Up until recently, if you got something wrong with how you paid your staff, the chances of anyone checking depended largely on whether the issue was raised.
That is changing.
The Fair Work Agency (FWA) launched on 7 April 2026, bringing several employment enforcement functions together under one government body. Its purpose is to make it easier to identify breaches of employment rights, take action against employers who fail to comply and protect workers from unfair treatment.
For small businesses, this is another reason to make sure your HR and payroll processes are working as they should.
You do not need a huge HR department to get things right. But you do need to understand your responsibilities, keep accurate records and know where the risks might be hiding.
So, what does the Fair Work Agency actually do, and what should small employers be checking?
What is the Fair Work Agency?
The Fair Work Agency was established to bring previously separate enforcement functions together, creating a more joined-up approach to protecting workers’ rights.
Its initial responsibilities include enforcing the National Minimum Wage and National Living Wage, regulating employment agencies and employment businesses, and tackling labour exploitation.
The agency is also expected to take on enforcement of additional employment rights, including statutory holiday pay, as its responsibilities expand.
Its powers include investigating employers, inspecting relevant records, requiring businesses to address breaches, issuing financial penalties and prosecuting serious offences where appropriate.
Importantly, the agency does not simply rely on employees bringing claims themselves. It can investigate concerns and take targeted enforcement action.
For employers, this means being able to demonstrate compliance is just as important as believing you are doing the right thing.
What employment rights does the agency cover?
The Fair Work Agency’s responsibilities are being introduced in stages, so it is important to distinguish between the powers it already holds and those that are still being phased in.
Its current remit includes:
- National Minimum Wage and National Living Wage: ensuring workers receive at least the minimum amount they are legally entitled to.
- Employment agency standards: overseeing compliance with relevant rules governing employment agencies and employment businesses.
- Gangmaster licensing: administering licensing requirements for labour providers operating in specified sectors.
- Labour exploitation: taking action within its remit to protect vulnerable workers and address serious exploitation.
Further responsibilities are planned. Enforcement of statutory holiday pay is expected to begin in 2027, with the government confirming that it will not start before April 2027.
For now, HMRC continues to carry out day-to-day National Minimum Wage enforcement on the agency’s behalf, with the full transfer planned for April 2027.
Statutory sick pay is also changing under separate employment legislation. Although the rules employers must follow have changed, this does not mean every sick pay issue is already enforced by the Fair Work Agency.
Understanding these timelines matters. Employers should comply with existing employment law now rather than wait for every part of the new enforcement system to be introduced.
Why should small businesses pay attention?
For a small business, payroll and HR responsibilities can easily become another job squeezed between managing customers, keeping work moving and looking after your team.
Perhaps one person manages payroll alongside their other responsibilities. Maybe annual leave is recorded on a spreadsheet, contracts have not been reviewed for a few years, or overtime is processed differently depending on who is working.
These arrangements might appear to work perfectly well day to day. The problem is that small errors can build up over time, particularly when nobody is regularly checking the process.
Consider a business that pays an employee their basic hourly rate but fails to account correctly for working time that must be included in the National Minimum Wage calculation. If that mistake continues for months or years, the amount owed can grow.
The same principle applies to holiday pay. Employees with regular overtime or commission may be entitled to have relevant elements of their normal pay reflected in their holiday pay calculations.
The mistake might be unintentional, but that does not automatically remove the employer’s legal responsibilities.
The key takeaway? Good intentions are important, but accurate calculations, clear processes and reliable records are what help demonstrate compliance.
Holiday pay and record keeping: what employers need to know
Holiday pay is an area worth reviewing, particularly if your employees work variable hours, receive commission or regularly earn overtime.
Depending on the worker’s circumstances and the type of leave being taken, holiday pay may need to reflect more than their basic salary or hourly rate.
For example, an employee who regularly works overtime may be entitled to have those payments included when calculating their normal rate of holiday pay. Getting this wrong can result in an employee receiving less than they are legally entitled to.
There is also a specific record-keeping requirement to be aware of.
Since 6 April 2026, employers have been required to keep adequate records demonstrating compliance with relevant annual leave and holiday pay requirements for at least six years from the date the records were made.
These records should allow an employer to demonstrate matters such as:
- How much annual leave an employee was entitled to take.
- How much leave they actually took.
- How holiday pay was calculated.
- What holiday pay was paid to the employee.
Employers can choose how they create and maintain these records, but they need to be accessible and sufficiently detailed to demonstrate compliance.
A spreadsheet is not automatically a problem. A spreadsheet that is incomplete, out of date or impossible to reconcile with payroll is a different matter.
Now is a good time to review how your business records annual leave and whether you could confidently explain your calculations if questions were raised.
What happens if your business gets it wrong?
The Fair Work Agency has enforcement powers designed to address non-compliance, with the response depending on the relevant legislation, the nature of the breach and the circumstances.
For National Minimum Wage underpayments, employers can be required to repay workers what they are owed. Financial penalties may also apply.
Under the existing National Minimum Wage enforcement framework, penalties can reach 200% of the underpayment, subject to a cap of £20,000 per worker. The penalty can be reduced where the employer meets the applicable payment requirements within the required timeframe.
The agency can also pursue enforcement action and publish details of non-compliant employers where the relevant rules allow it.
For a small business, the consequences can extend beyond the immediate financial cost. Investigations can take up management time, create additional administrative work and affect relationships with employees, customers and potential clients.
It is also important to remember that different employment rights have different enforcement mechanisms. The precise consequences will depend on the breach and the powers available for that particular issue.
The sensible approach is to identify and correct problems early rather than assume that a small error will never come to light.
Five areas small employers should review now
You do not need to overhaul your entire business overnight. Start by reviewing the areas most likely to expose gaps in your current processes.
1. Check your payroll calculations
Make sure employees are receiving the correct pay and that National Minimum Wage calculations account for the relevant working hours and deductions.
Review overtime, commission, bonuses, salary sacrifice arrangements and other pay elements where relevant. Some payments and deductions can affect minimum wage calculations differently, so do not assume that checking an employee’s basic hourly rate is enough.
2. Review your holiday pay
Check how holiday pay is calculated for employees with variable hours, regular overtime or commission.
Confirm that your approach reflects the applicable statutory rules and that payroll is using the correct information.
If you have not reviewed your holiday pay calculations recently, this is a useful place to start.
3. Get your records in order
Make sure you can access the records needed to demonstrate compliance with your employment obligations.
For annual leave and holiday pay, check that the required six-year records are being retained. It is also worth reviewing how employment contracts, pay records, working hours and absence information are stored.
You should not have to search through several inboxes and ask three different people to piece together a basic employment record.
4. Check your statutory sick pay processes
Statutory Sick Pay rules changed on 6 April 2026, removing the previous waiting period and lower earnings limit.
Eligible employees can now qualify for SSP from the first qualifying day of sickness, subject to the applicable rules. The calculation of SSP has also changed.
Make sure whoever manages payroll understands the new requirements and that your processes have been updated accordingly.
5. Review contracts and HR policies
Your contracts, policies and day-to-day practices should reflect how your business actually operates.
Check that contractual terms are current, responsibilities are clear and your managers understand how to handle matters such as sickness absence, annual leave and pay queries.
A policy that exists in a folder but is never followed will not provide much practical protection.
Do you need HR software to comply?
Not necessarily. There is no universal requirement for every small business to purchase a particular HR system simply because the Fair Work Agency has been established.
However, as your workforce grows, managing everything manually can become increasingly difficult.
HR software can help you organise employee information, track annual leave, maintain absence records and make important information easier to access. Depending on the system, it may also support payroll processes and reporting.
The important thing is to choose an approach that suits the size and complexity of your business and to make sure the information it holds is accurate.
Technology can make good processes easier to manage, but it cannot replace the need to understand your legal responsibilities or check that your calculations are correct.
If your current system works well and your records are complete, you may simply need to review your processes rather than introduce new software.
How can small businesses prepare for the Fair Work Agency?
The launch of the Fair Work Agency does not mean every employer should expect an inspection or penalty. Businesses that already meet their legal responsibilities should continue to focus on maintaining good practice.
However, the changes are a useful prompt to review whether your current arrangements would stand up to scrutiny.
Start with a practical compliance review. Check your payroll, holiday pay, statutory sick pay processes and record keeping. Identify any gaps, decide who is responsible for addressing them and make sure changes are implemented consistently.
If you discover that something has been calculated incorrectly, seek appropriate advice on how to correct the issue and meet your obligations.
It is much easier to address a problem when you have time to investigate it properly than when you are responding to an urgent request for records or an enforcement notice.
Get your HR processes working for you
Keeping up with employment legislation can be challenging when you are already busy running a business. But getting the fundamentals right can help protect your employees, reduce avoidable risks and give you greater confidence in how your business operates.
At Effective HRM, we understand that small businesses need practical HR support that works in the real world, not just policies that sit on a shelf.
Whether you need help reviewing your HR processes, checking your employment documentation or understanding your responsibilities as an employer, our team can help you identify what needs attention and work out your next steps.
Want to feel more confident about your HR compliance?
Get in touch with Effective HRM for a conversation about your business and the support you need.