Ethnicity pay gap reporting: Next steps for employers

Author: Stephen Simpson

The Government is consulting on taking forward its proposals to require large employers to publish ethnicity pay data. We investigate what shape the legislation might take; the challenges that an ethnicity pay gap reporting obligation would pose; what reporting employers are already carrying out; and the potential implementation timetable.

On 11 October 2018, the Government launched its public consultation to bring forward its manifesto commitment to "ask large employers to publish information on the pay gap for people from different ethnic backgrounds".

The consultation highlights that reporting ethnicity pay information should enable employers to identify and tackle barriers to creating a more diverse workforce. If there is a consistent approach to reporting, employers can also benchmark their progress towards equality against other employers.

The ethnicity pay gap reporting proposals are limited to England, Wales and Scotland. Equality laws in Northern Ireland are devolved.

A trend towards transparency

The proposals are the latest in a trend for legislation compelling large employers to be more transparent in the steps they take towards tackling inequality in the workplace.

Gender pay gap reporting requirements are already in force for employers with 250 or more employees. The deadline for private- and voluntary-sector employers to publish their second round of gender pay gap figures is 4 April 2019 (or 30 March 2019 for public-sector employers).

Meanwhile, legislation has been put in place requiring quoted companies with more than 250 employees to publish the pay ratio between their CEO and "average" employees (see Executive pay ratio reporting: Six issues for employers to consider now). The first executive pay ratio figures, which have to be included in directors' remuneration reports, are expected in 2020.

The Government is also planning to consult on the possibility of requiring large employers to publish details of their family-friendly policies (see Proposed requirement to publish family-friendly policies: Implications for employers).

Which employers would be covered?

The consultation suggests thresholds triggering mandatory ethnicity pay gap reporting could be set at employers with:

• 50 or more employees (as recommended by Baroness McGregor-Smith in her 2017 Government-commissioned report, Race in the workplace);
• 250 or more employees (which would mirror gender pay gap reporting obligations); or
• 500 or more employees.

The Government's preference is for a threshold of 250 employees. It says that requiring employers with fewer than 250 employees to report risks imposing too great a burden on businesses. A threshold of 250 employees would also have the advantage of mirroring gender pay gap reporting.

According to the consultation, this would mean that around 10,000 employers would be covered.

What figures would employers have to publish?

The consultation sets out three example options for the publication of ethnicity pay gap information, together with some of the pros and cons of each approach.

• One pay gap figure comparing average hourly earnings of ethnic minority employees as a percentage of white employees. This option would have the advantages of mirroring gender pay gap reporting and making it easier for employers to communicate a single headline figure. However, any nuances would be lost by lumping all ethnic minority groups into one and poor overall figures could be masked if one or two people from ethnic minorities occupy more senior positions.
• Several pay gap figures comparing average hourly earnings of different groups of ethnic minority employees as a percentage of white employees. This option would define ethnic minority groups very broadly. The consultation uses the example of the NHS's ethnicity pay gap figures, which provide a headline white/ethnic minority comparison, plus figures for Asian, black, mixed race, white, "other" and "unknown". However, this approach increases the risk of individuals being identifiable, for example where a smaller employer has only a few employees (or possibly even one employee) from a particular group.
• Ethnicity pay gap information by pay band or quartile, showing the proportion of employees from different ethnic groups by £20,000 pay bands or by pay quartiles. This option would be similar to the requirement in gender pay gap reporting for employers to publish the proportion of men and women in quartile pay bands. This approach would help employers to identify where people from ethnic minorities are concentrated in terms of pay and identify any apparent barriers to their progression. However, it would increase the risk of individuals being identifiable, for example where there are a small number of employees of a particular ethnic minority in a pay band or quartile.

While it would not be mandatory, the consultation suggests that some employers may wish to provide additional information to put its figures in context. This could include:

• geographical information (for example if some ethnic minority groups are concentrated in employers' London locations);
• age variations (people from ethnic minorities are generally younger than the white population, according to the consultation); and
• gender variations (allowing employers to link the figures to their gender pay gap figures, perhaps looking at the pay differences between ethnic minority men and women).

Supporting narratives and action plans

The consultation acknowledges that there is no obligation on employers to publish a narrative or action plan when reporting on their gender pay gap, but that around 50% of employers published a narrative in some form or another in the first year of gender pay gap reporting.

One key difference with ethnicity pay gap reporting is that the results may depend significantly on how many employees are willing to provide information on their ethnic origins, which staff are not legally obliged to do. Employers could use the narrative to set out declaration rates.

It is particularly important that ethnicity pay gap reports lead to employers taking action to address ethnicity pay disparities. The consultation therefore asks whether or not it should be mandatory for employers to publish action plans as part of their ethnicity pay gap reporting.

Major challenges

The consultation highlights three particular challenges for employers, around classification of ethnicity, collection and analysis of data, and data protection.

• Classification of ethnicity. Employers that collect ethnicity data use a variety of classifications, and it may even be that the same employer uses different classifications in different parts of the business. While the legislation could introduce standardised ethnicity classifications, this has the potential to increase costs to employers that have pre-existing classifications built into their HR and IT systems. An over-simplified classification would result in differences between more specific ethnic groups being lost, but too many categories of ethnicity could prove to be unmanageable. For example, the 2011 UK population census included 19 ethnic sub-categories within five main categories.
• Collection and analysis of data. Perhaps the biggest barrier to effective ethnicity pay gap reporting will be getting staff to identify their ethnicity in the first place. The consultation suggests a number of ways in which employers can encourage staff to provide the information, including: explaining to employees clearly how the data will be used; building the collection of information into the recruitment process; and making the data easy to collect (for example via an online form). It is a good idea to have an option for employees who "prefer not to say", which should improve the accuracy of results.
• Data protection. Information related to an individual's racial or ethnic origin is classified as special category personal data under the General Data Protection Regulation (2016/679 EU) (GDPR). There are specific rules in place for processing special category personal data, including the requirement to have an appropriate policy document in place (see Processing special category personal data and criminal records data policy). It is also important that individuals cannot be identified from ethnicity pay gap reports. For example, publicly available civil service workforce statistics suppress values based on five or fewer responses.

Are employers already collecting ethnicity data?

Only 36% of private- and voluntary-sector employers that took part in Equality and Human Rights Commission (EHRC) research on disability and ethnicity pay gap reporting (published in August 2018) record or collect data on employee ethnicity.

Employers that do report on workforce composition or pay by ethnicity tend to use binary categories (ie white and ethnic minority) and generally do so at the recruitment stage, and thereafter in staff surveys.

Less than a quarter of private- and voluntary-sector employers surveyed by the EHRC collect the ethnicity data that would be necessary to analyse ethnic minority pay and progression. The EHRC research suggests that the majority of employers are not currently in a position to report on their ethnicity pay gaps.

A good first step for large employers is to find out whether or not any parts of their business already collect workforce ethnicity data. It may be a useful initial exercise for employers to standardise how this data is collected.

However, the reality is that many employers will have to start from scratch, and they need to make a decision as to whether it is worthwhile starting to collect ethnicity data now or best to wait until the legislation is confirmed.

The advantage of an employer acting now is that it would be better prepared should ethnicity pay gap reporting become mandatory. The disadvantage is that there is no guarantee that the new law, which is at the early consultation phase, will be introduced.

Given there are so many uncertainties, particularly around ethnic minority classifications, employers that pre-empt the legislation may find themselves having to make costly changes to their HR and IT systems later.

Employers that are leading the way

Some employers are early adopters of ethnicity pay gap reporting. These include the "big four" accountancy firms KPMG, EY, Deloitte and PwC, which have all voluntarily provided ethnicity pay gap data over and above their mandatory gender pay gap reporting.

KPMG's and EY's reports (see below) are particularly noteworthy because they provided ethnicity pay gap reports alongside their gender pay gap reports. Employers can get a sense from these two companies of what a publicly available ethnicity pay gap report might look like.

Meanwhile, retailer Marks and Spencer has committed in its gender pay gap report to extend pay gap reporting to ethnicity, disability and age by 2020.

In the public sector, the NHS has announced a goal to eliminate its ethnicity pay gap after analysis revealed pay gaps.

In March 2018, the Greater London Authority published an ethnicity pay audit, the results of which included pay disparities of 9.8% for Transport for London and 16.7% for the Metropolitan Police.

KPMG's ethnicity pay gap report

KPMG's report sets out:

• differences in average basic pay between white and ethnic minority staff (median of 11.7% and mean of 13.9%), based on the snapshot date of 5 April 2017;
• differences in average bonus paid between white and ethnic minority staff who received a bonus (median of 23.1% and mean of 38.5%), based on bonuses paid from 6 April 2016 to 5 April 2017; and
• percentage of white employees who received a bonus (88.3%) against percentage of ethnic minority staff who received a bonus (77.5%), based on bonuses paid from 6 April 2016 to 5 April 2017.

The report states that KPMG's ethnicity data is based on individuals who chose to declare their ethnicity, which is just over 95% of its employees.

EY's ethnicity pay gap report

EY's report sets out:

• differences in average hourly pay between white and ethnic minority staff (median of 9.8% and mean of 17.3%), based on the snapshot date of 5 April 2017;
• differences in average bonus paid between white and ethnic minority staff who received a bonus (median of 35.7% and mean of 34.1%), based on bonuses paid from 6 April 2016 to 5 April 2017; and
• percentage of white employees who received a bonus (61.3%) against percentage of ethnic minority staff who received a bonus (46.2%), based on bonuses paid from 6 April 2016 to 5 April 2017.

In addition, EY's report divides staff into quartile pay bands to show the percentage of white and ethnic minority staff in each band:

• Upper band: 80.7% are white and 19.3% are people from ethnic minorities.
• Upper middle band: 69% are white and 31% are people from ethnic minorities.
• Lower middle band: 66.5% are white and 33.5% are people from ethnic minorities.
• Lower band: 70.4% are white and 29.6% are people from ethnic minorities.

The report states that EY's statistics represent employees who have declared their ethnicity. Its declaration rate is stated as 80.3% (11,186 individuals).

What happens next?

Employers have until 11 January 2019 to respond to the Government's consultation. However, the consultation paper does not say for definite that an ethnicity pay gap reporting obligation will be introduced nor, if it is, indicate when it might come into effect.

Unlike gender pay gap reporting, there is nothing in the Equality Act 2010 that gives the Government a power to introduce ethnicity pay gap reporting in the private and voluntary sectors via secondary legislation. The change would require such a power to be introduced into the Equality Act, or the change could be introduced via fresh primary legislation. It could be introduced in the public sector via secondary legislation.

Even if the Government fast-tracks its proposals, Brexit means that the parliamentary time needed for debating complex ethnicity pay gap reporting legislation will be at a premium in 2019.

Given the complexities involved, employers will want to be given more time to prepare than they had for gender pay gap reporting. Employers had around 12 months from the finalisation of the legislation until the deadline for the publication of their first gender pay gap reports.