Sharper teeth, stronger bite needed for US minimum wage laws

Steal something worth $2,500 or more in America, and you could face prison time. Fail to pay your workers the federal minimum wage, and you just owe back wages — and that’s only if you’re caught by the Department of Labor.

New research from MIT Sloan assistant professor Anna Stansbury finds that strengthening federal minimum wage enforcement on its own isn’t enough to incentivize corporate compliance. What’s required are stiffer penalties for violators.

Despite progress in recent years, penalties must “substantially increase” for companies that don’t pay their workers the national minimum wage, Stansbury writes in her paper “Incentives to Comply With the Minimum Wage in the US and the UK.”

“A simple cost-benefit calculation would tell many firms to break the law: With low penalties, and a small chance of getting caught, for many firms it makes financial sense to take the risk and underpay the minimum wage,” Stansbury said.

If they’re even detected, most first-time, nonwillful violators in the United States “are still only required to pay back wages owed,” according to Stansbury, who studies labor, macroeconomics, and the decline of worker power. There’s no opportunity to levy additional penalties other than liquidated damages (where a precalculated amount of money is owed if there’s a breach of contract), and despite some increase in their use in recent years, they are still levied infrequently.

The same goes for the minimum wage in the United Kingdom, where the labor market shares similarities to the United States’, including low unionization rates, minimum wage as the core legislated pay protection, and an enforcement system that relies on both government inspections and private actions brought by employees.

“The minimum wage is a core worker protection in both the U.S. and U.K.,” Stansbury writes. “But the minimum wage is only effective if it is paid.”

The realities of American wage theft

In the U.S., the federal minimum wage is set through the Fair Labor Standards Act, under the purview of the Department of Labor. While in recent years some states have set higher minimum wage rates and stiffer penalties, as of 2021 40% of U.S. workers lived in the 21 states where the federal minimum wage prevails.

For her U.S. analysis, Stansbury studied nearly 161,000 federal wage and hour cases opened by the Department of Labor from 2005 to 2023. The department detects wage theft violations through random inspections, targeted investigations, and worker-initiated complaints. But according to research cited in Stansbury’s paper, the chances of an employer being randomly inspected was less than 1% as of 2012.

But even targeted inspections fail to catch all violators. For example, Stansbury estimates that among the top 20 fast food chains (an industry with a high rate of wage infractions), a violating firm has a 1.4% chance of being detected through a targeted investigation.

And even though employees have the option of lodging a complaint or filing a suit, they don’t often do it, Stansbury writes. Workers might not report a violation for several reasons, including lacking the records to prove that it occurred and fearing employer retaliation or job loss if the business is penalized by the Labor Department.

Sometimes the worker isn’t even aware that they’re being underpaid, such as when they aren’t given breaks, are required to work after clocking out, are paid piece rates that don’t add up to the minimum wage, or are misclassified as an independent contractor, Stansbury said.

When a case is opened by the Department of Labor, its investigators determine whether there has been a wage violation and, if there has, whether it was intentional. All firms in violation of the FLSA must pay back wages owed to workers; however, willful intention is an important factor when determining additional penalties. That’s because civil monetary penalties can be levied only if the violation is found to be willful or a repeat violation.

Criminal prosecution is permitted under the FLSA, but only 38 convictions occurred from 1994 to 2020, according to federal records. Criminal prosecution allows up to a $10,000 fine and a six-month prison sentence, but, according to those records, there were only four cases in which fines were imposed — with a mean value of $3,063 — and none included prison time.

Civil monetary penalties “are in practice minimal for almost all violators,” Stansbury writes, and those penalties are paid to the federal government, not the worker.

Liquidated damages equal to the back-wage amount can be imposed on violating firms — with workers receiving the money instead of the government — but according to Stansbury’s research, less than 1% of cases before 2012 were assessed such damages. In the past decade, however, the Department of Labor has increased its use of liquidated damages, with about 30% of all violators having to pay them.

In addition, the Department of Labor has a “hot goods” provision, which can embargo products made in violation of the FLSA. However, the garment industry and similar industries — in which the provision is mostly likely to be applied — account for only 1.1% of all FLSA violations.

For minimum wage violations in the United Kingdom, Stansbury pulled data from publicly available government reports, “naming and shaming” lists, and employment tribunal case records. Many violators of the minimum wage law in the United Kingdom have to pay only the back wages they owe, similar to U.S. practices. Some violators, however, are required to pay additional penalties. According to Stansbury’s research, the average U.K. violator in fiscal 2018-19 paid back wages plus an additional penalty equivalent to 70% of the wages owed. Criminal cases were rare, however: From 1999 to 2018, there were only 14 criminal prosecutions of firms for wage theft. Worker-initiated enforcement was also infrequent.

The (dis)incentive to comply

To estimate the range of minimum probability of detection that a typical U.S. firm would have to expect in order to be motivated to comply under the existing penalties, Stansbury looked at Labor Department investigations for an average first-time violator, an average repeat violator, and an average willful first-time violator. By dividing $1 (for every dollar of back wages) by the total expected cost to a violator (expected liquidated damages plus the expected civil monetary penalty), Stansbury found that typical U.S. firms would have to expect a 48% – 83% probability of detection by the Department of Labor, or a 25% probability of a successful FLSA suit, to have an incentive to comply. Considering the 1.4% chance of detection for the top fast food chains, in practice this calculated range is substantially higher than a typical firm’s chance of detection, Stansbury said.

Using similar calculations, Stansbury found that the probability of detection for typical U.K. firms would need to be 44% – 56%, with a 50% chance of court action. In her research, Stansbury estimates that the actual probability of detection in any given year for a violating U.K. firm is 1.5% – 13%.

The cost-benefit analysis is clear, Stansbury said. Many firms have no financial incentive to comply with the minimum wage.

Recommendations

To address this problem, Stansbury recommends a strategy of combining an increased enforcement probability — including more inspection resources — and increased penalties.

In terms of increasing penalties, Stansbury offered several suggestions for the U.S.:

• Ensuring that liquidated damages are always levied.
• Tripling damage amounts for violators.
• Increasing civil monetary penalties for willful and/or repeat violations.
• Extending the statute of limitations for willful and/or repeat violations.
• Extending the use of the “hot goods” provision.
• Increasing the use of criminal prosecutions.

For the U.K.:

• Reducing the share of violations eligible for self-correction.
• Reducing the prompt-payment discount.
• Increasing the scope for penalties in cases of egregious or intentional minimum wage violations.
• Automatically levying penalties in employment tribunal cases.
• Increasing the use of criminal prosecutions and director disqualifications.

Stansbury warned that the problem of noncompliance will only get worse if the federal minimum wage is increased.

“As legislators push for a much higher federal minimum wage,” she said, “more workers will be covered, and firms will have a greater incentive to break the law.”