The rise in Minimum Wage underpayment – what’s the underlying story?


The Low Pay Commission’s latest report has revealed a rise in UK workers being paid less than the minimum wage, but do we need to go behind the headlines?

The report finds that approximately “439,000 people were paid less than the hourly minimum wage they are entitled to” (1). As of April, the minimum hourly wage for young people is £7.70 for 21-24 year olds, £6.15 for 18-20 year olds, and £4.35 for 16-17 year olds (1).

Of these 439,000 underpaid workers, 369,000 were aged 25 and over, entitled to and paid less than the National Living Wage (NLW) – this equates to 23% of those paid at or below the rate(1). When the NLW was first introduced in 2016 for workers aged 25 and over, the number of people owed the minimum rate increased significantly. At the time, 135,000 people were paid below the rate of £7.20 an hour. As of April, it is now £8.21 an hour.

Whilst the report has been published with a number of caveats, the estimates are still consistent with the trend of increasing underpayment since the NLW was introduced (1). Women are more likely to be underpaid the minimum wage than men, and this is also true for the youngest and oldest workers (1). Hospitality, retail and cleaning and maintenance are among the industries with the greatest numbers of underpaid workers, whilst childcare has the highest proportion (1).

What is most telling in the report is that the numbers of cases opened and closed, has stood still and the overall figures of underpayments provided by HMRC have been driven by a relatively small number of cases (1). We know that more employers are challenging HMRC’s aggressive interpretation of the NMW legislation and arguing that they are being named and shamed for violations that have never been highlighted in guidance since the regulations were first published 20 years ago, such as the definition of a salaried worker. Equally, the regulations simply don’t work for 21st century pay practices in terms of allowable pay reference periods (anything longer than a month is illegal), stripping out premium pay elements and treating agreed net pay deductions as reductions in gross pay.

It is good to see two large employers bucking the trend of just paying up –  after a long fight – and taking HMRC to tribunal. Middlesbrough FC won their case in February against HMRC who had ruled that paying for a football season ticket through net pay instalments breached NMW regulation 12 ‘payment of charges for the benefit of the employer’. Iceland are due to go to court in the autumn to challenge a similar bizarre ruling on their collection of Christmas club monies from net pay.

It was good to see BEIS who ‘own’ the legislation consulting over Christmas on some elements of the current rules, but in my opinion, we need to go much further. I hope that Sir David Metcalfe, head of Labour Market Enforcement, will create an independent agency to oversee NMW, holiday pay, gangmasters’ licencing and all employment rights enforcement and alongside creating such a body engage with stakeholders in a root and branch review of the legislation and accompanying guidance to make it fit for the 21st century.

LPC chair, Bryan Sanderson reminds that “it is vital for businesses to be able to operate on a level playing field and not be illegally undercut on wages”, and I couldn’t agree more, but the legislation should not also outlaw low paid workers from being able to buy items out of net pay from their employers, as this penalises the very workers the regulations were designed to protect, as do the prescriptive salary sacrifice rules.

One of the recommendations set out by the LPC, is that the government continues to invest heavily in communications to workers and employers around minimum wage compliance and enforcement (1). This is followed with specific recommendations around information for workers and trade unions, guidance for employers and publicity around the enforcement regime (1). My view is that I see no evidence of any investment in actually listening to employers and providing practical guidance.  Further communication efforts would hopefully encourage whistleblowing, ensuring workers feel listened too – particularly given that complainants have likely felt discouraged to act given that the government failed to act on the LPC’s 2016 recommendation to establish a formal public protocol for the handling of third-party whistleblowing (2).

The increasing number of workers underpaid the NLW has sparked further debate about whether this is actually reflective of the ‘real living wage’.

Katherine Chapman, Director of the Living Wage Foundation, has said that “although the report’s findings were shocking, about 6 million people earned less than what she called the real living wage of £9 an hour, or £10.55 in London and were ‘struggling to keep their heads above water’”(2).

“We need to see more employers commit to pay a real living wage that covers the cost of living, to provide security and stability for workers and their families,” she said (2).

Labour have also pledged to introduce a real living wage of at least £10 an hour (2) – but can all independent businesses afford this? As businesses continue to close under economic pressures, it’s important that the government takes on the LPC’s recommendations to provide effective support and guidance to both workers and employers. Steps must be taken to proactively balance the risk of unemployment from business failure as result of NMW and the rise in Just About Managing (JAM) families.