The Employment Rights Bill creates a new state enforcement agency for specific employment rights, including some major new enforcement powers.  What is covered, and what will these new powers mean in practice?  We explain what we know so far. 

The Employment Rights Bill creates a new state enforcement agency, which likely to be called the “Fair Work Agency” (FWA). Initially, this will cover specific areas which are already covered by existing enforcement agencies, plus a new remit over holiday pay.  The Bill also gives the government broad powers to extend the FWA’s remit to cover other employment rights.

The Bill sets out a range of enforcement powers, including powers to require individuals to provide information, to enter premises to get documents, and in some cases to require employers to provide undertakings – backed up by criminal offences. Recent amendments to the Bill have added additional powers to enforce failure to pay statutory holiday and sick pay, backed up with financial penalties and an ability to recover enforcement costs from the employer. This is a major change towards more state enforcement of employment rights, although questions remain about how quickly this will happen and whether the new agency will have sufficient resources to be effective.

What will the Fair Work Agency cover?

The Bill covers the following areas: 

  • Rules on employment agencies and employment businesses
  • National minimum wage rights (NMW) – including entitlement to the NMW and record-keeping requirements
  • Modern slavery offences
  • Statutory sick pay
  • Statutory holiday pay – the right to payment for holiday, including any arrangements for rolled-up holiday pay for irregular hours and part-year workers
  • A new obligation to keep records demonstrating compliance with statutory holiday entitlement (including the amount of leave and pay) for six years, with failure to comply being a criminal offence punishable by a fine
  • Gangmasters licencing
  • Financial penalties for failure to pay sums ordered by an Employment Tribunal or in a COT3 (a penalty enforcement system from 2016 that is rarely used in practice)

Many of these areas were already covered by existing enforcement agencies.  The Bill will combine the Employment Agency Standards Inspectorate (which deals with employment agencies), HMRC’s National Minimum Wage Enforcement Team, and the Gangmasters and Labour Abuse Authority (which covers modern slavery).    It also abolishes the Director of Labour Market Enforcement, who currently oversees the work done by these bodies.  

The most significant new addition for employers is enforcement of rights to holiday pay.  This is not currently subject to enforcement by a state agency, and it is also a notoriously complex area where employers may make mistakes.  

The inclusion of financial penalties for failure to pay tribunal awards and settlements is a bit of an oddity.  Since 2016, an employer who fails to pay can be subject to a penalty payable to the Secretary of State if the claimant completes an enforcement form.  This power is not being used regularly in practice, and published data shows that only 836 claimants used the scheme between the financial years 2016/17 and 2021/22.  

The Bill also gives powers to add to the list of employment rights that are covered by the FWA.  Although this could include major new areas such as discrimination law, perhaps more likely is an extension to narrower rights - such as statutory pay for family-related leave, to sit alongside enforcement of statutory sick pay. There seem to be no current plans to extend the FWA’s remit in this way. 

What powers will it have?

A key aspect of the Bill is the powers of enforcement which give the FWA its “teeth”.  Extensive powers are planned:

  • Perhaps most significantly, new powers to enforce failures to pay certain statutory payments to workers (including holiday and statutory sick pay) have been added as amendments to the Bill. These are based on (and will replace) existing powers to enforce the NMW. The FWA will be able issue a notice of underpayment to employers, which specifies the amount payable to each individual within 28 days. This can cover underpayments going back up to six years, covering unpaid sums from when the Bill is passed (or back six years in all cases for unpaid NMW). The notice of underpayment must also impose a penalty of 200% of the sum due, capped at £20,000 per individual, payable to the Secretary of State. As with current NMW penalties, this is reduced to 100% if the sums owed and penalty are paid within 14 days. Separate regulations will specify when a penalty is not required. Avoidance of a penalty is likely to be exceptional if the regulations follow what currently happens with NMW enforcement, for example where the employer has sought and followed written guidance from a government department that the compliance officer later considers was incorrect. The current HMRC approach to NMW enforcement confirms that notices of enforcement should generally be issued where arrears are outstanding at the start of an investigation, “notwithstanding that the employer claims that the underpayment of minimum wage was accidental”. It seems likely that the FWA will take the same approach.
  • Power to issue a notice requiring a person to provide information - either by attending a specified time or place to answer questions, or by providing specified information or documents.
  • Enforcement officers being able to enter business premises to examine documents, require any person on the premises to produce documents, or check any computer or other equipment used to process or store information or documents.  Enforcement officers can also seize documents. In certain circumstances, and if they also obtain a court warrant, enforcement officers can also enter people’s homes.
  • Power to request a labour market enforcement (LME) undertaking. If the Secretary of State believes that a person has committed a labour market offence, they can be asked to comply with any requirements set out in an LME undertaking.  A court can make an LME order if an undertaking is refused, and failure to comply with that order is a criminal offence.  A labour market offence will include the new criminal offence of failing to keep holiday records, as well as existing offences under NMW legislation.
  • New criminal offences that can apply to all breaches of employment rights covered by the Fair Work Agency.  It is an offence to knowingly or recklessly produce false documents and information.  It is also an offence to intentionally obstruct enforcement action, or fail to comply with an enforcement requirement without reasonable excuse. The penalty is a fine, imprisonment for up to 51 weeks (in England and Wales), or both.  Corporate officers can also be found guilty of these offences if they consented to the conduct or it was attributable to their neglect. 

The new powers to issue notices of underpayment with a financial penalty, require information or documents and enter premises will be especially significant for employment rights that were not previously covered by enforcement bodies, particularly the right to holiday pay.  

New enforcement mechanisms and costs

The Bill gives the FWA new ways to enforce the rights that it oversees and wider employment rights, and to recover its own enforcement costs. The key new provisions are:

  • An ability to recover enforcement costs from employers who are not complying with the law by requiring them to pay a charge. The method for calculating and charging this charge will be set out in regulations, including whether it is a fixed amount or based on an hourly rate. This is a significant new provision that has been added as an amendment. It would be a mechanism to help the FWA fund its own work by charging costs to employers who have breached the law, including by failing to pay minimum wage, holiday or sick pay correctly. Depending on how the costs are to be calculated, this could prove expensive for employers if charged on top of a penalty and requirements to pay missing payments.
  • The FWA will be able to bring Employment Tribunal proceedings on behalf of a worker, if the worker has the right to bring a claim but it appears they are not going to. Any financial award would still go to the worker. It is unclear why the FWA would use this route for areas where it has other powers, in light of the current backlog in the tribunal system. However, the ability to bring proceedings applies to all types of Employment Tribunal claim, not just those falling within the FWA’s remit. It remains to be seen whether they will have the time and resources to use this power often.
  • The FWA will also be able to provide legal assistance to any party to civil proceedings relating to employment law, trade union law, or the law of labour relations. This can include legal advice and representation, and it seems can be provided to respondents as well as claimants. If a party they support is awarded costs, the FWA can reclaim their expenditure out of these costs. This could change the way landmark test cases are run, as costs are normally awarded to the successful party once a case reaches the Court of Appeal or Supreme Court – the FWA may be more willing and able to back such cases if costs can be recovered.  

Ultimately, the significance of the FWA for both employers and employees will depend on its resources and funding.  The current enforcement systems struggle with this. For example, the 2018/19 report from the Director of Labour Market Enforcement highlighted that the likelihood of an HMRC national minimum wage inspection for the average employer was once every 500 years (although it is more probable that a non-compliant employer will be reported and so subject to investigation).  The FWA is likely to generate its own revenue to some extent through imposing penalties, and the new power to charge enforcement costs to non-compliant employers could add substantially to this if used regularly. The FWA could prove to be a lot more proactive than HMRC and other cash-strapped enforcement agencies if is adequately funded. 

How significant is this in practice?

The government says that the intention is to “create a strong, recognisable single brand so individuals know where to go for help and lead to a more effective use of resources”.  The overall idea of streamlining employment enforcement agencies makes sense.  The significance of the change depends on the area of law involved.

  • Holiday pay. This is very significant because the right to paid holiday applies to all workers, it can be so complex, and it is not currently subject to state enforcement.  It is a particular risk for employers who have taken a “wait and see” approach to some of the more complicated areas of holiday pay. The extension of notices of underpayment and associated penalties to holiday pay, combined with the new investigation powers, represents a major change to the way in which this right is enforced. This could mean, for example, employers having to pay 100% of any unpaid holiday pay to the FWA if a breach is uncovered (on top of back pay to the worker) – and potentially even more if the sums owed and penalty are not paid promptly.  
  • Statutory sick pay. There is currently no direct state enforcement of the right to statutory sick pay (SSP).  HMRC can determine whether SSP should be paid if there is a dispute between an employee and employer, but this requires the employee to make a complaint and there are no penalties for getting it wrong.  As with holiday pay, the extension of notices of underpayment, associated penalties, and the new investigation powers to SSP is quite a big change, but is likely to be of less concern to employers than holiday pay enforcement because the right to SSP is simpler to operate correctly.  
  • Employment agencies. This is not a significant change from the current system.  The Employment Agencies Standards Inspectorate already has powers to require information or documents and enter business premises.  They can also require LME undertakings and ask courts to issue LME orders – although it is worth noting that not a single LME order was made in the last reported year.  There is even a risk that scrutiny enforcement work in this area will be diluted by inclusion in a new combined agency, depending on how well the FWA is funded and resourced.
  • National minimum wage. HMRC already has significant enforcement powers, including the requiring LME undertakings and issuing LME orders, the ability to order employers to make missing payments and the power to impose penalties.  As with the rules on employment agencies, this is more of a change of enforcement body than a major change to the enforcement system itself. 
  • Modern slavery. This does not appear to be a significant change to the powers already held by the Gangmasters and Labour Abuse Authority, which can conduct unannounced inspections and require access to premises, the provision of documentary evidence, and interviews with workers. The GLAA already has the power to conduct criminal investigations where an offence is suspected, and the existing modern slavery regime includes criminal sanctions with a maximum penalty of 10 years’ imprisonment. 
  • Immigration. Immigration rules as a whole are not covered by the FWA. There is one change though, as the curent system of immigration LME undertakings and orders is being replaced by the provisions in the Bill.  These new provisions are very similar and will not make any significant change in practice.

Next steps and what employers can do

As with most of the reforms in the Bill, the FWA is unlikely to be up and running before late 2026 at the earliest – and it may well take longer than this to close down the existing agencies and transfer their responsibilities.  The Bill requires a labour market enforcement strategy to be set every three years, so the first of these will give some guidance on where resources are likely to be focussed.  

Employers should already be complying with all of these important rights, particularly those that are currently backed by criminal and civil penalties such as modern slavery and employment agencies rules.  Holiday pay is the main area where you may want to ensure your house is in order – especially now that the FWA is to be given significant additional enforcement powers.  Although we would expect the FWA to target employers perceived to be exploitative, the risks of turning a blind eye to the rules look set to increase. This also looks like a deliberate shift away from individual enforcement of rights through the overburdened Employment Tribunal system, towards centralised state enforcement backed by financial penalties. 

For more information about the Employment Rights Bill, see Lewis Silkin - What’s in the Employment Rights Bill?

 

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