Voluntary ethnicity pay reporting

The government has published voluntary guidance for employers on Ethnicity Pay Reporting (the Guidance).

The Guidance acknowledges that while there are similarities with gender pay gap reporting, ethnicity pay gap reporting is more complex. Although the Guidance uses the same pay calculation process as the gender pay gap regulations, the overall approach is more detailed than the gender pay gap regime. Employers are advised to identify the appropriate ethnicity classification structure, review the data, look for explanations on pay disparities, produce a narrative and draft an action plan.

This Guidance will be of interest to those employers who already report their ethnicity pay gap, who can garner ideas on how to bolster or improve their current reporting system, and those who are considering doing so by way of providing a framework to follow.

Background

It has been a long journey to publication. In 2018 the government launched a consultation on mandatory ethnicity pay gap reporting, after introducing gender pay gap reporting in 2017.  Despite committing to legislate on this issue, in March 2022 in their Inclusive Britain report, the government said that they would, in fact, issue guidance rather than legislate. In this Law-Now we have captured the main aspects of the framework suggested by the Guidance.

Who is in scope?

Employers following the Guidance are advised to gather information relating to ‘employees’ (in accordance with the gender pay gap guidance Who needs to report.) This includes a wide range of individuals, extending to cover workers, certain overseas workers, some partners if they are on the payroll and some self-employed people.

What information are employers being asked to report?

The Guidance suggests that employers carry out eight calculations, with three measures relating to pay, and a further two detailing ethnic representation. Three calculations relating to bonus pay should only be included if bonus pay makes up a large proportion of pay.

The reason for using a range of measures, rather than one single measure is because of the complexity of the ethnicity pay gap. One of the main challenges with ethnicity pay reporting is incomplete data and the impact this has on calculating a pay gap. The questions on representation are designed to contextualise the results of the other calculations.

 Pay

• Calculation 1: percentage of employees in different ethnic groups in each hourly pay quarter
• Calculations 2 and 3: mean (average) and median ethnicity pay gap for hourly pay

Representation

• Calculation 4: representation of ethnic groups in the organisation
• Calculation 5: percentage of employees whose ethnicity is ‘unknown’ or ‘prefer not to say’

Bonus

• Calculation 6: percentage of employees in different ethnic groups receiving bonus pay
• Calculation 7: mean (average) ethnicity pay gap for bonus pay
• Calculation 8: median ethnicity pay gap for bonus pay

Data protection considerations

Ethnicity data is special category data and therefore tighter rules exist around the processing, security and retention of this data. Before an employer asks an employee to disclose ethnicity data they must provide a description of how they will:

• use the ethnicity data, and
• keep the disclosed ethnicity data safe and secure, including how they will ensure no individual can be identified from any data or analysis that is published.

Employers are advised to take advice on data protection obligations at the start of any project to collect and report their ethnicity data.

Ethnicity classifications

The Guidance recommends that employers should use detailed ethnicity classifications wherever possible, ideally the same ethnicity classifications as the Census questions in England and Scotland (which are slightly different). For companies operating across the UK that want to take a UK wide approach, the Guidance contains a link to information on ethnicity classifications using a harmonised approach.

The Race Disparity Unit has published Standards for ethnicity data which should be consulted before an employer decides how to categorise ethnicity; the aim is about trying to harmonise how employers capture data and report.

Minimum category sizes

If an employer chooses to report their figures externally then they should consider minimum category numbers. A minimum category size of 50 employees is recommended. The Guidance explains “Once you have decided your minimum category size, you can count the number of employees within each ethnic group you have collected. This will tell you which groups are below the minimum category size you have collected. If some groups are below that number, you may need to aggregate some ethnicities into larger groups.”

Single figure reporting

The Guidance recognises that employers may report using a single figure ethnicity pay gap.  However, the Guidance states “We strongly discourage you from doing this in isolation. Only reporting 2 groups will mask detail and nuance which might be vital for understanding ethnicity pay gaps and identifying relevant actions. However, you may have to do this should employees’ confidentiality be at risk if any further details were released.”

Capturing data on ethnicity

In relation to capturing the data, employees should be asked to report their own ethnicity, but always with an option to opt-out of answering, such as ‘prefer not to say’. For those employers who do not yet capture this information, communication with employees about ethnicity data capture is critical to achieving a good response rate, and employers should explain that they are asking for this information to follow the Guidance.

Making the calculations

The Guidance recommends using a very similar approach to gender pay gap calculations. While this has the benefit of consistency, it does replicate some of the trickier aspects of compliance.

Understanding the results

Employers are encouraged to review and analyse the results of the calculations before they publish the information. From the gender pay gap reporting experience this is where real value for employers can lie.

The Guidance places a great deal of emphasis on the fact that there are various reasons for pay disparities and has a list of questions employers should consider when interrogating the data.

• Are some ethnic groups more likely to be recruited into lower paid roles in your organisation?
• Is there an imbalance in individuals from different ethnicities applying for and achieving promotions?
• Do people from certain ethnic groups get ‘stuck’ at certain levels within your organisation?
• Are some ethnic groups more likely to work in specific roles than other ethnic groups in your organisation, and is this reflected in pay?
• Are some ethnic groups more likely to work in particular locations, and does this have an impact on pay?
• Do employees from different ethnic groups leave your organisation at different rates?
• Do particular aspects of pay (such as starting salaries and bonuses) differ by ethnicity?

There may also be internal or external factors which affect the ethnicity of the workforce. For example, the employer may operate from multiple locations with different local representations of ethnic groups.

Reporting the data and providing a narrative

There is no obligation to report but if an employer chooses to do so they should take care over their approach. Context should be provided for the figures with a narrative explaining the results of the analysis.

The action plan

In addition to the narrative, the action plan should set out what the employer plans to do to reduce any pay disparities, taking  into account the underlying causes that have been identified. This may include actions to improve the evidence base or remove barriers in recruitment and progression. Helpfully the government has also published guidance on taking positive action to improve representation where the legislative conditions are met: Positive action in the workplace.

Next steps for employers

The majority of employers do not yet report their ethnicity pay gap. According to a 2021 report from the Women and Equalities Committee, only 19% of employers voluntarily report. For those employers who want to report, and had concerns about how to do this, the Guidance will be helpful in providing a framework.

There are many reasons why employers may choose to report in this way, not least because it can be a tangible way of demonstrating S credentials as part of an ESG strategy (see ESG: Pay Gap Reporting – a tangible way to show progress under the S). Employers may also want to get ahead of the curve  by  reporting their ethnicity pay gap as part of the government’s plans to introduce an Inclusion Confident Scheme. According to the Guidance, employers who sign up to the Scheme will demonstrate their commitment to adopting the most effective diversity and inclusion measures in the workplace.

However, the approach adopted by the Guidance is not straightforward which is unlikely to encourage adoption on a voluntary basis. The voluntary approach was certainly proven not to work for gender pay gap reporting. We would expect that even the most enthusiastic employers may not choose to follow the whole regime but rather select the aspects that they think will work best for them.