wage would currently need to be fined around 700 per cent of arrears to effectively counteract the savings it makes, more than three times the maximum HMRC penalty of 200 per cent of arrears.

The report recommends strengthening and raising the profile of the existing ‘naming and shaming’ policy; complementing this with more rigorous enforcement, to increase the chances of rule-breaking firms being uncovered in the first place; and introducing tougher financial penalties.

Hannah Slaughter, Economist at the Resolution Foundation, said: “Reputation matters for businesses, and the Government should raise the profile of its welcome work to ‘name and shame’ those breaking minimum wage rules.

“However, naming dodgy firms only works when they are caught in the first place, so more widespread enforcement is needed. And fines are currently too low so there is little economic incentive for rule-breaking employers to change their ways.

“As well as raising the profile of the ‘naming and shaming’ regime, the Government must introduce tougher financial penalties and more widespread enforcement to ensure that rule-breaking firms are caught and deterred.”

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