Support from an HR consultancy in Edinburgh to help you understand the new enforcement body, and protect your businesses from costly penalties.
Many small business owners have never had an inspector turn up to check whether staff are being paid correctly. That was the reality for most employers until very recently. Since April 2026, a new government body called the Fair Work Agency has the authority to inspect premises and audit records, whether anyone has complained or not.
The financial consequences of getting things wrong can add up fast, so here is what you need to know and what you can do about it.
A new enforcement body with real teeth
Before the Fair Work Agency was created, employment rights enforcement was split across several different bodies. Each dealt with a specific area; in practice, small employers were unlikely to be inspected unless an employee took legal action directly.
That setup has changed. The Fair Work Agency has brought those separate bodies together into one organisation with much broader powers, covering areas including minimum wage, holiday pay, statutory sick pay, and agency worker protections.
The agency can inspect premises, demand to see records, issue financial penalties, and even bring employment tribunal claims on behalf of workers. Employees can also report concerns directly through an online portal without needing to go through a full tribunal process.
The government has called 2026/27 a transitional year. HMRC is still managing day-to-day minimum wage enforcement for now under the agency’s strategic direction, but full responsibility transfers to the Fair Work Agency in April 2027 alongside holiday pay enforcement powers. While things might feel quiet right now, that preparation window is closing quickly.
Why pay and leave are the first priority
The agency has chosen to focus its early efforts on pay and leave compliance. According to a report published shortly after its launch, 14% of UK workers had experienced at least one breach of basic employment rights in the two years leading up to summer 2025.
Most of the time, these issues aren’t caused by employers deliberately underpaying staff. The mistakes tend to be honest administrative errors, such as:
- Calculating holiday pay incorrectly for staff whose hours or pay vary.
- Running statutory sick pay under old rules when it has been payable from day one since April 2026.
The agency doesn’t distinguish between deliberate and accidental errors; if the calculations are wrong, penalties still apply.
Record-keeping obligations have changed
Since April 2026, every employer is legally required to maintain detailed records of annual leave and holiday pay going back six years. You need to be able to show how much leave each person took, how their holiday pay was worked out, and exactly what was paid. For anyone on variable pay or commission, you must also show how those elements were factored into the calculation.
Failing to keep adequate records is now a criminal offence, and the fines are potentially unlimited. A spreadsheet that gets updated sporadically isn’t going to cut it; if you don’t already use proper HR software to manage leave and entitlement, now is a good time to look into it.
How penalties are calculated
If the agency identifies an underpayment, it can issue a Notice of Underpayment covering up to six years. On top of repaying what’s owed, businesses face penalties of up to 200% of the underpayment, capped at £20,000 per worker. Settling within the required timeframe reduces that penalty to 100%.
If a business employs 15 or 20 people and holiday pay calculations have been slightly off for a couple of years, the total bill could be substantial.
Being named publicly
The agency also has the power to publish business names on a public government list of non-compliant employers. That is the sort of thing a potential client might find with a quick online search, and that kind of exposure can cause lasting damage beyond the financial penalty itself.
What to review right now
If you’re wondering where to start, focus on the areas the agency is most likely to examine first:
- Holiday Pay – If any team members work irregular hours or receive overtime, check that holiday pay reflects their actual earnings rather than just their basic rate.
- Leave Records – Verify whether six years of detailed leave and pay data can be produced if inspected tomorrow.
- Employment Contracts – Ensure contracts accurately reflect how staff actually work, updating any roles or hours that have changed over time.
- Statutory Sick Pay – Confirm that SSP processes pay from day one of absence rather than using outdated waiting days.
- Payroll Records – Ensure every calculation can be clearly evidenced, as inspectors will not accept informal habits as proof of compliance.
Getting ahead of this is easier than dealing with the consequences
Getting pay records and contracts reviewed now is far less stressful than receiving an enforcement notice down the line, and it is considerably cheaper.
As an outsourced HR partner, we can review your current setup, identify any gaps, and help you put things right before the agency comes knocking.
If you’d like a confidential chat about where your business stands, please get in touch with us today at letstalk@albanyhr.com or by phone on 0131 364 4186.
