Now that the final version of the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 (the Regulations) have been published, we are in a position to advise employers on the way forward with the detail around the calculation and publication process. In this law-now we have set out the key requirements of the Regulations and identified a number of changes from the draft Regulations which were published in February 2016.
Calculating the various pay gap figures set out in the Regulations is not a straightforward process. Employers will need to go further than simply extract their April payroll figure. The definitions around ordinary pay, the requirement to exclude those employees who are not in receipt of full pay, and modifications to deal with those who do not work standard hours all mean that there will be a significant level of adjustment at an individual level to the payroll figure.
What has changed?
- The snapshot date to carry out the data analysis is now 5th April 2017. Employers also have one year from this date to publish the data.
- When it comes to calculating the pay gap figure, the Regulations apply to a full-pay relevant employee. If an employee receives less than full pay for any reason during the pay period, such as statutory maternity pay or where they are in receipt of half pay whilst absent on one day’s sick leave, they should not be counted for the purpose of the pay gap figure. However they will still be classed as a relevant employee for the purpose of the bonus pay gap calculation.
- The bonus pay gap should be calculated according to the mean and median figures (previously it was just the mean).
- Non-cash bonuses such as securities and cash values of shares should be included in the calculations at the point when the employee becomes liable to tax. There were concerns that the previous version of the Regulations referred to bonuses being received and earned, which may result in double counting in relation to the award of the bonus and the payment of it.
- It is only employees who are in employment on the snapshot date who should be counted. Questions had been raised about the bonus period covering 12 months and whether this would include bonuses awarded during the 12 months, where employees have also left the business.
- The Regulations apply to the wider definition of employee under s.83 of the Equality Act 2010 to include employees who perform their services personally, this includes workers, and potentially some classes of contractors if they cannot delegate their duties. The Regulations now expressly exclude partners including LLP partners.
- Ordinary pay now expressly excludes pay in lieu of leave, in addition to the previous categories which were excluded such as redundancy pay, termination payments, and salary sacrifice arrangements.
- It is now clear that pay quartiles involve dividing the workforce into 4 equal parts based on hourly pay, rather than on the level of pay across the organisation.
Who is in scope?
The Regulations apply to private and voluntary sector businesses that employ 250 employees at the relevant date, which is the 5 April 2017. Separate, and we understand similar, regulations will be published which cover public sector employees in England and Wales. Scottish public sector employers are already obliged to publish their gender pay gap as a result of the Scottish specific equality duties, although these duties do not refer to bonus figures or quartiles. Employers will not be required to publish any information until 5 April 2018 but the first data gathering exercise (or data snapshot) should take place on 5 April 2017.
Employers who are in scope will be required to publish:
- The median and the mean gender pay gap figure for pay
- The mean and median gender pay gap figure for bonuses
- The percentage proportion of men and women receiving a bonus
- The number of men and women in each quartile of their pay distribution
Calculating your gender pay gap
The gender pay gap is based on the definition of hourly pay which is made up of ordinary pay plus bonus pay. Ordinary pay is assessed with reference to the relevant pay period, whether that is weekly or monthly. There are various steps that an employer will require to follow to simply extract the information. The Regulations are prescriptive in the approach employers should take. Employers should:
- identify all employees who are in scope and identify all relevant full pay employees, and all relevant employees (since relevant employees should still be included in the bonus pay gap calculations)
- assess what is included/excluded in ordinary pay
- assess the weekly working hours of the relevant full pay employees
- identify all bonuses paid to full pay relevant employees in the 12 month period and pro-rate this to the same pay period as the ordinary pay (see the formula in the Regulations)
- identify the hourly rate of pay for men and women who are receiving full pay
- analyse the mean and the median pay figures
Calculating your bonus pay gap
Bonus payments include anything that relates to profit sharing, productivity, performance, incentive and commission. It also includes vouchers, securities, securities options and interests in securities. In the final version of the Regulations it is clear that in order to determine the value of bonuses which are paid in securities, employers should assess this at the same time that the employee incurs a charge to income tax.
Bonus payments which are made in a 12 month period prior to 5th April 2017 will be caught in the calculation, provided the employees are still employed on the relevant date. Employees who receive bonuses and leave in the 12 months prior to 5 April should not be included.
Employers will be required to report on the number of men and women in each of four pay bands or quartiles:
- Pay band A is from the lowest pay to the first quartile
- Pay band B is from the first quartile to the second quartile
- Pay band C is from the second quartile to the third quartile
- Pay band D is from the third quartile to the highest pay
This involves dividing the workforce into four equal sized groups. These four groups will be separated according to the hourly pay rate, starting from lowest paid to the highest paid. Therefore in a workforce of 1000 this would involve 4 quartiles of 250 employees. The aim, according to the government, is “to identify if there are particular areas of concentration by gender and if there are any blockages to progression.”
Publication is to be on the company website, must be publicly available for three years and should be accompanied by a written statement of accuracy by a company director or the appropriate person designated within the Regulations. Employers must also submit information to the government who will publish the gender pay gap information in league tables.
The supporting statement
While there is no legal requirement to do so, the government recommend that employers produce a narrative explaining the background behind their gender pay gap figure and any distortions which may have affected this average figure. The narrative is incredibly important as it puts the information in context and sets out any actions which will be taken to address the pay gap. A number of companies who have been early adopters of gender pay reporting also produce adjusted gender pay gap figures to provide a better way of explaining the pay gap within their organisation. It can for instance be helpful to include the sector average in a narrative.
There is no enforcement mechanism for employers who fail to produce their gender pay gap information. There is of course the possibility that the EHRC may decide to investigate any employer who fails to comply. The government has indicated that they may take a “naming and shaming” approach to those employers who fail to comply. The government is hoping that internal pressure from employees and external reputational pressure will drive change and ensure compliance.
We would advise employers to review their payroll systems with a view to conducting a trial run before April 2017. This will involve:
- assessing who is in scope as a relevant employee – how will you deal with contractors or overseas employees?
- setting up payroll systems to remove employees who do not receive full pay in the gender pay gap calculation
- understanding what is pay and what is not included in ordinary pay
- assessing bonus pay and understanding how to include this in the GPG figure
- calculating the value of non-cash bonuses