The Fair Work Agency: A new era of employment law enforcement

We now know that the new Fair Work Agency is scheduled for creation next spring and is one of the first significant changes that employers will see from the Employment Rights Bill coming into force. So what is it, and what will it mean in practice?

What is the Fair Work Agency?

The Fair Work Agency (FWA) will be responsible for overseeing and enforcing specific employment law rights. This includes the national minimum wage (currently under the remit of HMRC) and statutory holiday and sick pay.

The FWA is due to be set up in the spring of 2026, and although regulations have yet to be produced, we already have some indication of the strength of its powers.

For the first time, claims can be lodged not only by the individual but also by the agency on their behalf. This is expected to apply to all types of employment law claims, not just those within its enforcement remit.

How far this will extend is likely to depend on how well the agency is funded and whether the already struggling Tribunal system can cope with increased demand. However, the FWA will have the power to recoup its costs from employers, which may enable it to bring more cases by funding its operations through enforcement activity.

How will this affect employers?

Given the remit of the new FWA, organisations employing lower-paid or flexible-hours workers are likely to be most affected. However, all workers are entitled to holiday pay, and this is often a complex area of law. The risk of error is particularly high in areas prone to confusion, such as calculating holiday pay where bonuses, commission, or irregular part-time hours are involved. In short, all employers are at risk of enforcement action, and the penalties can be significant.

Where holiday pay has been paid incorrectly, the cost of rectifying this across an entire workforce can be substantial. With the new powers enabling a 200% penalty and claims reaching back up to six years, employers will need to take this issue very seriously.

What powers will the FWA have?

Based on the information currently available, the FWA will have the authority to enter premises and inspect documents and computer records. Failure to comply may constitute a criminal offence. In some cases, employers could also be required to sign a Labour Market Enforcement Undertaking, obliging them to follow specific instructions, such as maintaining detailed holiday records. Breaching such an undertaking could result in fines or imprisonment.

Where the FWA finds that there has been an underpayment (including holiday or statutory sick pay), it will issue a Notice of Underpayment. The employer will have 28 days to pay the amount due. This could include underpayments going back as far as six years, for multiple staff members.

A 200% penalty will also be applied in addition to the underpayment, and this is where the impact of the FWA’s powers will be most strongly felt. While this penalty will be capped, it is expected to be set at £20,000 per worker.

There is some relief available: if payment is made within 14 days, the penalty will be reduced to 100%. However, this still effectively doubles the amount owed.

It currently appears that an “honest mistake” will not constitute a defence. In addition, to benefit from the reduced penalty, the employer must accept the decision without challenge. This may lead some to pay rather than appeal, potentially limiting the development of case law in this area.

How can employers prepare?

The FWA is due to be set up from April 2026 onwards, although it may not become operational until autumn that year.

That timeline is not far off, and employers should begin preparing now. Internal audits of holiday pay and other statutory payments will be key. Inspections are likely to be unannounced, so it is essential to ensure your processes are already in order.

Even fully compliant employers will need to review their procedures and record-keeping to ensure they can provide the required documentation if requested. Under the new regime, failure to keep adequate records will become a criminal offence, with unlimited fines for non-compliance.

For employers who have previously taken a “wait and see” approach to complex calculations, now is the time to act. Once the FWA’s enforcement powers come into effect, the cost of correction will rise significantly, from simply making a payment to also facing additional penalties of 100–200% and liability for the agency’s costs.