A 'shadow economy' of firms like hand car washes and nail salons is exploiting workers – and regulations are making things worse

Almost a million UK workers do not receive holiday pay and the UK continues to lag behind most European countries in tackling the exploitation of these workers.

Our research indicates this is because the UK’s regulatory framework for businesses is too permissive. Its complexity also gives certain types of business cover to flout the rules. And regulators just don’t have the resources to monitor these businesses properly and force them to abide by the rules.

The regulatory framework for UK businesses needs to be redesigned to suit the current economic environment of restricted resources for investigating and punishing businesses for unlawful activities.

The permissiveness of the current rulebook is clear among business types such as hand car washes, nail bars, food delivery, construction and those operating within the gig economy. Businesses in these sectors often exist in a “shadow economy” , providing legal goods or services but operating out of sight of regulators.

Research demonstrates that, across the UK economy, 2 million people, or roughly 9% of the employed private sector working population, work in the shadow economy. Their employers often openly display non-compliance with the minimum wage, health and safety regulations, paid holiday requirements and broader employment standards for worker welfare.

Successive labour market enforcement strategy documents highlight business types such as hand car washes and nail bars as some of the most common to break these rules. These reports say enforcement agencies must act decisively because such problems are more or less universal.

For hand car washes, for example, regulatory complexity enables non-compliance because regulators are too stretched to police them properly. Businesses in this sector are more likely to copy each other. This creates an alternative regulatory environment where unlawful activity occurs in plain sight – on the side of the road or on our high streets.

Investigating problematic businesses

The Home Office’s Modern Slavery Prevention Fund recently supported our team at the Work, Informalisation and Place Research Centre and the Responsible Car Wash Scheme in mapping, classifying and investigating the most visibly problematic businesses across the three local authority areas of Leicester, Norfolk and Suffolk.

We shared the 12 “riskiest” businesses with local agencies including police, local authority staff and voluntary and community partners. These companies were identified by our research as most likely to flout rules and regulations. We visited and assessed these firms against the Responsible Car Wash Scheme Code of Practice.

The businesses were told the team would return for another assessment and were given a period of time to improve their practice. This was to allow owners to locate key documents such as insurance papers, trade effluent consents and employment contracts before our second visit.

But our team recorded a significant level of unlawful practice overall. There were also little, if any, attempts by these business owners to become compliant after our first visit. This mirrors our previous work on voluntary licensing of hand car washes in Slough, Luton, Hillingdon and Watford.

In a second part of our Home Office funded work, we ran workshops to discuss these problems. We included key enforcement agencies and local partners such as trading standards, fire and rescue services, the UK National Crime Agency, and voluntary and community organisations. When we talked to them about the challenges of working with businesses, they often blamed non-compliance on the UK’s complicated regulatory environment.

A lack of legal recourse to easily compel businesses to operate lawfully was also seen as a key factor. When businesses are caught breaking the rules, they can often “phoenix”, relaunching with a new legal owner. This further restricts regulators from properly censuring these companies.

Trying to decipher complex regulations. ra2 studio/Shutterstock

Building a better enforcement strategy

The current government has been unable to address this issue. But the opposition may struggle to do much better without focused engagement. Our paper on the fragmentation of labour market enforcement in the UK coincided with an event to mark the release of a report called Enforce for Good by the Resolution Foundation. The keynote speaker at the event, Labour party deputy leader Angela Rayner, outlined how an incoming Labour government would make labour market regulation less complicated and more effective.

Rayner talked about introducing a single enforcement body for labour market regulation in the party’s first 100 days of parliament, if it wins the next election. This is something the current government has also explored but not enacted.

A single enforcement body could help resolve some of the problems around non-compliance on workers rights in the shadow economy. But its power relations and status with other important organisations such as HMRC needs to be clarified from the outset. Guidelines for joint operations would be needed early on to ensure efficient collective action.

This attention to enforcement is a positive first step. But more systemic change is needed to tackle all forms of unlawful practice. Even then, some sectors such as hand car washes will require a more specific approach.

Our research indicates that the complex and fragmented nature of regulation and enforcement of businesses must end. This should form a cornerstone of any policy development by current and future governments.