Fair Work Agency: The £20,000 Per Worker Mistake Hiding In Your SME

Fair Work Agency: the polite knock at the door is the easy version

Picture this. You're halfway through payroll when there's a polite knock at the door. It's an inspector from the Fair Work Agency, and yes, they can look at your records. The Fair Work Agency does not need a complaint or a tip-off. It can pick your business from a target list and turn up.

Launched on 7 April 2026 under the Employment Rights Act 2025, the Fair Work Agency brings together HMRC's National Minimum Wage team, the Gangmasters and Labour Abuse Authority, and the Employment Agency Standards Inspectorate into one body with broader powers and a single approach.

If you employ one person in the UK, the Fair Work Agency can review how you employ them. No small business exemption. In fact, SMEs are often on the radar because gaps are more common without a full HR team.

This post is the legal lowdown behind Episode 19 of Buzzing About HR. That episode gives you the headlines and a four-week action plan. Here, you get the nuts and bolts: what the Fair Work Agency is, what it can do, what records you must keep, and what to do if they arrive on a Wednesday afternoon.

Grab a brew. This one matters.

What the Fair Work Agency actually is?

The Fair Work Agency sits inside the Department for Business and Trade as an executive agency. Its Strategic Steer and Enforcement Policy Statement were published on 7 April 2026.

In plain English, it is the Government's single front door for enforcing UK employment rights.

What the Fair Work Agency covers now or during the transitional period:

• National Minimum Wage and National Living Wage
• Holiday pay and statutory leave
• Statutory sick pay
• Employment agency standards
• Gangmaster licensing
• Modern slavery and labour exploitation
• A growing list of Employment Rights Act 2025 measures, including predictable working patterns and day-one rights as they roll in

The big shift: one inspector can look at everything in one visit. No more separate bodies for each issue. The Government has called 2026 and 2027 a transitional period. Enforcement will be data-driven, not blanket. Translation: the Fair Work Agency already knows which sectors and sizes are high risk. They will be selective and strategic.

Quick stat check and context

• A GOV.UK "name and shame" list published on 19 March 2026 identified 389 employers, £7.3 million in arrears and around 60,000 affected workers. Household names appeared on that list. If they got it wrong, so might you. (Source: GOV.UK)
• SMEs account for the bulk of UK private sector employment. In recent government estimates, small and medium businesses employ over half of private sector workers. That puts SMEs in scope for Fair Work Agency focus. (Source: DBT Business population estimates)

What the Fair Work Agency can do?

Here is the bit that surprises most small business owners.

The Fair Work Agency can:

• Open a proactive investigation with no complaint, no tip-off and no warning
• Enter business premises to inspect, and in some cases, force entry
• Inspect, copy and remove employment records going back six years
• Issue a Notice of Underpayment requiring payment of arrears within 28 days
• Impose a penalty of up to 200% of the underpayment, capped at £20,000 per worker
• Publicly name non-compliant employers
• Arrest in cases of serious, deliberate or persistent non-compliance
• Refer for criminal prosecution in the most serious cases

That £20,000 cap is per worker. Not per business. Ten underpaid workers can mean ten penalties, plus arrears, plus reputational damage.

Where SMEs actually trip up?

The Fair Work Agency is not only looking for the obvious. It is looking for the technical. The small things that add up. These are the traps I see every week in real audits.

1. Minimum wage by mistake

From 1 April 2026, the National Living Wage is £12.71 per hour for workers aged 21 and over, and £10.85 for workers aged 18 to 20. If payroll did not move on 1 April, you already have arrears to fix.

Classic traps:

• Flat salary staff working longer hours than the contract assumes, so the maths drops below the NMW
• Uniform deductions, training time or pre-shift setup are not treated as working time when they should be
• Salary sacrifice pulling hourly pay below the minimum
• A birthday moved someone into a higher age band, but your system missed it

Do the maths before the inspector does.

2. Holiday pay is still done the old way

Since 2024, variable-hours staff must use a 52-week reference period. Skip unpaid weeks and extend back up to 104 weeks to find 52 paid weeks.

Many SMEs are still using the old 12-week method or a flat percentage uplift on payslips. Both create underpayments. Both compounds over the years.

3. Holiday records are now a legal duty

From 6 April 2026, employers must keep records of:

• Annual leave taken
• Holiday pay paid
• Any carry-over
• Any payments in lieu

This is the law. Not a nice-to-have. If your "tracker" lives in WhatsApp, Outlook and a dusty spreadsheet, you are out of step from day one.

Tip: Breathe HR makes leave, balances and pay audit-ready without faff. I am not paid to gush. I just like tools that save you time and tribunal stress.

4. Right-to-work checks done wrong

A passport photo on WhatsApp is not a Right to Work check. A photocopy in a folder is not a Right to Work check. You must follow Home Office guidance: a compliant manual check, an online share code check, or a certified Identity Service Provider (IDSP) for British and Irish citizens.

Your records must show the check date, document type and, where needed, the share code. Since February 2024, civil penalties have risen to £45,000 per illegal worker for a first breach and £60,000 for repeat breaches. (Source: Home Office)

5. Day-one written particulars are missing or wrong

Every employee must receive a Section 1 Statement of Particulars on or before day one. Not "after probation". Day one.

In small business audits, I often find 30 to 60 per cent of staff without a compliant statement, or one that no longer reflects the job. That is six years of exposure, fixable in one month with a tidy process.

6. Status confusion: worker, employee, self-employed

Labels do not decide status. Reality does. If someone looks and behaves like an employee, expect the Fair Work Agency to treat them as one. That triggers holiday pay, sick pay, minimum wage and Right to Work obligations, whatever the contract says.

The four-week tidy-up plan

You do not need to panic. You need a plan. Block one focused hour each week.

Week One: Pay audit

Pick the three lowest-paid people. For each one:

• Add up every hour actually worked in the most recent full month
• Divide gross pay by those hours
• Compare against the current NMW for their age band
• Factor in any deductions, salary sacrifice and uniform costs

If above the NMW, file the maths. If below, fix and backdate now, then note what you found and what you changed.

Week Two: Holiday audit

For every current employee:

• How much leave have they accrued this leave year?
• How much have they taken?
• What is the running balance?
• Where is the source of truth?

Pull it into one home, such as Breathe HR or a single spreadsheet. From 6 April 2026, records are a legal duty. For variable-hours staff, confirm you are using the 52-week reference period and document it.

Week Three: Contracts and statements

For every employee, confirm there is a signed contract or Section 1 Statement that:

• Is dated within their employment period
• Reflects the current role and working pattern
• Meets the legal content rules

If anything is missing, fix it this month. ACAS templates are a good start.

Week Four: Right to Work audit

For everyone hired since April 2024, confirm:

• The correct check route was used: manual, share code or IDSP
• The record includes the original document or share code
• The check date and the person who did it are recorded
• Any follow-up check dates are diarised where time-limited

This single audit protects you from the most expensive mistake an SME can make.

What to do if a Fair Work Agency inspector turns up?

It might not happen this year. If it does, use this playbook.

• Stay calm and polite
• Ask for ID and the legal basis of the visit, and note it
• Provide what is requested, nothing extra
• Take notes: who was present, what was asked, what you provided, when they left
• Call HR or legal support while the inspector is on site
• If staff interviews are requested, ask if the employee wants representation or a witness
• Do not falsify, alter or hide records

If issues are identified, you will normally receive a Notice of Underpayment with 28 days to pay or appeal. Appeals go to the Employment Tribunal, and time limits are tight. Move fast.

Mythbuster parade

• "They only go after big employers." No. The data points to bigger gaps in SMEs. You are more, not less, likely to be reviewed.
• "No complaints, no inspection." Wrong. The Fair Work Agency can start proactive investigations on its own initiative.
• "I didn't know." Not a defence. It might nudge penalty levels, but arrears are still due.
• "My accountant is dealing with this." They handle payroll mechanics. Legal compliance on pay and records sits with you.

The seven-minute action list for this week

If you only do seven things:

1. Confirm the exact location of the last 12 months of payroll records

2. Pull your holiday tracker into one home

3. Check every current employee has a signed contract or Section 1 statement

4. Check the lowest-paid person's last payslip sits above the current NMW

5. Confirm Right to Work checks are documented for everyone hired since April 2024

6. Write a one-page plan for an unplanned inspection: where to meet, what to provide, who to call

7. Listen to Episode 19 of Buzzing About HR for the human version of this

You do not need to be perfect. You need to tidy.

The Fair Work Agency is not out to crush small businesses. Its steer says genuine, good-faith employers will be treated differently from deliberate offenders.

"Good faith" is much easier to show when your records are organised, your maths is written down, and your processes are clear. It is far harder when you cannot find half the contracts and holidays live on WhatsApp.

The businesses that will get hurt are the ones that were warned, did nothing, and keep doing nothing when the polite knock arrives.

You have been warned. Take the next four weeks.

FAQ

• What is the Fair Work Agency?

- It is the single UK enforcement body for employment rights launched in April 2026 under the Employment Rights Act 2025. It can investigate pay, leave, agency rules, licensing and more.

• Can the Fair Work Agency inspect me with no complaint?

- Yes. It can open proactive investigations and attend without prior notice.

• How far back can the Fair Work Agency check my records?

- Up to six years for most employment records linked to pay and statutory rights.

• What penalties can the Fair Work Agency issue?

- Up to 200% of arrears, capped at £20,000 per worker, plus naming and potential criminal action in the most serious cases.

• Are Right to Work checks part of a Fair Work Agency inspection?

- Yes. Inspectors can review Right to Work compliance alongside pay and holiday records.

• What records must I keep for holidays from April 2026?

- Leave taken, holiday pay paid, any carry-over and any payment in lieu, all in one reliable place.

Work with KUHR

Need a hand to get tidy fast?

• Book a Free HR Health Check
• Book a discovery call
• Listen to Episode 19 of Buzzing About HR

Kettle On. Standards Up. Until next time, keep buzzing and take care of your people!