Chapter 6: How to enforce minimum wages

6.6 Dissuasive sanctions regimes

Sanctions should be dissuasive and rapid

Compliance is encouraged when employers perceive a likely probability of being inspected and exposed to penalties. In order to be dissuasive, a sanction regime needs to include penalties that are sufficiently high to act as a deterrent.

Sanctions do not necessarily have to be of a penal nature in order to be effective and dissuasive. Creating an economic cost for non-compliance creates an incentive for compliance. In cases where the “penalty schemes” do not impose high monetary fines, these should be complemented with additional fixed costs, which may indirectly cause losses, like losing government subsidies, for example.1

The length of the proceedings required to impose sanctions also influences the extent to which penalties act as a deterrent. Immediate sanctions are a greater deterrent than longer proceedings, particularly if their outcomes are uncertain.

For example, when sanctions are imposed through judicial proceedings, courts often do not have sufficient resources to handle labour cases efficiently. This may encourage non-compliance among employers’ as they are aware of this situation and perceive that there is no liable threat of sanctions.

Workers, meanwhile, are likely to be discouraged from taking claims of violations to court, as the outcome is uncertain.

Authorization to impose fines?

Costa Rica is one of several countries where labour inspectorates are not authorized to impose fines for labour law violations, including in regard to wages. As a rule, inspections in Costa Rica can only lead to an imposition of a fine once a follow-up inspection has found that the violation persists.

In such cases, the labour inspectorate must then submit the case to court, which will determine the fine imposed. Similarly, workers are required to claim outstanding wage payments in court. However, judicial proceedings are lengthy and only a small proportion of cases result in fines and back-payment of underpaid wages. This raises questions about whether further gains in minimum wage compliance could be made by strengthening the sanctions regime.2

Labour inspection strategies and dissuasive sanction regimes to address violations are the necessary backbone of any credible compliance system. This is particularly the case where workers lack collective representation or are otherwise vulnerable – such as informal workers, domestic workers, low-skilled migrant workers and undocumented migrants.3

1 Chang, Y-M. and I.Ehrlich (1985). “On the economics of compliance with the minimum wage law”, Journal of Political Economy, Vol.93, pp.84-91.
2 Vega, M. L. and R. Robert (2013). Labour inspection sanctions: Law and practice of national labour inspections. Labour Administration and Inspection Programme Working Document No. 26. Geneva, ILO; Trejos, J. D. (2013). La aplicación de los salaries mínimos en Costa Rica con énfasis en el sector rural. Unpublished mimeo. San José, Research Institute in Economic Sciences, University of Costa Rica.
3For more information on how different countries have designed sanctions for minimum wage violations see ILO, Minimum Wage Systems, General Survey 2014, pp. 153-157.