Government publicly ‘naming and shaming’ firms breaking labour market rules has some effect, but must be higher profile and complemented by tougher enforcement and larger fines

Publicly naming businesses using exploitative practices or underpaying workers encourages other firms to comply with labour market rules – but tougher financial penalties and better detection of those breaking the law are still essential, according to new research published today (Tuesday) by the Resolution Foundation.

The report No shame, no gain? – part of the Foundation’s ongoing labour market enforcement investigation, supported by Unbound Philanthropy – uses a combination of in-depth interviews with firms in high risk sectors, case studies and quantitative analysis to explore how reputational concerns can influence firms’ compliance with labour market rules such as the minimum wage and holiday pay.

The report finds that the Government’s ‘naming and shaming’ of firms underpaying the minimum wage does have a deterrent effect, and that sectors with more naming do tend to see a subsequent reduction in underpayment.

However, this impact is very small and concentrated in sectors where detection rates are already high. The Foundation notes the Government’s ‘naming and shaming’ policy is useful, but could be strengthened with far wider and more tactical publicity – only one-in-five of the firms interviewed had heard of the policy.

The Foundation says that while smaller businesses are more likely to break the rules – minimum wage workers in micro-businesses are 37 per cent more likely to be underpaid the minimum wage compared to those in the largest businesses – they are less likely to get caught and named for doing so.

And while public naming is more associated with bigger, well-known firms, those companies tend to be better able to manage the effects of a scandal. The share prices of Primark, exposed in December 2017 for underpaying 9,735 workers over £200,000, and Tesco, named for underpaying 78,199 workers over £5 million, were unaffected. But the Foundation’s interview participants highlighted the reputational damage that negative reviews, online publicity or gossip can do to a small business, with one construction company owner explaining that “reputation is everything” in his industry.

Crucially, though, the Foundation’s study finds that it isn’t the fall-out from customers that businesses fear most, but the impact that reputational damage can have on their relationship with other firms in their supply chain who might be reluctant to work with them after hearing negative reports.

In terms of changing customer preferences, the report suggests bad publicity is unlikely to do firms long-term damage, or cause significant financial losses. The consensus among those surveyed was that, broadly speaking, consumers would always favour cheaper prices over ethical concerns, with one participant stating: “The sad fact is, people kind of forget. If they’re offering… a cheaper service…they tend to go back.”

This observation is borne out by case study evidence. In July 2020 factories supplying Boohoo were found to be underpaying workers and providing unsafe conditions. An independent review later found that senior Boohoo directors had been aware of cases of “unacceptable working conditions” and “illegally low pay”, but had done “too little, too late” to address them.

However, despite negative headlines and the well-publicised decision of online retailer ASOS to stop stocking their products, the pandemic shift to online shopping meant that Boohoo actually saw a 41 per cent rise in annual sales in the year to February 2021.

Increasing the impact of a reputational hit on non-compliant firms matters, the Foundation says, because the Government has said it will not increase the financial penalties imposed on businesses when they break labour market rules. But the report estimates that a firm underpaying the minimum wage would currently need to be fined around 700 per cent of arrears to effectively counteract the savings it makes, more than three times the maximum HMRC penalty of 200 per cent of arrears.

The analysis concludes that policymakers must therefore adopt a multifaceted approach, with the Foundation’s key recommendations being:

• Strengthen and raise the profile of the existing ‘naming and shaming’ policy
• Complement this policy with more rigorous enforcement, to increase the chances of rule-breaking firms being uncovered in the first place
• Introduce tougher financial penalties, to further minimise the incentives for breaking the rules

Hannah Slaughter, Economist at the Resolution Foundation, said:

“Reputation matters for businesses, and the Government should raise the profile of its welcome work to ‘name and shame’ those breaking minimum wage rules.

“However, naming dodgy firms only works when they are caught in the first place, so more widespread enforcement is needed. And fines are currently too low so there is little economic incentive for rule-breaking employers to change their ways.

“As well as raising the profile of the ‘naming and shaming’ regime, the Government must introduce tougher financial penalties and more widespread enforcement to ensure that rule-breaking firms are caught and deterred.”