Minimum wage offenders in London: distorted perceptions of delinquency

In October 2013, a new “name and shame” regime was introduced for employers who had been identified as breaching National Minimum Wage (NMW) regulations. Since then, the government’s business ministry (now known as BEIS – pronounced as “baize”), has been publishing periodic lists of offenders, the latest of which came out earlier this month.

Unpaid Britain has taken a closer look at the details of the 104 London-based employers so far identified. According to our analysis, these London employers had deprived 16,201 workers of a total of £2,274,000 in minimum wages (an average of about £140 per worker). We have looked at what these cases can reveal about breaches of employment contracts, partly through categorising them by industrial sector, and partly by checking for indicators of company survival.

For the media, who love a human interest story, tales of extreme exploitation of “vulnerable” workers by evil individual employers are bread and butter. To some extent, this is echoed in regulators’ approach, with BEIS listing large numbers of small employers and apparently targeting sectors known to host large numbers of SMEs. However, the scale of an offence can be measured through several different prisms. If we take the number of offending employers from each sector, we will have one idea of which is the most abusive. Measuring the number of workers affected will tell us something else. Finally, the sums of money involved may be the most significant, from both the workers’ and employers’ points of view, and will tell us still something else.

This is where the economies of scale come in. Let us assume for a minute that an employer wants to boost their profits by depressing wages (not too much of a stretch of the imagination), and that for at least some workers this may involve breaches of employment regulation. For these breaches to be sustainable and substantial, they will ideally represent small sums at the individual worker level, but be widespread and continuous. They should also have a low chance of detection and (in the event of discovery) be plausibly deniable as a deliberate strategy.

Taking the evidence presented in the London list of shame, we can test this by presenting the sectoral data in a variety of ways, firstly by counting the guilty employers (see table 1).

Table 1 By number of employers

Other personal services 17
Food & beverage services 15
Retail 11
Education 10
Employment activities 5

Other personal services, which tops this league, contains the hairdressers and nail bars traditionally presented as sites of exploitation, and recently suggested by the CEO of the Gangmasters Licensing Authority as priority areas for the GLA’s new remit (when it takes on an extra A and becomes the Gangmasters and Labour Abuse Authority). However, these are small workplaces, so those 17 employers were found to have underpaid only 25 workers. The largest numbers of underpaid workers were found in a largely different group of sectors, led by the retail industry. Not surprisingly, these sectors also showed the largest total sums identified as outstanding (see tables 2 and 3).

Table 2 By number of workers affected

Retail 13307
Security & investigations 2519
Human health 177
Food & beverage services 82
Other personal services 25

Table 3 By total sum owed

Security & investigations £1,742,655.56
Retail £244,302.49
Food & beverage services £160,199.64
Education £24,229.59
Other personal services £22,308.05

 A handful of cases dominate these last two tables: retailers Debenhams (thought to have underpaid workers by one day per year) and Monsoon (who had required staff to repay the company for clothes they were obliged to wear at work); TSS (Total Security Services) (who claimed to have made “an inadvertent mistake” with a salary sacrifice scheme); and twice-featured San Lorenzo restaurant (who apparently were struggling with family crises). The sectors showing the highest average sum per worker are again different, led by residential care and telecoms, but these represent only two cases per sector, each involving one worker. Food and beverage services features in all the tables, confirming its place in the Index of Employer Delinquency first proposed on this blog. However in this analysis of NMW offences, the sector owes its place there to the double appearance of the upmarket San Lorenzo restaurant, found to have underpaid 30 workers in August 2016, and 29 again in February 2017. The retail sector, although showing the second highest total sum outstanding, showed only an average “take” per worker of only £18.36.

Table 4 By average sum unpaid per worker

Residential care £3170.09
Telecommunications £3004.67
Travel agency, tour operators £2732.09
Other wholesale £2204.97
Food & beverage services £1953.65

These figures suggest that the employer most wanting to operate a sustainable system would do well to take little and often, since that is where the big money can be found. The exception to this seems to have been the case of TSS (Total Security Systems) Ltd of east London, who had both a large number of workers affected, and a relatively high sum per head (£691.80).

TSS claimed that a salary sacrifice scheme was the source of the underpayment, and was aimed to increase workers’ take home pay, but was withdrawn in 2014. Also in 2014, the highest paid director of the company received a salary of £2.6m, suggesting that other means of boosting workers’ pay may have been available. The 2014 accounts also tell us that at the end of October that year, provision was made in the company’s accounts of £1,736,000 for “payroll liabilities”. The sum owed to workers according to the NMW offenders list issued by the government in February 2016 was £1,743,000. I wonder, as they say in Private Eye, if these sums are by any chance related?

One other factor Unpaid Britain has been monitoring is the health of companies who have been pointed out by BEIS. Our work on Employment Tribunal (ET) judgements suggests that many of the companies who are judged to owe their workers wages, become insolvent or are dissolved, possibly to avoid payment. In our sample of London ET cases including “deductions from wages” and lodged in 2012 and 2014, only 36% of private sector employers remained active at the end of 2016.  Research conducted by Ipsos Mori and Community Links in 2012 for the Low Pay Commission found that NMW offending employers were likely to cite affordability as one of the drivers of their failure to pay. Were this to be the case, one might expect a high level of company dissolution amongst employers on the list of NMW offenders. In fact we find that 92% are still active. At this stage, this comparison is somewhat crude, as it does not take account of time lags or other factors, but it suggests that reports of the impending demise of those forced to pay the NMW may have been premature.

The data does not prove the existence of the employer strategy posited earlier in this blog, but it most certainly does not disprove it, and provides some support for it. Later in the year, Unpaid Britain will be drawing together the many strands of our research to describe the factors underlying the non-payment of wages, but in the meantime, as always, we are happy to hear of examples (confidentiality respected).

A note of caution: These cases do not include unpaid holiday pay, or wages owed in excess of the NMW, so the sums owed could be considerably larger than reported by BEIS. Some employers may be identified as London-based but have underpaid employees located across the country, similarly others with workers in London may be based elsewhere. We have sought to locate employers and identify their industrial sector from information provided on BEIS lists, supported by Companies House data and internet searches, but in some cases the workers may have been carrying out work in sectors other than the one identified as their employer’s main business. Finally, the sample of only 104 employers is unlikely to be a representative sample of NMW offenders.

 

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Delinquent Employers and in-work benefits: Intended and Unintended Consequences

Many low paid and part-time workers are dependent on welfare benefits to bring their income to a level which meets their essential expenditure. This unfortunate fact goes against the prevailing narrative of work-shy, undeserving poor prevalent in the media and used by government to justify deep cuts to the welfare state. While it might be argued that the state ought not to top up low wages through in-work benefits and through tax credits in particular, it is unavoidable while wage stagnation continues and living costs inexorably rise, and no amount of pontificating about minimum wage levels will solve this problem.

Being in receipt of in-work benefits requires a great deal of application from the claimant, and the worker faces a great deal of pressure to immediately report any changes to their rate of pay and to provide supporting evidence of that. And this is where an obstructive, delinquent or simply disorganised employer can have a seriously deleterious effect on the lives of their workers.

This post describes some of the ways in which employers’ actions, whether motivated by a desire to maximise profit, avoid scrutiny from Her Majesty’s Revenue and Customs (HMRC) or to circumvent National Minimum Wage legislation, can result in a knock-on effect which reduces or stops the worker’s benefit income and puts their quality of life, home and health at risk.

Not supplying payslips

The right to a payslip is enshrined in the Employment Rights Act 1996 but is flouted by many delinquent employers. All in-work benefits require the claimant to provide evidence of their income, and if they cannot, their benefits may be stopped and they may be asked to pay back any benefit previously received. Additionally, while any investigation is being carried out, the claimant’s benefits will be suspended, causing additional hardship and often pushing people into rent arrears and other debts. For example, at Citizens Advice Barnet we recently advised a client who had worked part-time for two employers. One had offered her extra hours, so she accepted and gave up her other job. She reported the change of circumstances to the benefits authorities, as she was obliged to do, but when they requested evidence in the form of payslips, her employer refused to provide them, saying that he had never given anyone payslips and did not intend to start now. Her benefits were suspended and she fell into financial hardship – and the employer continued to refuse to provide evidence of the hours she was working. Latterly he produced hand-written payslips covering a short period, which he sat down and wrote in from of the client, each with a different pen. These contained inaccurate information so were useless as evidence of anything. The employee had to appeal the benefits decisions – and the benefits were ultimately reinstated – but her stress and hardship caused by the employer shirking his statutory duty were damaging and completely unnecessary.

Late payment of wages

Late payment, while it causes cashflow problems, does not usually affect in-work benefits. However, where it can cause real problems is when a person loses their job and makes a claim for Universal Credit (UC). UC is gradually being introduced across England and Wales as a replacement for almost all other benefits – paid as a single monthly payment. The problem that late payment causes arises in quite specific circumstances. If someone claims UC, they are subject to a 4-week ‘assessment period’ during which their income for that period is used to calculate their entitlement. If they leave work having received their final pay and them claim UC, there should be no problem – but when the final payment is wrong, as it often is, and the employer pays the difference later (which will usually include accrued holiday pay, notice pay etc), then that will be counted as income for the assessment period (even though it should have already been received) and the claimant will have to wait a further 4 weeks before they can receive any UC. This illustrates well the complexity of the benefits system and the unintended consequences late payment can have. In effect, this will mean an additional 4 weeks where the claimant is unable to pay their rent or feed their family.

Zero Hours contracts

For a person on a zero hours contract, reconciling that with an ongoing claim for in-work benefits creates enormous complexity and an administrative headache for the worker. In order to avoid potential overpayment of benefit and the resulting allegations of fraud, the employee has to report any change in earning to the benefits authority immediately. However, where there is a zero-hours contract, in some weeks the worker may have 40 hours of work, in other weeks 2 or 3. This means that their benefits payments will fluctuate along with their wages, but the benefits payments – particularly housing benefit which is paid in arrears – lag behind and make budgeting extremely difficult. Most people who are in low paid work will receive some housing benefit to enable them to top up their income to pay their rent, and where the housing benefit is paid directly to the landlord (as it often is), the claimant simply does not know how much to pay themselves to make up the difference. This all contributes to a feeling of helplessness and has the potential to lead to eviction if the landlord gets fed up with receiving fluctuating payments.

Deliberately avoiding liability for statutory payments

This happens most often in cases of female workers on zero hours contracts or contracts which state a low number of hours but where custom and practice means that the worker is actually working far in excess of the contractual position. Where these workers become pregnant, the employer has a duty to pay Statutory Maternity Pay (SMP). However, despite being able to reclaim this from the state, many employers, either because of a perceived administrative burden or from an ideological opposition to pregnant workers, will seek to avoid liability. The method is simple – gradually reduce the number of hours so that by the time the calculation for SMP is made, the earnings are below the qualifying level of £112 per week. This does take some application from the employer, as the calculation averages the gross pay for the 8 weeks before the 15th week before the date the baby is expected, so they really do need to think ahead in order to circumvent their employee’s rights.

These are only a few examples, but in combination with the zealous pursuit of benefits claimants by the Department for Work and Pensions and HMRC (which has been well documented) where any question over entitlement is treated as potential fraud – in alignment with the prevailing media and government narrative – it is yet another instance of low paid workers being exploited, both by their employer and by the administrators of the safety net which is supposed to be there to help them.

Worker’s Status

A worker who has not been paid their wages has the right to bring a claim in an Employment Tribunal (ET) for an unlawful deduction from wages.

But who is a worker?

The law states a worker is someone who personally performs any work or services under a contract of employment or any other contract, provided that the worker is not in business on their own account (i.e is genuinely self-employed).

The legal definition of a worker is important because workers have some employment rights (see Box on Employment Rights) including a right to be paid the national minimum wage and the right to pursue a claim for unlawful deduction from wages in an Employment Tribunal if they have not been paid the wages they are owed including, for example, if they have not been paid holiday pay.

This compares with those who are genuinely self-employed (i.e. in business on their own account), who do not have those same employment rights.

Employers in the new ‘gig economy’ often categorise those working for them as self-employed.  For example, taxi drivers, couriers and cleaners are often given contracts or “written terms” stipulating that they are “independent contractors” or are “self-employed”.  In other cases, there may be nothing in writing at all other than the fact that the company classifies them as self-employed.

With reports of couriers having pay deducted because they have not made a delivery within the allotted hour or not being paid for the last shift because they did not accept a job in the last minute before their shift ended, those working in this sector are often unclear as to what action they can or cannot take to recover pay that is rightly due to them.

The correct categorisation of the working relationship is all-important in determining whether someone is a worker and therefore is able to take action to recover unpaid wages.

Case law has held that there are two key elements to determining whether someone is a worker.  The person must:

  • Provide personal service; and
  • There must be mutuality of obligations between the parties.

What is personal service?

At one level establishing that someone provides personal service seems relatively easy.  Surely, if you are asked to do the work and you do it there is no problem? However, some employers claim that those that work for them have the freedom to get others to do the work for them – during periods of sickness or holidays, for example.  This, the employers claim, means that the person can provide a substitute who can do the work for them, so they are not required to carry out personal service.  In Autoclenz Ltd v Belcher, the company provided car valeters with a written contract which stipulated that the car valeters were “entitled to engage one or more individuals to carry out the valeting” on their behalf.  However, in practice, it is difficult, if not nigh on impossible, to find anyone else to do the work or at least anyone whom the company is willing to accept.  If that is the reality then there is every chance they are in fact providing personal service and so satisfy the first step in establishing that they are a worker.

What is mutuality of obligation?

This is the obligation on the employer to provide work and a correlating obligation on the person to accept work when it is offered.

Many of those working in the new “gig economy” are  sold the idea of self-employment on the basis that they can decide when they want to work and that they can be their own boss.  However, when there is rent to pay, food and clothes to buy the ability to choose not to work is often no choice at all.

The reality is that if work is not accepted when it is offered not only will there be no pay but the person is unlikely to be offered any further work in the future.  So, in practice, people rarely refuse work when it is offered.

The profits companies stand to make from the self-employed similarly means that in most cases the company is obliged to offer work to stay in business.  An article in the Guardian dated 18 July 2016 on delivery firm, Hermes, revealed that pre-tax profits of £36 billion in the year February 2015 was the product of a workforce of couriers, 84% of whom were self-employed!

The question then is, can a company write into a contract terms which would prevent someone from claiming they are a worker?

Generally a written contract is seen as sacrosanct when determining the working relationship.

In Stevedoring and Haulage Services Limited v Fuller and Ors, (albeit a case which concerned employee status rather than worker status), the contractual terms expressly stated that work would be provided on an ad hoc basis with “no obligation on the part of the company to provide work nor for [you] to accept any work so offered”.  The Court said that there was no scope for implying a positive obligation on the parties to offer work and for work to be accepted where to do so would contradict the express terms.

But that was back in 2001.  Today the Courts take a dim view of employers relying on contractual terms to deny workers employment rights where the terms do not reflect the reality of the working relationship.

Contracts which do not represent the reality of the situation are now recognised to be sham contracts.  A sham contracts as expressed in the case of Consistent Group Limited v Kalwak is a contract where “the reality of the situation is that no one seriously expects that a worker will seek to provide a substitute or refuse the work offered, the fact that the contract expressly provides for these unrealistic possibilities will not alter the true nature of the relationship”.

In many cases for workers in the new “gig economy” the written terms or the written contract will not represent the reality. Anyone unsure of the status of their working relationship and associated employment rights should join and seek the advice of a trade union who can advise on this hugely important issue.

 Employment Rights Box

Statutory Rights Employee Worker Self Employment
Dismissal Y
Redundancy Y
Notice Y
Maternity Leave Y
Parental Leave Y
Fixed Term Employment Y
National Minimum Wage Y Y
Protected Disclosure Y Y
Working Time Y Y
Part time work Y Y
Right to be Accompanied Y Y
Unlawful deduction from wages Y Y
Protection from discrimination because of a protected characteristic Y Y Y

Impact of Employment Tribunal fees on selected employers

We have reported before on our trips to the Employment Tribunal (ET) judgement registry, hidden away in the heart of East Anglia (Bury St Edmunds). We are back there now, and as before concentrating on the cases which are key to our research namely those featuring “unauthorised deductions from wages” (generally known, for historical reasons, as Wages Act claims), and those relating to failure to provide holiday pay.

As we plough through scanning hundreds of judgements, we see some respondent (that is to y, employer) names recurring. This makes us wonder if it would be easy to see how frequently these company names come up as respondents in cases involving claims of unpaid wages. So we chose a few of the larger outsourcing and facilities management companies, based on their tendency to have subsidiaries beginning with the parent’s name. I should say that this method is far from fool proof – not all of the subsidiary names will follow this model, and it of course leaves out parent companies which do not follow this model at all.

So our leaving out some large employers is not intended as a slight – we were simply using the rudimentary search strategy which is available on the database of ET judgements, namely putting the wildcard “*” after the first few characters of the company name. So the five parent companies selected almost but not quite at random, were Capita, ISS, Mitie, Serco & Sodexo. We looked to see how many cases which included “wages act” claims had reached a hearing, by the year in which the claims had been accepted. We looked at each year from 2010 to 2015. In the first year, these five companies accounted for 148 such cases, but by 2015, this had fallen to 41.

Perhaps this is good news for their collective workforces. Perhaps they are just much less disgruntled, and more confident that they have been paid correctly for their labour power. Or then again, perhaps the introduction of ET fees has been of great benefit to these companies, many of them delivering outsourced and privatised public services. Because there does seem to be a dramatic fall after 2013, the year fees were imposed. Have a look at the graph, and see what you think.

ET cases includin WA claims reaching hearing

The delinquent employers’ dilemma: settle or dissolve?

Employment rights in the news

Last week two very interesting (from Unpaid Britain’s perspective) stories hit the headlines. In the first, Mike Ashley, owner of Sports Direct, admitted that 15 minutes of pay was deducted from workers who arrived at work even a minute late. This is a high-profile example of the low-level “gaming” of employment contracts which Unpaid Britain is studying.  The second story saw former Chelsea FC doctor Eva Carneiro  accept a settlement from Chelsea shortly before she was due to testify to an Employment Tribunal (ET). The latter story illustrates a particular phenomenon which we have been examining, as this blog will attempt to explain.

The Employment Tribunal

Since March 2016 we have been analysing Employment Tribunal cases brought before London and Watford tribunal offices for unauthorised deductions from wages. This has so far involved a two week stint at the Bury St Edmunds employment tribunal registry. Even though employment tribunal judgements are public records they can only be accessed via terminals located in the basement of Bury St Edmunds county court. There, surrounded by disintegrating boxes containing paper copies of ET judgements, we went about selecting a random sample of judgments from London for the years 2012 and 2014 (before and after the introduction of fees). Details (parties, jurisdictions, general outcome) of the judgements had to be copied from an old computer screen onto our laptops (no digital downloads!). Then we had to find and scan the paper copies of the judgements. This was a lengthy task; many copies of the judgement are mis-filed and some are absent.

ET computers  ET roling Stacks

Companies House

Back at Middlesex, we reviewed the Companies House databases for the respondent companies named in the judgements. We sought to identify the company’s status, sector and identity of their directors. Companies House has two database systems, of which Beta is the more detailed. However many of the companies don’t appear on it especially if they had been dissolved a few years previously, so a constant transition between Beta and the second (WebCheck) is required.

Half way through this process we decided to examine our findings so far, and they suggest something very interesting about employers who settle.

Preliminary Findings[1]

What is interesting is the marked difference between the status of companies for the different outcomes of claims. Where the case has been “dismissed on withdrawal”, dismissed on settlement (as in the Carneiro case) or fails at a hearing the company is most likely to be still active. Where there is a default judgement (usually occurring when the respondent i.e. the company doesn’t respond to the claim or appear at the Tribunal) or the workers’ claim was successful the company is most likely to be dissolved through insolvency or other means.  What does this reveal regarding these companies intention, or the prospects of workers recovering their wages?

Dismissal on Withdrawal

21% of outcomes out of our preliminary sample were “dismissed on withdrawal”, meaning the “claimant informs the Tribunal through writing or in the course of a hearing that the claim or part of the claim is withdrawn”, following which the Tribunal issues a judgement ruling that the claim is dismissed. This leaves the actual outcome in terms of whether the worker was successful in getting their money unknown.  A case might be settled informally, or in cases such as that of Eva Carneiro a settlement was reached during proceedings and be classified as dismissed on withdrawal. Members from the Unpaid Britain project’s Advisory group call this type of settlement “napkin cases”, when a settlement is agreed and in some cases scribbled onto a napkin just before or during a hearing. However a dismissal on withdrawal could also occur where the claimant no longer wanted to pursue the case, (for reasons such as stress or feeling that the claim might not succeed).

Settlement

Where settlements take place, it may be assumed that the worker received  at least some of their money, but judgements stating that a settlement has occurred are the smallest group amongst our sample. We had many more cases classified as “dismissed on withdrawal”, and  wanted to investigate the likelihood that these had  been withdrawn due to a settlement occurring (this had been suggested to us by legal advisors). To do this we chose to compare the status of respondent companies where we know a settlement has occurred with that of those in cases withdrawn on dismissal. We found the Companies House status of respondents in cases dismissed on settlement to be very similar to those dismissed on withdrawal, with around 80% of companies still being active.  This is in contrast to the profile of other groups of respondents.

Default Judgements and successes

Looking at cases that were Default Judgements the majority of companies appear to have been dissolved, with only a small minority still active. This may not be that surprising: if they are about to be or are already insolvent, employers may be unable or reluctant to defend the case. However where the claim was heard and succeeded (the most common outcome) the majority of respondent companies are now either dissolved or insolvent – only around 30% are still active. Research done by the Department for Business Innovation and Skills  in 2013 found that only 32% of claimants whose unpaid wage claims were successful were paid in full. Larger companies were more likely than small ones to pay awards, and this may be explained by widespread use of insolvency and limited liability to evade payment.

Failed claims

In cases which were heard, but the claim failed, our preliminary findings show that 94% of respondent companies are still active.

What the findings suggest

These findings suggest to us that the majority of cases that are “dismissed on withdrawal” are actually settled before or during the hearing.

One further hypothesis is that if an employer expects to pay the money to their workers they are likely to settle before the hearing, only going ahead with a hearing where they are confident of winning. Settling reduces litigation costs for employers, especially if the unpaid wages claim is linked to other claims such unfair dismissal or discrimination.  Cases classified as being dismissed on withdrawal leave no evidence of guilt of non-payment. This enables the employer to maintain their image both in terms of brand as well as to other employees. Thus systematic non-payment of wages can carry on unnoticed/unchallenged.

Where employers have no intention of paying, however, they may simply fail to defend, leading to a default judgement, or go to a hearing and use insolvency and limited liability to protect directors from any personal cost. It could also be that losing the ET case pushes the company into insolvency, but given that most unpaid wages claims are for few hundred pounds, this could only apply in a minority of cases.

Although we still have a lot of work to do to understand the phenomenon of non-payment and employment tribunal claims, these preliminary findings are consistent with there being a group of employers who “game” the system with apparent impunity.

For the time being we will keep you all updated. Any comments on this blog or our research are as always greatly appreciated.

 

 

 

 

[1] The preliminary findings are based on 205 cases including unpaid wage claims, predominantly made in 2012, and for which the respondent company’s identity has been located at  Companies House. The most common outcome in these cases is that the case has been “dismissed upon withdrawal”.