Ethnicity pay gap: Lords debate mandatory reporting

A House of Lords debate on the introduction of mandatory ethnicity pay reporting outlined why this issue needs a business case, not just a moral imperative. Ranjit Dhindsa, head of employment, pensions, immigration and compliance at Fieldfisher, examines the issues.

The UK's House of Lords debated the issue of mandatory ethnicity pay gap reporting this week. Proposed by the Labour peer, Lord Boateng, the debate followed calls by the Confederation of British Industry, the Trades Union Congress and the Equality and Human Rights Commission for the introduction of mandatory ethnicity pay gap reporting and an e-petition debate on the same topic in the House of Commons on 20 September 2021.

While many of the points raised echoed those debated by MPs, peers also touched on a number of less discussed practical issues that need to be addressed to push pay gap reporting up the UK business agenda.

Moral vs business case

Peers on both sides of the House agreed that pay can be used to enhance diversity in UK workforces, particularly at senior level.

This in turn offers benefits such as increased employee satisfaction, improved productivity, better talent, greater staff retention, reduced recruitment costs and fairer, more representative corporate environments.

However, evidence of what are mostly ethical advantages is not the same as articulating a clear business case for mandatory ethnicity pay gap reporting.

As with the now mandatory gender pay gap reporting requirement, no legislative penalties have been proposed for revealing and failing to close gaps in ethnicity pay rates.

Unless and until penalties are introduced for businesses, the principal push factors for pay gap reporting are legal and financial risks, including:

  • The threat of discrimination allegations by employees based on pay data
  • Whistleblowing and investigations into business practices, and
  • Losing customers, especially public sector customers, whose procurement policies increasingly contain diversity and pay gap stipulations.

It is up to interested parties to make this case more strongly, rather than relying on moral pressure to drive change.

Perfect reporting vs good reporting

Notwithstanding broad consensus on the need for ethnicity pay data, a number of peers held that mandatory reporting would be a burden on smaller businesses and risks infringing individual privacy.

Thought needs to be given to how to capture and handle ethnicity pay data so that the information collected is useful and the encumbrance on business is minimised.

Perfect reporting is an unrealistic objective that has been allowed to stall progress on ethnicity pay. With business groups' and the public's patience now wearing thin, it may be expected that incremental steps will soon be taken to introduce mandatory reporting at local (city), professional or industry level, at least on a trial basis.

Mandatory gender pay reporting is well-established in the UK, but in 2021 the pay gap is scarcely narrower than it was when the reporting requirement was introduced in 2017.

Realisation is dawning that gender pay data needs to be used for more than mere statistical comparison. It should be analysed to understand the factors contributing to pay disparity and as a basis for devising action plans to tackle identified pay gaps affecting all groups.

As all professions and industries are different, there is a clear case for allowing different sectors to develop their own action plans.

The Lords debate risked confusing the issue of closing unjustified pay gaps with the UK government's levelling up agenda and policies to reduce societal poverty.

However, many of the most shocking statistics on ethnicity and gender diversity refer to the paucity of representation at senior level in well-paid corporate roles and highly-skilled professions.

It is unhelpful to conflate different policies and forge tenuous justifications for mandatory pay reporting, when the clearest route to triggering change lies in visible, influential roles in regulated sectors.

Being honest about the challenges

Key to getting the correct methodology for ensuring meaningful ethnicity pay data is collected is the frank admission that mistakes were made in mandatory gender pay gap reporting.

"Bridging the Gap", an October 2021 report by King's College London and the Fawcett Society, analysed gender pay gap reporting systems in the UK, Australia, France, Spain, Sweden and South Africa and outlined numerous flaws in UK gender pay reporting, including the treatment of maternity leave pay, part-time workers and the use of average rather than actual figures.

The result of poorly designed reporting requirements has been the proliferation of ineffective policies that are used to fend off scrutiny but which do not reflect or address the realities of how different categories of employee are treated within the workforce.

Ethnicity pay reporting will be even more complex than gender pay, so careful analysis and some experimentation will be needed to come up with appropriate categories and reporting standards.

If government and business groups are serious about making progress on pay equality, they must work together to communicate a clear business case for mandatory pay gap reporting and ensure this issue goes to the top of board agendas.