The Government has opened a consultation seeking views on how to take forward the manifesto commitment that large employers should be required to publish ethnicity pay information.

Why is the Government considering introducing mandatory ethnicity pay reporting?

The Government considers that there is a compelling case for improving the participation and progression of ethnic minorities in the workforce. The Government's Race Disparity Audit and the Labour Force Survey has shown that the employment rate for people from ethnic minorities* is lower than that for white people, and that once in work people from ethnic minorities earn less than white colleagues.

Evidence from McKinsey's Delivering through Diversity report indicates that diverse workforces are preferable from the employer's point of view: they perform better and are more profitable. Further, diverse workforces are good for the economy as a whole. Baroness McGregor-Smith's 2017 report, Race in the Workplace, indicated that equal participation and progression in the workforce across ethnicities could be worth an additional £24 billion to the UK economy (around 1.3% of GDP).

One of the recommendations coming out of the McGregor-Smith report was that large employers should be required to publish ethnicity pay information as a means of driving corrective action. The Government agrees with that approach noting that:"Transparency is a vital first step towards harnessing the power of a diverse workforce. We have seen the power of transparency in gender pay gap reporting". In the spirit of 'what gets measured gets managed' the Government considers that reporting ethnicity pay information will encourage employers to identify and tackle the barriers to a truly diverse workforce.

Views are sought on what type of pay information should be reported and which employers should be in scope to report. The consultation will close on 11 January 2019 and applies to England, Wales and Scotland, but not Northern Ireland.

Is it unlawful to have an ethnicity pay gap?

As with the gender pay gap, pay disparity is not necessarily the result of unlawful discrimination by the employer (although this may be a contributing factor in some cases). Instead, the drivers are typically factors which disadvantage people from ethnic minorities, but which are not unlawful. For example:

  • Occupational segregation: broadly speaking, people from ethnic minorities tend to work in low-skilled, low-paid jobs (although this varies between different ethnic groups).
  • Progression: once in work, people from ethnic minorities progress less far and earn less than white British workers.
  • Age: people from ethnic minorities are on average younger than white British people. As pay increases with age, this could be another explanation for the gap.
  • Education: although ethnic minorities typically have higher qualifications than white British people, representation at senior management level is below expected levels.
  • Gender: there is some evidence of a "double disadvantage" in pay for ethnic minority women.
  • Bias: even when overt discrimination is not present there remains a "lingering bias" – which can be unconscious - which causes disadvantage.

Which employers should be required to report?

The Government considers that only employers with 250 or more employees should be expected to report as a lower threshold would be too burdensome on business. This would mirror the threshold in place for gender pay gap reporting and would cover around 10,000 employers.

However, the consultation notes that some employers have argued that a higher threshold is needed to reduce the prospect of an employer not being able to publish data due to concerns about loss of anonymity for its employee population. The consultation seeks views on the right threshold: should it capture all employers or only those with a certain number of employees only (50; 250; 500; or other)?

What ethnicity pay information should employers be required to report?

The consultation asks whether some or all of the following information should be reported, or whether something else should be considered:

  • One pay gap figure comparing average hourly earnings of ethnic minority employees as a single group as a percentage of white employees: This approach offers a binary pay comparison and would mirror the approach used in gender pay gap reporting. Whilst a single headline figure is undoubtedly easier to calculate and communicate, it comes at the expense of nuance. By rolling all ethnic minority groups into one, differential results between ethnic minority groups are lost. Further, a headline pay gap figure such as this won’t necessarily speak to a lack of representation within a business (e.g. a few highly paid ethnic minority employees could result in a favourable pay gap figure, despite the fact that the workforce is not diverse overall).
  • Several pay gap figures comparing average hourly earnings of different groups of ethnic minority employees as a percentage of white employees (e.g. black vs white; Asian v white; mixed race v white): Naturally, this more granular approach would produce a more nuanced set of results. The intention would be that the groupings would not be so granular that it risked the disclosure of individual personal data. However, this approach would inevitably be more time-consuming for employers.
  • Ethnicity pay information by pay band or quartile showing the proportion of employees from different ethnic groups by £20,000 pay bands or by pay quartiles: It is said that this approach would allow employers to consider where ethnic minorities are concentrated in terms of pay, and identify any apparent barriers to progression. Baroness McGregor-Smith recommended data be reported by reference to £20,000 pay bands on the basis that this would provide an at-a-glance view of an organisation's ethnic minority representation across the business. An alternative would be to report by pay quartiles, which would mirror the gender pay gap reporting methodology. Either approach would avoid the tricky issue of how to organise different ethnic minorities into different groups.

Should additional contextual information also be reported?

The consultation recognises the need to keep the reporting exercise as simple as possible to minimise the burden on employers. However, it also recognises that additional information could help employers understand more about the drivers of pay disparity, whilst providing important context to employees about the data reported. Views are sought on whether the following contextual information should be reported:

  • Geographic variations: employers could consider the effects of local variations and regional allowances on pay data (e.g. a significant proportion of ethnic minorities are based in London where pay is higher).
  • Age variations: employers could look at the age profile of those from ethnic minorities compared to white employees to assess whether age explains some of the differences in pay and progression (as ethnic minorities tend to be younger than the white population).
  • Gender variations: employers could consider whether women from ethnic minorities are likely to experience greater pay differentials to men and women from a white background. They could also look at the differential between ethnic minority men and women. This would provide a richer picture of how ethnicity influences men and women's pay differently.

Should employers be required to publish a narrative and action plan alongside their data?

The consultation acknowledges that employers within the scope of gender pay gap reporting were not obliged to publish an explanatory narrative or action plan on how they intended to close their gap. However, around 50% of employers went on to voluntarily provide a narrative with some form of action plan.

The consultation indicates that a narrative would be particularly useful for ethnicity pay reporting as it could address the issue of employee declaration rates (see below: How should employers collect ethnicity data?). The consultation seeks views on whether it should be mandatory to publish a narrative and action plan for addressing pay disparities.

How should employers collect ethnicity data?

It is recognised that there are many hurdles around collecting, analysing and reporting meaningful ethnicity data.

First, there is no legal obligation for individuals to disclose their ethnic group and nor is there a legal obligation on employers to collect such data. EHRC research shows that about 60% of large employers (250+ employees) do collect such data but they face the problem of low participation. Self-declaration rates can be as low as 50%. This raises questions about the value of such incomplete information. The consultation asks for views on the most effective approaches for employers to improve self-declaration rates and also how non-disclosure rates should be dealt with in the reporting exercise.

Second, where data is self-declared, employees often voice concerns about how the employer intends to use that data. Ethnicity data is a "special category of personal data" under the Data Protection Act 2018 and organisations will need to take care to ensure the anonymity of those who do opt to provide their data. The consultation asks for views on how this could be done.

Third, the data relies on the employee's subjective view of their ethnic identity. Some employees may not identify with any group or with more than one.

Fourth, where employers do gather data they may use their own bespoke system of ethnicity classification, thus weakening the ability to draw comparisons between employers. The consultation recognises that ethnicity classifications are likely to be built into the HR and IT infrastructure and that imposing a standardised classification would result in additional costs to the employer. Views are sought on whether a standardised approach should be used and on the estimated cost of changing HR systems to allow for this.

What are the next steps?

Employer wishing to respond to the consultation should do so online, by email or in writing by 11 January 2019. It is to be expected that the Government would take several months to respond to the consultation responses and confirm their final approach. Primary legislation would then be required to introduce the pay reporting obligation in the private sector. That being the case, it seems unlikely that ethnicity pay reporting will come into force in the course of 2019.

The consultation also mentions the possibility of the Government working with "early adopters" in the private and public sector to test approaches before mandatory reporting comes in.

It would be churlish not to commend the Government for wishing to improve transparency in this area as a means of driving change for ethnic minorities at work. That said, the Government is perhaps guilty of overreaching about the impact of transparency in the field of gender pay. Whilst gender pay gap reporting has certainly attracted a great deal of media interest, it remains to be seen whether gender pay gaps will narrow as a result of the public reporting requirement. It is simply too early to tell.

It's also not yet clear how valuable the reported information will be. A binary comparison between average ethnic minority pay vs white pay seems like a blunt tool. How much does it really tell us about the experience of quite different ethnic minority groups? Yet, the greater the nuance, the greater the burden on employers – something the Government says is to be avoided.

And, perhaps, more importantly, without a compulsion on employees to provide their ethnicity data, many employers will be left with incomplete data sets from which to extract the relevant information. How useful is this when assessing an employer's performance? And do such results lend themselves to fair comparisons between employers? Comparing the ethnicity pay information from an employer with an 80% employee declaration rate with an employer with a 10% employee declaration rate seems like comparing apples with pears.

For now, employers should monitor the progress of this proposal and begin to think about who in the business would own the reporting exercise, how employee declarations would be encouraged and how ethnicity and pay data would be protected.