The Government Equalities Office has launched a consultation on extending its proposals for gender pay gap reporting to public bodies operating in England (including some whose remit extends to Wales and Scotland). The latest development follows an earlier consultation looking at the detail of how the new reporting regime will operate in the private sector.
The reporting duties in the private and public sector are expected to mirror each other and within the next few months we are likely to see the final versions of the two sets of regulations that will give effect to the new reporting regimes. Until then we won’t know the full detail, but the latest consultation paper gives us a slightly clearer idea of what to expect. This briefing considers the latest position on the gender pay gap reporting requirement for both sectors.
In summary, we are expecting affected employers to have to report annually:
- the ‘mean gender pay gap’ and the ‘median gender pay gap’ for their organisation;
- their ‘mean gender bonus gap’ and (as revealed in the latest consultation paper) ‘median gender bonus gap’;
- the proportion of men who received bonus pay and the proportion of women who received bonus pay in the relevant twelve month period; and
- the numbers of men and women, respectively, working in four notional pay bands (set by reference to quartiles) spanning the organisation’s pay range.
The latest consultation paper says that the first gender pay reports will have to be published no later than 4 April 2018, based on pay rates as at 5 April 2017 and, in the case of the bonus pay gap, bonuses paid between 6 April 2016 and 5 April 2017. This is slightly sooner than the 30 April date originally suggested.
Although this may seem to be some distance away, employers should start thinking now about how they will communicate about gender pay with employees and the wider public to aid understanding of the figures that have to be published. To be in a position to do that, employers should take early steps to identify why they have a pay gap and what they are or could be doing about it.
Further details of what to expect are set out in the ‘frequently asked questions’ section below.
NB. The following content may be subject to change when the final regulations and guidance are available.
Frequently asked questions
Which private sector employers are in scope?
In the private and voluntary sectors, the new regime will apply to employers in Britain with at least 250 relevant employees on the relevant date. The relevant date is 5 April in each year.
In many cases, it will be obvious whether or not an employer has to comply with the regulations. In some cases, however, it will be less straightforward, particularly for employers who use casual staff.
Which public sector employers are in scope?
The new duty will apply only to public authorities in England (including relevant cross-border authorities in England and Wales) and certain public authorities operating across Great Britain in relation to non-devolved functions.
The new regime will take effect as an amendment to the Specific Duties Regulations made under the Equality Act 2010 and so will apply to public bodies that are subject to those existing regulations. The present proposal, subject to consultation, is to apply the new reporting obligations only to public bodies with at least 250 relevant employees.
The new rules will sit alongside the existing duty for public bodies operating in England with 150 or more employees to publish information on the diversity of their workforce, in order to show how they are complying with the public sector equality duty. Although gender pay gap reporting is not mandatory under this existing duty, the Government Equalities Office and Equality and Human Rights Commission issued guidance at the time the duty was introduced making it clear that employers should consider including gender pay gap information in the data that they publish. This duty will remain in place but the reporting date will be brought into line with the new pay gap reporting duty.
Public bodies in Scotland with more than 20 employees are already required to publish gender pay gap data. In Wales, public bodies are required to have due regard to the need to have equality objectives that address the causes of pay differences, including those relating to gender, between their employees.
Which employees are counted?
In the draft gender pay gap regulations annexed to the consultation paper published earlier this year, relevant employees are said to be those who ordinarily work in Great Britain and whose contract of employment is governed by UK legislation.
The draft regulations do not define the term ‘employee’. However, the latest consultation paper suggests the government is considering adopting the same definition of employee as is used in the Equality Act 2010. Under the Act an ‘employee’ is someone who works under a contract of service, a contract of apprenticeship or a contract to do work personally. This could encompass some self-employed, non-PAYE workers who are not on the employer’s payroll and, if this definition is used, it will not always be easy to identify whether an individual should be included or not.
How soon will employers have to publish their gender pay gap data? T
he latest word from the Government Equalities Office is that employers’ first gender pay reports will have to be published no later than 4 April 2018, based on pay rates as at 5 April 2017 and, in the case of the bonus pay gap, bonuses paid between 6 April 2016 and 5 April 2017.
How is the mean gender pay gap calculated?
The mean gender pay gap is the difference between the average hourly earnings of all of the employer’s female employees and the average hourly earnings of all of its male employees.
The difference between men’s and women’s mean earnings is expressed as a percentage of men’s earnings and is based on earnings as at 5 April in the relevant year.
Example: if average hourly earnings are £9.48 for women and £15 for men, the mean gender pay gap is 36.8%. This figure represents the difference between men's and women's average hourly earnings (£5.52) as a percentage of men's earnings.
How is the median gender pay gap calculated?
The median gender pay gap is the difference between the median hourly earnings of the employer’s female employees (taken as a single group) and the median hourly earnings of its male employees (again taken as a single group).
The median hourly earnings of a group of employees can be calculated by listing all employees in the group in order of their earnings and identifying the hourly rate paid to the individual who appears in the middle of the list. So if there are 501 employees in a group, median earnings for that group would be represented by the amount paid to the 251st highest earner. If there are 500 employees in a group, median earnings for that group would be represented by the average between the 250th and 251st highest earners.
The difference between men’s and women’s median earnings is expressed as a percentage of men’s earnings and is based on earnings as at 5 April in the relevant year.
Example: if median hourly earnings are £10 for women and £15 for men, the median gender pay gap is 33.3%. This figure represents the difference between men's and women's median hourly earnings (£5) as a percentage of men's earnings
What earnings are taken into account when calculating the mean and median pay gaps?
The figures are based on gross earnings paid in the pay period spanning 5 April. The length of the pay period depends on how frequently the particular individual is usually paid, be it weekly, fortnightly, monthly or a shorter or longer period.
The latest information from the government suggests that earnings will include: basic pay, area and other allowances, shift premium pay, bonus pay and piecework pay. We are told that earnings will not include: overtime pay, expenses, the value of salary sacrifice schemes, benefits in kind, redundancy pay and tax credits.
In the consultation paper published earlier this year the Government Equalities Office suggested that earnings would include maternity pay. It now appears that pay during periods of leave (including annual, sick, maternity and other family leave) will only count if the employee is paid their usual pay during their absence.
How is the hourly rate of pay calculated?
The hourly rate of pay is determined using weekly pay divided by weekly basic paid hours for each relevant employee.
The term ‘weekly pay’ is not defined in the draft regulations published earlier this year. For those paid on a weekly basis it seems to mean earnings paid in the week in which 5 April falls. For those paid at less frequent intervals, eg monthly, we assume the intention is for employers to pro-rate the earnings paid in the pay period in which 5 April falls. What is not yet clear is how payments such as annual bonuses should be treated.
The term ‘weekly basic paid hours’ is also left undefined in the draft regulations.
How is the mean gender bonus gap calculated?
The mean gender bonus gap is the difference in average bonus pay paid to all men who received bonus pay and average bonus pay paid to all women who received bonus pay during the period of 12 months to 5 April each year.
The difference between men’s and women’s mean bonus pay is expressed as a percentage of men’s bonus pay.
How is the median gender bonus gap calculated?
The earlier of this year’s two consultation papers made no mention of the median gender bonus gap – it seems the original intention was for only the mean bonus gap to be published. The latest consultation paper makes it clear, however, that employers will also have to publicise their median gender bonus gap.
We expect the median gender bonus gap to be the difference in between the median bonus pay of the employer’s female employees (taken as a single group) and the median bonus pay of its male employees (again taken as a single group) during the period of 12 months to 5 April each year.
The difference between men’s and women’s median bonus pay is expressed as a percentage of men’s bonus pay.
What is bonus pay?
The draft regulations published earlier this year say that bonus pay includes payments received and earned in relation to profit sharing, productivity, performance and other bonus or incentive pay, piecework and commission; long term incentive plans or schemes (including those dependent on company and personal performance); and the cash equivalent value of shares on the date of payment.
There is considerable uncertainty as to how, in practice, the reporting regime will apply to bonus pay and no further guidance is provided in the latest consultation paper. Some of the questions remaining include: when should awards of shares under long term incentive plans be included in the calculation of bonus pay; how should shares be valued for this purpose; what happens if an employee is advised that he or she has earned a bonus but does not receive the bonus until some time later; and must share options be included in calculating bonus pay and, if so, how they should be valued? These issues have been raised during the consultation process and it is hoped that the final regulations will be somewhat clearer than the published draft.
How are the quartile pay bands worked out?
Employers need to divide their overall pay range into four notional pay bands, to be labelled A-D, and report the gender split in those bands. Each pay band needs to contain the same number of employees ie a quarter of the workforce.
To identify the pay bands:
- Compile a single list of all relevant employees (male and female), in order of increasing hourly pay.
- Split the list into four groups, with each group containing the same number of employees ie a quarter of the workforce. This can be done by drawing a line a quarter of the way down the list, a second line half way down the list and a third line three-quarters of the way down the list (these dividing points are known as ‘quartiles’).
- The top group, containing the lowest earners, will be in band A; the next group will be in band B, the next in band C and the bottom group, containing the highest earners, will be in band D.
For each pay band, employers need to report the gender split ie how many men are in the group and how many women.
The draft regulations published earlier this year are not clear on whether employers must also set out the pay range covered by each of the four bands when publishing their data.
Where must the information be published?
Employers will need to publish their pay data in English on a searchable UK website that is accessible to employees and the public. The information will have to be signed by a director, or equivalent, to confirm that it is accurate.
In addition, employers are expected to be required to send evidence of compliance to a government sponsored website. This latter step will allow the Government to produce publically displayed tables, by sector, of employers’ reported pay gaps.
Must/should pay gaps be explained?
Although there is no legal obligation to publish an explanation, many employers are concerned that highlighting pay differences in this way could damage their reputation for fair treatment or undermine efforts to redress under-representation at certain levels of their workforce. Many will, therefore, be keen to provide additional information, explaining the context for any pay gap, to give a more nuanced and accurate picture, even though this is not required by the legislation.
Employers should also formulate a communications plan well before they publish any data, to ensure they present information in a considered way and are ready to respond to challenging questions from employees, unions and the media.
What happens if an employer does not comply?
For private sector employers there are no specific penalties for non-compliance. Instead the incentive to comply with the new rules comes from the risk of adverse publicity and reputational damage. Defaulters are likely to be easy to identify and unions, campaigners and the media could well be keen to name and shame those who try to keep their gender pay record under wraps, particularly in the case of well-known brands and those competing for work in the public sector. Indeed the Government has said it may decide to publicise the identity of employers known not to have complied.
Brand values, corporate reputations, goodwill, share prices and, importantly, the ability to recruit and retain key talent are all at risk if businesses do not take this seriously. Furthermore, organisations failing to engage with gender pay gap reporting risk losing work, reflecting increasing demands for gender equality data as part of tendering processes.
Public sector employers who do not comply with their new duties also risk adverse publicity and reputational damage. In addition, the Equality and Human Rights Commission will be charged with monitoring compliance by public bodies and will be able take enforcement action through the courts if necessary.
Is there a risk of equal pay claims?
While gender pay gaps and equal pay gaps are not the same, there is clear potential for one to affect the other. The recent spike in public sector equal pay claims was spurred by the introduction of new pay and grading systems, which drew attention to historical gender pay anomalies including unequal bonus arrangements. There is a risk that gender pay gap reporting, particularly where significant differences are reported, could similarly focus attention on pay differentials and possibly lead to equal pay claims. This broader implication of gender pay gap reporting should be considered as part of risk assessment planning.
What should employers be doing now?
- Be proactive – doing nothing is not an option. Understanding your pay arrangements will help you manage and present information meaningfully and in context.
- Review all current pay practices across your organisation in order to understand the differentials which may exist.
- Consider gender pay gaps which exist on a departmental/geographical/functional level and compare these with the composition of your workforce.
- Analyse the rationale behind your current arrangements to identify potential risk areas.
- If pay gaps are due to underrepresentation of women at more senior levels, look critically at what you are doing to attract, recruit, develop and retain female employees.
- Prepare a communications plan so that you are better placed to present information in a considered way and are ready to respond to challenging questions from employees, unions and the media.