Effective enforcement of the National Minimum Wage is crucial to its success. As recognised in our previous reports, the vast majority of employers support and comply with the minimum wage. But we continue to be concerned that a minority of workers are still being underpaid. The Inland Revenue has continued to develop and focus its minimum wage enforcement activities in the light of its experience since the introduction of the minimum wage in 1999. Since our fourth report (2003) the Department of Trade and Industry has taken action to address some legislative anomalies that have arisen and which impeded effective enforcement. We welcome the work that has been done by both Departments, but we believe that more could be done to tackle persistent non-compliant employers and to encourage more workers to report underpayment so that they can receive the pay due to them.

Reviewing the evidence, we are concerned that awareness of the minimum wage remains low in some groups of vulnerable workers. To tackle this, we recommend that the Government review its minimum wage publicity strategy to consider how best to target low-paid workers, with particular emphasis on vulnerable groups of workers.

We also now believe that a more significant deterrent to non-compliance by employers is needed. We therefore recommend that the Government should introduce interest charges payable on arrears arising from minimum wage underpayment and financial penalties for seriously non-compliant employers.

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Introduction

6.1 In our fourth report (2003) we concluded that the vast majority of employers were complying with the National Minimum Wage, but we also highlighted our concern that some workers were still being underpaid, particularly, though not exclusively, in the informal economy.

6.2 For this report we have again examined closely how well the minimum wage is being complied with and how effectively it is being enforced. Our work has been informed by an internal evaluation of enforcement powers carried out by the Inland Revenue. We invited organisations and individuals to address compliance and enforcement in their written and oral evidence to us and we have asked about it in our visits. In this Chapter we consider in turn: awareness of the minimum wage, non-compliance, progress in enforcement, employment tribunals, detriment and dismissal related to the minimum wage, the informal sector and the Inland Revenue's evaluation of enforcement powers.

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Awareness

6.3 From the outset, we have taken the view that the minimum wage should be self-enforcing as far as possible and to date this approach has largely been effective. Awareness of the minimum wage among all affected groups is therefore essential. In our fourth report (2003), we were encouraged that awareness of the minimum wage continued to be at a high level. However, we noted that awareness among small firms could be improved and that lower awareness persisted among some groups of workers. We recommended that the Government should continue to publicise the minimum wage, including the headline rate and the Helpline, and that publicity should be targeted at different groups. We also recommended that the Small Business Service (SBS) actively promote and disseminate factual information on the minimum wage tailored to small firms.

6.4 In our 2004 report, which largely focused on a minimum wage for 16 and 17 year olds, we recommended that consideration be given to the use of specific channels to promote awareness among young people of both the minimum wage and mechanisms for enforcement.

6.5 In response, the Government has carried out nationwide publicity campaigns for the last two minimum wage upratings, including adverts aimed at specific groups. It also mounted a campaign designed to appeal specifically to 16-17 year olds to coincide with the introduction of the new rate for this age group.

6.6 In 2004 the SBS published an updated version of its guide to employing staff which included the new 2004 rates and sources of further information. Its website also includes a dedicated section on paying staff which includes the new minimum wage rates and gives links to other related sites.

6.7 Other steps the Government has reported taking to heighten awareness of the minimum wage include producing a new guide for output workers and their employers explaining the new fair piece rates legislation; updating the short guides aimed at employers, adult and young workers; updating the detailed guide to the minimum wage; and the inclusion of information about the minimum wage rate changes and the Helpline in the Inland Revenue's employer bulletins (which reach 1.5 million tax-registered employers).

Low Pay Commission Research Awareness of the existence of the minimum wage was generally good among a majority of our worker respondents. The most common source of information was through family, friends or neighbours. Even where workers were aware of the existence of the NMW, however, they were not always clear about the detail of the wage nor their eligibility. Croucher and White, 2004. Enforcing the Minimum Wage: The Experience of Workers and Employers

6.8 We welcome the action that the Government has taken to publicise the minimum wage and the Helpline since our fourth report (2003). However, our consultation has highlighted that, although general awareness of the minimum wage is high, awareness of the rates is less so. Moreover, it seems clear that publicity on the 16-17 year old rate has not widely reached its target audience. The coalition of youth organisations' survey in September 2004 found that nearly two-thirds of respondents were unaware of the introduction of a minimum wage for 16-17 year olds in October 2004 and nearly 90 per cent of respondents did not know the rate.

6.9 We are particularly concerned that awareness of the minimum wage is lower within some of the most vulnerable groups of low-paid workers, particularly homeworkers and workers from some minority ethnic groups. The level of awareness needs to be raised further within these groups of workers. We therefore recommend that the Government undertake a review of its minimum wage publicity strategy to consider how best to target low-paid workers more pro-actively, with particular emphasis on vulnerable groups of workers.

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Non-compliance

6.10 The Office for National Statistics estimates that the number of jobs paid below the minimum wage was 272,000 in April 2004. However, this estimate is based on the Annual Survey of Hours and Earnings which is not designed to monitor compliance with the minimum wage. The survey cannot separately identify workers such as apprentices, those undergoing training and those workers eligible for the accommodation offset, all of whom may legally be paid less than the minimum wage. In order to assess the level of non-compliance we have therefore turned to a variety of other information sources, including Inland Revenue statistics, written and oral evidence and our own commissioned research.

6.11 The Government's evidence provides details of the work of the Inland Revenue's minimum wage team. Table 6.1 shows that the number of complaint cases generated from its Helpline remained relatively constant between 2001/02 and 2003/04. The amount of arrears decreased in 2002/03 and 2003/04 from the high of 2001/02, but the variation can be explained by the impact of a small number of large cases. If these large cases are removed, the annual arrears do not differ greatly between the years. Between April and September 2004, there were five large cases with arrears totalling £1 million. The incidence of non-compliance found in investigations arising from complaints continues to be high (40 per cent in 2003/04).

Table 6.1 National Minimum Wage: Enquiries and Complaints to the Inland Revenue and Enforcement Action Taken

Source: Department of Trade and Industry, Inland Revenue.

Note: These figures are for the number of cases closed with an inspection having been made.

'A 'name and shame' policy should be adopted towards employers who are found to be in breach of national minimum wage legislation.'

T&G evidence

6.12 In 2003/04 compliance teams completed over 5,500 investigations. The number of investigations arising from information gathered from the Inland Revenue Tax Credit Office has increased since the introduction of tax credits in 2000. In 2003/04 they accounted for 53 per cent of all completed investigations, although the proportion of arrears identified in relation to the total in that year was 36 per cent.

6.13 However, this information presents only part of the picture as we do not know the extent of undetected non-compliance. Evidence given to us suggests that the vast majority of employers are compliant, and that the Inland Revenue is making good progress in tackling those employers not paying the minimum wage. A number of organisations did, however, highlight their concern that to date, no prosecution cases for non-compliance have been brought by the Inland Revenue.

6.14 We commissioned research from Croucher and White (2004) to investigate the experiences and perceptions of workers and employers who had been through the minimum wage enforcement process. The findings suggest that the reasons for non-compliance are numerous. In some cases, employers were clearly not aware of how the rates worked. In others, there was evidence that monitoring systems were inadequate so that when workers crossed age thresholds and became eligible for the adult minimum wage rate, they were not identified. Cases where workers were paid for a fixed number of hours when in fact they worked for longer than those hours was another identifiable reason for non-compliance.

6.15 Although progress in tackling non-compliance has undoubtedly been made, we must not be complacent. A number of organisations have expressed concern that minimum wage underpayment continues to be a problem for many workers and seek a greater level of deterrent to non-compliance. Many reported non-compliance in the 'informal economy' as being a particular problem. We look at the informal economy and deterrents later in this Chapter.

'The Inland Revenue, which acts as the enforcement agents for the DTI have made strenuous efforts to catch underpaying employers.... '

TUC evidence

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Progress in Enforcement

6.16 Effective enforcement of the minimum wage is in the interests both of workers and of the large majority of employers who are fully compliant. Satisfaction levels with the performance of the Inland Revenue's enforcement team are high, with both employers' and workers' representatives commenting favourably. The T&G thought that the effectiveness of the Inland Revenue compliance teams across the country had been a major factor in the success of the National Minimum Wage. The CBI stated that enforcement was working well in general. However, there were a number of suggestions put forward during our consultation as to how the current enforcement operation could be further improved.

The Effectiveness of Enforcement

6.17 The research project we commissioned on the experiences and perceptions of workers and employers who had been through the minimum wage enforcement process (Croucher and White, 2004), involved telephone and face-to-face interviews with a sample of employers and workers. It found that employers' and workers' views of the process probably related to the outcomes of their case, but, overall, both groups considered that compliance officers had been courteous and helpful. One concern highlighted by both groups was the length of time taken to complete the enforcement process.

6.18 At present the Inland Revenue has a target timescale of 35 working days to visit an employer from the time they receive a minimum wage complaint. There are, however, currently no other target timescales in place for the remainder of the enforcement process. The Inland Revenue advise that the completion time is dependent on the nature of the case and the complexity of the issues involved. But it further advised that as part of a new quality monitoring system, the compliance officer and their manager will review progress of their cases at three key stages in the enquiry process. In addition, new mandatory management checks of every case at set time intervals are being introduced. This will enable progress to be monitored effectively and, where necessary, appropriate interventions made by managers. The Inland Revenue will use the experience gained to identify and address any general issues that result in a delay in completing cases. We welcome this development and believe it should assist in ensuring that any unnecessary delays in progressing cases are addressed promptly.

Low Pay Commission Research Over half of the employers had pay records that were found to be deficient in some respect. A major benefit of the Inland Revenue visit was seen by some employers as the opportunity to receive advice on their pay records. Croucher and White, 2004. Enforcing the Minimum Wage: The Experience of Workers and Employers

6.19 Overall, there were three broad conclusions derived from the Croucher and White research.

• The relative complexity of the National Minimum Wage regulations led to employers making 'silly mistakes' on the one hand and workers failing to claim their entitlement on the other.
• There needs to be more attention to the post-enforcement period to ensure that workers receive their full arrears.
• The inspection process can be of real benefit to employers as many found it helpful in improving their overall pay records administration and in meeting their legal obligations.

6.20 We are pleased to note from the research that many workers said they would turn to the Inland Revenue again if they were being underpaid and that some employers had continued to use it as a source of information and advice post-investigation. This would suggest that the Inland Revenue's intervention is relatively effective both at enforcement on behalf of workers and in encouraging future compliance by employers.

Pro-active Enforcement

6.21 In our fourth report (2003) we recommended that there should be further pro-active enforcement, with greater co-ordination between the Inland Revenue and wider Government compliance initiatives, and encouragement of compliance initiatives undertaken by employers and unions. We also recommended that the Government evaluate the use of existing powers, and identify whether any changes in practices or powers were needed to strengthen the deterrent to non-compliance.

6.22 In its evidence, the Government advised that the DTI and the Inland Revenue have been looking at how best to direct enforcement resources. It reported that it was introducing a targeted annual publicity and enforcement campaign commencing in 2005, aimed at tackling a particular low-paying sector or group of workers each year. We very much welcome this approach and believe that such targeting, appropriately directed, could have a significant impact in tackling non-compliance in the sectors where it is most prevalent.

6.23 The Government also advised that it is looking to identify areas where it might be possible for compliance officers to spend less time, in order to free up resources for tackling important breaches in low-paying sectors. In principle we welcome this proposed prioritisation of enforcement work, whereby resources used to pursue minor breaches in the minimum wage regulations are diverted to address more serious breaches. However, considerable care will need to be taken to ensure that genuine issues of non-compliance do not slip through the net. We look forward with interest to receiving details of the Government's proposals.

6.24 The Government stated its commitment to introducing a joint workplace enforcement pilot to explore the potential for sharing intelligence and for closer co-ordinated working between Government Departments to tackle the range of issues relating to illegal working. It is intended that the pilot will commence in Spring 2005. In addition, it has been agreed that any information on illegal workers and their employers that the Inland Revenue comes across during its enforcement activities will be passed, via the DTI, to the Home Office.

6.25 The importance and value of pro-active enforcement was stressed during our consultation, as it has been in previous years. We welcome these developments.

Community Based Activity

6.26 Following a recommendation in our second report (2000), the Government established seven community-based pilot projects with the aim of building workers' confidence in the effectiveness of the enforcement procedures and thereby encouraging greater levels of reporting of minimum wage underpayment. Five of these projects continued into 2003/04 and the Government's evidence described the progress being made.

• The Northern Ireland National Minimum Wage Helpline has been in operation since September 2001. Is is operated by the Northern Ireland Citizens Advice Bureaux, in partnership with the Inland Revenue and the DTI. Since its inception there have been over 6,000 calls to the Helpline with over 300 worker complaints referred to the Belfast compliance team for investigation.
• The Scottish National Minimum Wage Helpline was launched in February 2003. The Scottish Low Pay Unit operates the Helpline, in partnership with the Inland Revenue, the DTI and Citizens Advice Scotland. Since its launch, the Helpline has taken over 1,000 calls generating 50 worker complaints which have been referred to minimum wage compliance teams for investigation.
• In the East Midlands, the partnership with Leicester City Council and Community (formerly the National Union of Knitwear, Footwear and Apparel Trades) has continued to develop. Between April 2003 and March 2004, 31 referrals were generated and £31,000 in arrears identified in 15 completed cases.
• The pilot project with the National Group on Homeworking was aimed at improving awareness of the minimum wage among minority ethnic groups and homeworkers in Bradford and the surrounding area. While raising awareness it proved unsuccessful in generating complaints and it was closed in September 2003, with all parties agreeing to this decision.
• The partnership with the West Midlands Employment and Low Pay Unit initially aimed to raise awareness of the minimum wage across the region, targeting minority ethnic groups. The project was broadly successful in raising awareness but generated few complaints. It closed in October 2004.

6.27 The Government is continuing to monitor and evaluate these projects in order to understand why some appear more successful than others. We are pleased that it is doing so and would be encouraged if further projects were to be established to build on the successes of those currently in place.

The Employment Relations Act 2004

6.28 In its evidence the Government reported on a package of technical measures it had introduced in the recent Employment Relations Act, due to come into effect in April 2005, to assist enforcement of the minimum wage. One key measure relates to the treatment of enforcement notices. At present under the National Minimum Wage Act 1998, compliance officers are unable to withdraw enforcement notices, which set out arrears due to workers, even if new evidence has come to light or an error has been made. The position is the same for penalty notices issued to employers who refuse to comply with enforcement notices. This creates a number of enforcement problems as currently notices can only be rectified through an Employment Tribunal. The amendment to the Act will allow compliance officers to withdraw inaccurate notices and replace them with corrected notices where necessary. This is a positive development and will facilitate more effective use of enforcement and penalty notices.

6.29 Another of the Government's new measures addressed the lack of any specific power to permit compliance officers to disclose information between a worker and an employer to clarify particular issues arising on a case. This hindered investigation as different versions of events could not be cross-checked. The change to the legislation still ensures that information will not be passed on to an employer in a way that would reveal the identity of a complainant, unless authority has been given by the worker to do so. This is crucial as without such confidentiality many workers being paid below the minimum wage would not come forward.

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Employment Tribunals

6.30 In our fourth report (2003) we commented that the number of minimum wage applications registered by employment tribunals had fallen sharply between 1999/00 and 2001/02. However, as shown in Table 6.2, there is considerable annual fluctuation in the number of applications. 2002/03 saw a significant increase in National Minimum Wage applications, although this dipped again in 2003/04. The first six months of 2004/05 suggests another increase.

Table 6.2 Applications Registered by Employment Tribunals, Great Britain

Source: Employment Tribunals Service.

Note: The Employment Tribunals Service identifies the 'Main' Jurisdiction as the principal type of claim made when first received. A claim may be brought under more than one Jurisdiction or be subsequently amended/clarified in the course of proceedings, but will be counted only once against the Main Jurisdiction.

6.31 In evidence the Leicester Minimum Wage Project (LMWP) expressed the view that, while it supported the existing enforcement arrangements, the Inland Revenue does not, and probably cannot, provide a fully comprehensive enforcement system on its own. They regard the employment tribunal system as an important tool in enforcing the minimum wage in some circumstances in which the Inland Revenue is unable to act. Other workers' organisations, including the T&G and Community, supported this view.

'The LMWP is currently pursuing five employers for non-payment of tribunal awards. One employer has failed to pay an award of £11,000 in minimum wage arrears. Another has been pursued for two years for payment of around £5,000.'

LMWP evidence

6.32 Although there was support for the tribunal system from a number of organisations who gave us evidence, some reported a growing problem in the number of employers failing to pay employment tribunal awards. Tribunal awards were seen as a good enforcement tool, with publicised successes sending an important message to employers. However, there was concern that this could be undermined if no action was taken against employers who failed to pay tribunal awards.

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Detriment and Dismissal

6.33 Workers have the right not to be dismissed or victimised because they try to ensure they are paid the minimum wage or because they are, or are going to become, eligible for the minimum wage. Where employers respond to the minimum wage by, for example, reducing workers' hours or consolidating allowances into the basic wage, these are legal means of coping with the minimum wage if they are taken by agreement with the workers concerned. However, the unilateral introduction of terms and conditions by employers in these circumstances is a contravention of National Minimum Wage legislation.

6.34 Information on the breakdown of minimum wage applications is not collected by the Employment Tribunals Service, therefore, it is not possible to identify how many of the cases shown in Table 6.2 concern minimum wage related detriment and dismissal. We did, however, hear from organisations representing low-paid workers of their concern that workers continue to be dismissed or experience detriment due to the minimum wage. The TUC reported that workers find it very difficult to enforce their rights as redress can only be achieved via an employment tribunal case. The National Group on Homeworking expressed concern that insisting on the right to be paid the minimum wage can often result in the homeworker concerned not receiving any more work. The GMB and TUC called for compliance officers to have more powers to deal with detriment cases.

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The Informal Sector

6.35 We have received a significant body of evidence indicating that non-payment of the minimum wage in the informal sector continues to be a problem. Such non-compliance often affects the most vulnerable groups of workers and presents unfair competition to compliant employers.

'According to the British Hospitality Association, 41 per cent of companies in this sector believe they are being undercut by black economy firms paying below the NMW.'

CBI evidence

6.36 The CBI reported that employers in certain sectors feel that they are increasingly undercut by competitors operating in the informal economy, in particular in the hospitality, business services, hairdressing and horticulture sectors. The CBI believes that the higher the minimum wage, the greater the incentive to informal economy activity as the potential gain for unscrupulous employers from tax evasion rises and non-compliance becomes more attractive. It also reported that some employees are willing to accept wages below the statutory minimum from rogue employers (often accompanied by a 'cash in hand' payment) in order to increase their take-home earnings through evasion of income tax and National Insurance Contributions. The CBI suggested that any rises to the minimum wage must be treated cautiously so as not to add to the problem. Other organisations that registered concern about the growth in the informal economy included the T&G and Community.

Low Pay Commission Research 'The NMW does not really influence how wage rates are determined. NMW has not had any impact as it is not applied in this trade; employees are just paid a weekly sum, hourly calculations don't really come into the equation' (Quoting an employer in the restaurant sector.) Ram et al., 2004. Informal Employment, Small Firms and the National Minimum Wage

6.37 We commissioned research from Ram et al (2004) to investigate the ways in which small firms in the restaurant and clothing sectors in the informal economy operate in the light of the existence of the minimum wage for five years. The main reasons for non-compliance given by the employers in the study were their alleged inability to pay the full rate and a perceived unlikelihood of detection by the Inland Revenue. Many employers did, however, state that they were fearful of detection by the authorities, although there was uncertainty as to what action would be taken against them and the penalties for non-compliance. Some firms that did comply with the minimum wage were also included in the study to enable comparison. For these firms, a key factor in accounting for their decision to comply was their position in the market. Most sought to grow their business and found that paying below the minimum wage was incompatible with this. In addition, they often supplied larger firms, some of whom exercised influence over internal operations of the firms in the study, and they were more likely to be involved in local business networks.

'We are working with other bodies including DTI, to set-up networks within the supply chain and with retailers to encourage companies out of the informal sector.'

British Apparel and Textile Confederation evidence

6.38 The study suggested a high level of minimum wage underpayment in parts of both the clothing and restaurant sectors. In several of the non-compliant firms, the average wages, and in some cases even the highest wages, including those of the owners, were below the minimum wage level. Employers often evaded paying the minimum wage by under-declaring the number of hours worked by employees and in a number of cases workers were complicit in this activity. The study found no evidence that firms visited as part of an earlier study, were moving towards compliance. In fact, operating outside of the minimum wage legislation tended to have consequences for firms' tax and other practices, and this may have tightened their position outside the formal sector of the economy.

Low Pay Commission Research 'Some employees under-declare their hours to get a better family credit rating. They suggested this themselves. They get £150 from me, show £85 and get another £200 from the government.' (Quoting an employer in the clothing sector) 'We pay people a weekly wage, but we do not declare the whole amount as it is not beneficial for me or the staff as they will not be able to get maximum working tax credit. The lower the wages declared the lower the turnover can be declared by the owners. Accountants who work for restaurant owners know how the system operates and they are basically our point of contact on how to manage the NMW. Everyone in this trade will, if they are honest, give you similar answers, some may be afraid of the consequences.' (Quoting an employer in the restaurant sector) Ram et al., 2004. Informal Employment, Small Firms and the National Minimum Wage

6.39 We believe that the Government's proposed initiative to develop a programme of targeted enforcement, as referred to earlier in this Chapter, should help to address underpayment of the minimum wage in the informal economy. We will monitor progress with interest and maintain a regular dialogue with the Inland Revenue.

6.40 Some organisations reported that migrant workers were one of the most vulnerable groups of workers in the informal economy as they may be less aware of their employment rights and more open to exploitation. Community told us that workers without English language skills are worst affected. It cited the LMWP as an initiative that was helping migrant workers to gain basic language skills to overcome this problem. Citizens Advice advised us that they were receiving a relatively small but growing number of requests for advice from migrant workers. But they believe those that come forward represent the 'tip of the iceberg'. They are concerned that there may be many more in circumstances that make them too fearful of victimisation even to seek advice.

6.41 Since May 2004, workers from the new EU member states have been entitled to work in the UK, provided they register under the Workers Registration Scheme (WRS). The Government reported in its evidence that the Home Office is sharing information from the WRS database with the Inland Revenue, so that the Inland Revenue can sample a percentage of employers of new EU Member State nationals each month to check compliance with the minimum wage.

6.42 The Government also advised of its actions to assist in informing migrant workers coming to the UK of their employment rights and responsibilities. This included producing employment rights information for nationals from the new EU Member States in the form of bilingual leaflets. The leaflets were launched in Poland and Lithuania in 2004 and were distributed in the respective countries, as well as the UK, with the intention of informing workers of their rights ideally before they set out to travel to the UK. The programme is being rolled out to cover the other new Member States. The Home Office has also provided funding for the translation of a separate document produced by the TUC on workers' rights.

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Evaluation of Enforcement Powers

6.43 In our fourth report (2003) we welcomed the work that the Inland Revenue had done to date in enforcing the minimum wage, but felt that it was an appropriate time for a review of its powers and practices. Accordingly, we recommended that the Government evaluate the use of existing powers and identify whether any changes in practices or powers were needed to strengthen the deterrent to non-compliance.

6.44 The Inland Revenue carried out it own review of its use of enforcement powers set out in the minimum wage legislation, following discussion with the DTI and ourselves to identify the key areas to be covered. The Government's evidence noted the main conclusions of the review and these are detailed below.

• The Inland Revenue considered whether to seek confirmation of payment of arrears in all cases but concluded that this would not be resource effective. It will instead seek to identify employers most at risk of not paying arrears and ensure that all such employers are pursued for proof of payment. In addition, all compliance teams will set out clear, unambiguous deadlines for payment of arrears. Workers will be strongly encouraged to advise the Inland Revenue if arrears are not received by the specified date. Early enforcement action will be taken where non-compliance has recurred.
• The Inland Revenue's closed case review programme showed that only 55 per cent of employers visited were keeping adequate records. To tackle this, compliance officers will give advice on record keeping to all employers found to be keeping inadequate records during an enquiry.
• The Inland Revenue will work with the DTI to explore how changes to the legislation in the Employment Relations Act 2004 can enhance the effectiveness of enforcement and penalty notices as a means of bringing enquiries to a satisfactory conclusion.
• The Inland Revenue will build on the experience of a pilot it is running to identify cases where unannounced visits may be appropriate. In future, unannounced visits will be an option that is considered when planning all enquiries.

6.45 The review has clearly provided valuable specific information on areas for improvement. We strongly support the actions that have emerged from it and believe that these go some way to addressing problem areas that have been identified in the evidence provided to us. But if they are to do so, it is essential that they are taken forward in a timely manner, with arrangements put in place to evaluate their effectiveness. We shall monitor developments with interest.

'Under the current system there is almost an incentive for employers not to pay the NMW as, if caught, they get no more than a slap on the wrist and need to pay only what they should have paid in the first place. This is not sufficient, particularly when compared with penalties imposed under other regulations. For example, employers producing counterfeit goods face unlimited fines and up to 10 years in prison. IR charges interest to individuals on money owed to them.'

Community evidence

6.46 Although we are encouraged by these proposals, we do not feel that they will do enough to strengthen the deterrent to non-compliance. It is apparent that most employers who do not pay the minimum wage and have enforcement action taken against them are no worse off than if they had paid the minimum wage at the outset. Indeed, in many cases they may even be better off as they are not required to pay interest on underpayment of arrears to the worker. Nor is there any other financial penalty imposed for late payment in itself, except in cases where a penalty notice has been issued (although the financial penalty is not paid to the worker concerned). A worker, however, who is paid below the minimum wage is likely to suffer financial hardship even if arrears are eventually paid, since they do not receive interest to reflect the later payment.

6.47 The lack of an effective deterrent to non-compliance was raised by a number of organisations in their evidence to us. Some suggested that the imposition of a financial penalty on non-compliant employers would act as a deterrent. The TUC stated it was now time that persistent offenders were treated more harshly. It supported the principle of charging interest on the back pay owed to workers by defaulting employers in order to give employers stronger incentives to comply. We also note that interest is payable on any arrears of company or individual tax in order to reflect the time value of money to both taxpayers and to the Government.

6.48 We believe that requiring a defaulting employer to pay interest on minimum wage arrears would send a clear message that non-compliance is not an easy option. It might also encourage more workers to come forward and report underpayment. Imposing a financial penalty on employers guilty of serious non-compliance would strengthen this further. Current legislation does not allow for interest to be paid on arrears owed to a worker or for a financial penalty to be imposed and a change to the legislation would therefore be required. But we believe that the arguments to redress this situation to give workers their fair entitlement are compelling. We therefore recommend that the Government should introduce interest charges payable on arrears arising from minimum wage underpayment and financial penalties for seriously non-compliant employers.

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Conclusion

6.49 The information we have received indicates that compliance with the National Minimum Wage continues at a high level. However, although we view the overall position as positive, there remain some problem areas where non-compliance is more prevalent. We recognise the positive developments there have been to increase compliance and the steps taken by the Inland Revenue to develop the effectiveness of its enforcement action. We welcome the further improvements planned and believe that the targeted enforcement action announced by the DTI will be a particularly positive step forward. We will monitor progress on this and the other developments referred to above with interest.

6.50 Further, we believe that the recommendations we have made in this Chapter will add impetus to compliance and enforcement of the minimum wage. Awareness of the minimum wage is essential and we have, therefore, recommended that the Government review its minimum wage publicity strategy to target effectively all groups of low-paid workers, with emphasis on the most vulnerable groups. Introducing a requirement for employers to pay interest on minimum wage arrears and a financial penalty will help to ensure that underpaid workers are not disadvantaged and will provide a greater deterrent to non-compliance. We now turn to Chapter 7 in which we review the minimum wage rates.