The Fair Work Agency: A watershed in employment rights enforcement

In summary

• National Minimum Wage rises are increasing costs and risks for employers 
• The launch of the Fair Work Agency in April enhances this, with a more intensive enforcement regime likely 
• Even inadvertent underpayments can result in stiff penalties  
• Employers will now also face scrutiny over holiday and sick pay 
• They only have a few months to get their practices, processes and systems in order 

The UK is entering a new era of employment rights enforcement this April with the launch of the Fair Work Agency (FWA), established by the Employment Rights Act. The FWA centralises responsibility for employment rights, which is currently spread across several different government agencies, creating a one-stop shop employers and employees can turn to for help.  

The new agency absorbs responsibilities from bodies that include HMRC’s National Minimum Wage (NMW) Enforcement Team, the Employment Agency Standards Inspectorate, and the Gangmasters and Labour Abuse Authority. 

It will also take responsibility for the enforcement of new areas, in addition to enforcing the NMW, including overseeing holiday pay and statutory payments. 

The FWA will have wide-ranging powers. These include:  

• Inspection, with the power to inspect workplaces and request evidence of compliance with employment law  
• Civil penalties, with the power to issue penalties for non-compliance  
• Repayments, with the FWA able to order repayments to any current or former impacted employees 
• Civil proceedings, with the FWA able to take employers to tribunal, even if employees don’t want to do so 
• Cost recovery, so that, should the FWA be successful at tribunal, it will recover the costs of enforcement action from employers  

“It’s the biggest change in the enforcement of employment rights that we've ever seen,” says Julie Moore, S&W’s Partner specialising in employment tax and the National Minimum Wage.   

The government has described the move as a “once in a generation” employment rights reform that will benefit more than 15 million workers.  

“While it is great for employees, employers need to be aware of these landmark changes and take action if they have any areas of weakness,” says Moore. 

Although the agency is not yet operational, we can reasonably expect its inspectors to adopt an approach similar to that used in enforcing the minimum wage. The FWA has been given the same powers that HMRC had under the NMW Act 1998. These include: 

• A six-year lookback when considering if there have been underpayments 
• The power to order repayments to all impacted workers 
• 200% penalties in addition to this 
• Naming and shaming 

We also know that the FWA will have to file an annual report of its performance, and that, given this is a new government agency, evidence of success will be important. This could mean enforcement activity intensifies: 

• An increase in NMW activity, drawing on the capabilities of NMW Inspectors, who are already trained and undertaking reviews 
• NMW Inspectors potentially starting to inspect holiday pay records, given the similarities across these two areas 
• Enforcement across holiday pay and statutory payments from the first day of employment, given these are new areas, where enforcement activity has never taken place in the past 

We have seen from HMRC’s NMW audits that many NMW underpayments are entirely inadvertent and occur when employers are keen to do the right thing. Sometimes they even happen as a result of a perk such as flexible working or salary sacrifice arrangements. Employers need to carefully review all systems, processes and practices, including these areas, and consider whether there are any risks associated with them. 

“While these schemes are often a real positive when it comes to recruitment and retention, employers must ensure they have the right processes in place to support them,” says Dale Charnock, Employment Tax Senior Manager at S&W. “Unfortunately, in the past, they have often led to underpayments arising further down the line.’’  

Employers must also consider the new areas coming under the FWA enforcement regime, such as holiday pay. They will need to ensure they have robust processes in place to calculate payments in line with the regulations. As we have seen with NMW enforcement, evidence of how the calculation is performed will be crucial when facing an investigation. 

There are now just a few months to go until the new agency is established. Employers should review their processes and policies to ensure they are prepared for the increased scrutiny it’s likely to bring. Time is running out.