Department of Economics Knoop Lecture 2017 Stopping exploitation of labour Sir David Metcalf CBE Director of Labour Market Enforcement #knoop17

STOPPING EXPLOITATION OF LABOUR ENFORCING REGULATORY STANDARDS TO BOOST COMPLIANCE David Metcalf Director of Labour Market Enforcement BEIS and Home Office October 2017

CONTENTS 1. How we got here 2. Enforcement bodies Some evidence on wage underpayment 4. Effective enforcement: principles 5. Themes for Strategy

1. HOW WE GOT HERE Fissuring Relationship between workers and employers increasingly complex. Employers have contracted out, franchised and devolved many functions once done in- house Changing composition of workforce PT, Self employment and gig economy all ↑ hollowing out late 1970s 2016 Employees covered by collective bargaining 9-in-10 <3-in-10 Labour’s share in national income (%) 68 53 % working age population born abroad 7 16

2. ENFORCEMENT BODIES Enforcement 2016/17 2016/17 Scope Geographic 2016/17 Body (Responsible funding FTE locations cases Department) £m staff covered HMRC 20 363 All workers UK 2674 NMW/NLW some 2.3m at (BEIS) NMW/NLW GLAA* 4.8 70 996 licence England, Scotland, 250** (Home holders Wales and by order Office) 0.46m workers in Northern Ireland EAS 0.5 11 18,000 agencies England, Wales 616 (BEIS) 1.1m workers Scotland *Licensing activity only. The 2016 Immigration Act gave GLAA a much broader role addressing labour exploitation across the entire labour market. The new activity is carried out by Labour Abuse Prevention Officers (LAPOs). LAPOs have powers to: investigate labour market offences; arrest suspects; enter premises; search and seize evidence. ** of which Licence Applications 112, Compliance Inspections 72, Investigations 66 Note: in addition GLAA state there were 3078 “Criminal” cases consisting of 37 informal resolutions, 17 change of business cases, 157 calls to the language line, 1428 intelligence referrals to/from other agencies, 2867 unique intelligence submissions

3. SOME EVIDENCE ON WAGE UNDERPAYMENT Formal economy 1.3% of jobs paid below NLW in 2016 (see next slide) 18% of apprentices not paid their correct MW Overall, as % of wage bill 2015 £1.6 billion (holiday pay) + £1.2 billion (other) = £2.8 billion equivalent to around 3.5% of wage bill of bottom 3 deciles in wage distribution Employment Agencies one estimate is that £4.5 billion is misappropriated, mainly from workers but also from HMRC, derived so: £billion Holiday pay 2.5 Swedish derogation 1.0 Umbrella schemes 1.0 Equivalent to 15% of Employment Agency revenue (£30 billion)

Figure 1: Underpayment of the NLW (£7 Figure 1: Underpayment of the NLW (£7.20) for those due the 25+ rate in 10p pay band ource 1: NLW and NMW: Government evidence to the Low Pay Commission, July 2017, Department for Business, Energy & Industrial Strategy

4. EFFECTIVE ENFORCEMENT: PRINCIPLES (Weil) Prioritisation focus on severity of problem, frequency and level of harm Deterrence effect must proactively spur compliance more widely than those directly inspected turns on perceived probability of investigation and expect penalty Sustainability need long term impact on employer behaviour System-wide impacts influence behaviour in each layer of a sector (see supply chains)

5. THEMES FOR STRATEGY Intelligence hub Trade off: enforcement resources cf penalties Awareness; complaint mechanism; information sharing and joint working; evaluations; proactive cf reactive interventions; sector/geographic pilots Supply chain: joint liability; hot goods; public procurement Licencing: how practical? Individual bodies HMRC: holiday pay; payslips GLAA: extend/licencing?; LAPO powers EASI: umbrella companies; Swedish derogation; recruitment apps Sectors (not detailed in first Strategy) eg garments, care, cleaning, construction, car washes, nail bars, hospitality Not solved in one go. Rather iterative process