What is the Fair Work Agency and how does it affect small businesses?

Up until around March this year, if you were getting something wrong with how you paid your staff, the most likely outcome was nothing.

Unless an employee raised it themselves, nobody was coming to check.

This year, that all changed.

Since April 2026, there's now a single government body responsible for enforcing employment rights across the UK.

It has the power to inspect your business, review your records and issue financial penalties. And it doesn't wait for a complaint before it gets involved.

The basics, quickly

The Fair Work Agency brought several enforcement bodies that used to operate separately into a single agency with broader powers. It covers:

• Minimum wage

• Holiday pay

• Statutory sick pay

• and agency worker protections

This one agency can now inspect your premises, demand your records, issue penalties and bring employment tribunal claims on behalf of workers. It can look back six years. And workers can report concerns directly through an online portal without needing to go through a tribunal themselves.

The government has described 2026/27 as a transitional year. HMRC is still handling day-to-day minimum wage enforcement, but under the agency's strategic direction. From April 2027, that will transfer fully to the Fair Work Agency, along with holiday pay enforcement powers.

The quiet period is nearly over.

The agency is focusing on pay and leave

The agency's early focus is on pay and leave, because that's where the most common compliance gaps are.

The mistakes are rarely deliberate. Often, employers will miscalculate holiday pay for staff with overtime or irregular hours. Or they run sick pay under the old rules when statutory sick pay has been payable from day one since April 2026.

A report published by the agency shortly after launch found that 14% of UK workers had experienced at least one breach of their basic rights in the two years leading up to summer 2025.

The agency knows how widespread the problem is. And it's been set up to go looking for it.

Six years of records, or a criminal offence

Since April 2026, every employer is legally required to keep detailed records of annual leave and holiday pay for six years. That includes how much leave was taken, how holiday pay was calculated and what was paid out. For anyone with variable pay or commission, you need to show exactly how those were factored in.

Failing to keep adequate records is a criminal offence with potentially unlimited fines.

If your current approach is a spreadsheet that gets updated when someone remembers, this might not hold up against the new rules. Good HR software that can manage everything relating to leave and entitlement is a great place to start.

The penalties add up quickly

If the agency finds that you've underpaid someone, it can issue a Notice of Underpayment going back up to six years. On top of the amount owed, penalties can reach 200% of the underpayment, capped at £20,000 per worker. That drops to 100% if you pay within the required timeframe.

For a business with 15 or 20 employees and a holiday pay calculation that's been slightly wrong for a couple of years, the total can be significant.

The agency can also publicly name your business on a government list of non-compliant employers. That's the kind of thing a potential client or customer finds with a quick search.

What's worth checking now

Start with the areas most likely to be looked at:

• Holiday pay calculations, especially for anyone whose hours or pay vary

• Holiday and leave records and whether they'll hold up to six years of scrutiny

• Contracts and whether they reflect how your people actually work

• Statutory sick pay processes under the new day-one rules

• Payroll accuracy and whether you can show how figures were reached

If your paperwork is scattered across inboxes and spreadsheets, that's exactly where you're most exposed. An inspector won't accept "we've always done it this way" as proof that you're getting it right.

Get ahead of it

An experienced HR consultant can review your contracts and pay records to spot gaps before the agency does. Getting this checked now is significantly less stressful and less expensive than dealing with an enforcement notice later.

Get in touch for a confidential chat and we'll talk you through how we can help.