On Saturday, 28 January 2017, ACAS and the Government Equalities Office (GEO) published their eagerly awaited joint gender pay gap reporting guidance “Managing gender pay reporting in the private and voluntary sectors” (here) together with two short factsheets (here and here) and a reporting template (here) Here we look at some of the trickier questions arising from the Gender Pay Gap Regulations and consider whether the Guidance helps to answer them. As a general comment, the Guidance is pitched at a fairly high level and may not provide the clear direction businesses and practitioners were hoping for on some of the trickier questions. The Guidance is non-statutory and does not have any legal effect. However, it is likely that the Equality and Human Rights Commission would have regard to the Guidance when determining whether to take enforcement action against an employer.

1. Who is an ‘employee’ for Gender Pay Gap purposes?

The Explanatory Note to the Regulations provides that ‘employment’ for gender pay gap reporting purposes has the meaning set out in section 83(2) of the Equality Act 2010 – ie, an ‘employee’ is any person employed under a contract of employment, a contract of apprenticeship, or a contract personally to do work. This approach is confirmed by the Guidance which also clarifies the status of certain categories of employee. For other categories of ‘employee’ the position is less clear – we consider some of these below.

  • Agency workers – the Guidance confirms that these will be counted as the employees of the agency which employs them and not as employees of the end user.
  • Personal service company employees – the Guidance helpfully suggests that, where a person is employed by their own service company which, in turn, contracts to provide a service to an employer, that person will be counted as an employee of the service company for gender pay gap reporting purposes and not an employee of the client.
  • Partners and LLP members – the Guidance states that “the Regulations exclude partners in traditional partnerships and limited liability partnerships from the definition of employment”. If true, this would mean that these individuals would not count towards the 250 employees threshold and their data need not be included in the report. This is not, in fact, the case - what the Regulations actually do is exclude partners and LLP members from the definition of ‘relevant employee’. Since the obligation is to report on the pay data of ‘relevant employees’, this means that an employer will not have to include any traditional partner or LLP member’s pay data in its report. But it does not mean that the employer can ignore this group altogether - it is the number of ‘employees’ not ‘relevant employees’ which is relevant to whether the 250 employees reporting threshold is reached. It is clear from recent case law that an LLP member would satisfy the s.83(2) definition of ‘employee’ here, on the basis that they would qualify as a ‘worker’ under section 230(3) of the Employment Rights Act 1996 (Clyde & Co LLP v Bates van Winkelhof [2014]). The position in relation to traditional partners is less clear – this issue was not ruled on by the Supreme Court in Bates van Winkelhof – but non-binding comments by the Court suggest that the better view is that traditional partners are not ‘workers’ and therefore, by extension, not ‘employees’ for gender pay gap reporting purposes. Therefore, on a strict interpretation of the Regulations, an employer must include any LLP members when determining whether it has hit the 250 employees threshold, even though it is not required to include their pay data in the report. Despite this, the Guidance states clearly that, in the view of ACAS and the GEO, partners and LLP members are excluded from the definition of employment. It may therefore be open to employers to decide to exclude traditional partners and LLP members altogether. However, given that the Guidance does not have any legal effect, if the result of excluding partners and LLP members is that the number of employees falls only slightly below the threshold number of 250, our view is that it would be best to report if the inclusion of LLP members means that the number of employees is 250 or more. Either way, it would be advisable to set out the approach taken in relation to partners and LLP members in the supporting narrative.
  • Non-executive directors – The Guidance does not state whether a non-executive director (NED) counts as an employee for gender pay gap reporting purposes. If the NED works under a personal appointment letter (as is usually the case) with the relevant employer, there is still a question as to whether they qualify as an ‘employee’ even where it is clear that they are working under a contract ‘personally to do work’ (there can be no question of a substitute). They will qualify as an ‘employee’ for the purposes of s.83(2) of the Equality Act 2010 if they can be shown to be in ‘employment....under a contract personally to do work’. The NED can be said to be in ‘employment’ under the contract if the NED provides their services for and under the direction of the other party to the contract – there must be an element of subordination in order for the relationship to qualify as ‘employment’. Our clear view is that there should usually be sufficient subordination within the NED role for the NED to qualify as an ‘employee’ for gender pay gap reporting purposes – this is the case notwithstanding the considerable freedom and independence NEDs enjoy in carrying out their duties. NEDs should therefore generally be counted within the threshold number and be reported on. If it is the case that the services of the NED are provided through a personal service company of which they are an employee (which is unusual since the NED needs to commit personally to be a director of the company), that NED can now comfortably be excluded on the basis of the Guidance.

2. How does the Gender Pay Gap Reporting regime apply to overseas employees of a business based in Great Britain?

The Guidance states that, as a general rule, where an employer based in Great Britain has an employee who is based overseas that person will be within the scope of the Regulations if they would be able to bring a claim to an Employment Tribunal under the Equality Act 2010. The Guidance then goes on to state that whether this is the case will depend on whether the employment relationship suggests a stronger connection to Great Britain and British employment law than to the law of any other country. The Guidance here adopts the territorial scope test set by the courts in the cases of Lawson v Serco [2006] and Ravat v Halliburton [2012].

However, the comment in the Guidance that the test is whether the overseas employee can bring an Equality Act claim could potentially give rise to arguments that an employer is required to include EU-based employees within their calculations (whether or not they have a connection with Great Britain). This would be the case if the Bleuse principle were to apply – this principle extends the territorial scope of EU implementing legislation (such as the Lawson/Ravat test. Our view, however, is that the Bleuse principle is not relevant here - section 78 of the Equality Act, the section under which the Gender Pay Gap Regulations are made, does not implement EU law. Therefore it is the Lawson/Ravat test which should be applied to assess which overseas employees fall within scope of the reporting requirements.

On this basis, a British employer must consider whether any individuals who would be considered its employees under the definition in s.83(2) of the Equality Act but who are based overseas satisfy the Lawson/Ravat test. If they do they should be counted towards the 250 employees threshold and should, unless they fall within an exclusion in the Regulations, be reported on.

The following will be relevant to whether the Lawson/Ravat test is satisfied: - Where the employee’s home is located. - The currency in which he/she is paid and what tax/social security regime applies. - Where the employing entity is located and what the contract says about place of work and governing law. - The proportion of time the employee spends/works abroad. - Whether the employee works for the benefit of the business in Great Britain. - When looking at all the facts, whether they point towards Great Britain as being the place with which the employee has the closest connection rather than any other country.

3. How does the Gender Pay Gap Reporting regime apply to overseas companies with employees based in Great Britain?

The draft Explanatory Memorandum accompanying the Regulations (here) states that the Gender Pay Gap Regulations extend to Great Britain and the territorial application is to Great Britain. In our view, this means that an overseas employer may only potentially fall within the scope of the reporting requirements if it has an establishment in Great Britain which engages employees. It will then be required to report if it reaches the threshold of 250 employees. Clearly, if the overseas employer has 250 employees working in Great Britain, the threshold will be met. However, if it has fewer than 250 employees working in Great Britain, it will need to consider whether any of its employees working outside Great Britain should be taken into account when determining whether the 250 employees threshold has been reached.

To do this, it should, in our view, apply the Lawson/Ravat test to its non-Great Britain employees. Any employees who will clearly not meet the Lawson/Ravat test, ie employees who have no or no meaningful connection with Great Britain, can be discounted quickly and no detailed analysis of these employees will be required. It is only those employees who have a realistic chance of satisfying the Lawson/Ravat test that should be considered closely – see the answer to Question 2 above for relevant factors. The number of non-Great Britain Lawson/Ravat employees it has should then be added to the number of employees it has in Great Britain to determine whether it is required to report.

An associated issue may arise in relation to multinational organisations where employees of an overseas group company are assigned to a group company based within Great Britain. Should such an international assignee working on British soil but employed by an overseas company fall within the reporting regime? Potentially, yes. The best approach would be to carry out an individual by individual analysis to assess the extent of the assignee’s connection to Great Britain. Relevant factors will include the length of the assignment, the terms of assignment, what contractual documentation is in place and whether its states they are working for the Great Britain based company while on assignment, and which company is bearing the employment costs of the assignee. If the assignee is on an extended assignment, for example, of a year or more, it may be safest to treat them as an ‘employee’ of the company based in Great Britain for gender pay gap reporting purposes.

4. When will an employer not be required to include data relating to an employee who works under a contract personally to do work?

Regulation 2(3) provides that an employer is not required to include pay data relating to an employee working under a contract personally to do work where it does not have, and it is not reasonably practicable for it to obtain, the data. The Guidance provides that this data should be included where the employer has access to the data needed to carry out the calculations, for example if the pay figures are set out in a schedule of fees or a project initiation document. Where the employer does not hold the data in any form, the Guidance advises that the employer should consider whether it is reasonably practicable to obtain it, for example by asking the employee. Going forward, the Guidance is clear that businesses should try to ensure that when they engage a person under a contract personally to do work they will have access to the relevant data, either by making sure that they store it themselves or by ensuring in the contractual arrangements that the employee is required to provide it to them on request.

Where employers find themselves without ready access to this data for the first reporting year (in many cases this type of data will not be held in a readily accessible form or the employer may not have the information on hours worked necessary to calculate the applicable ‘hourly rate of pay’), they should, in our view, take all reasonable steps to collate it – this may require considerable due diligence. If it is not possible to report in full on this category of employee in respect of the first snapshot date, it would be advisable to set out what approach has been taken and the reasons for any limitations on the data in the supporting statement, and describe what steps are being taken to ensure that this data can be collected and reported on in subsequent years.

5. Salary sacrifice – is the position now clear?

There is no mention of the treatment of salary sacrifice arrangements in the Regulations themselves. They simply provide that the amount of an employee’s ordinary pay or bonus pay is to be calculated before deductions made at source (eg for income tax, employee pension contributions). The Guidance is, however, very clear that the gross amounts on which an employer should report are the gross amounts after any salary sacrifice arrangement has been applied. For the purposes of gender pay gap reporting, it is clear that gross pay means the pay to which the employee is contractually entitled before any deductions at source are made. Once an employee has entered into a salary sacrifice arrangement, they have no contractual entitlement to the pre-sacrifice amount - the pre-sacrifice amount is therefore not relevant when calculating what gross pay should be disclosed. The benefit provided in return for the salary sacrifice will be ‘remuneration provided otherwise than in money’ and will therefore be excluded from the definition of ‘ordinary pay’ and will not need to be reported on.

6. How should retention bonuses be treated?

This will depend on how the bonus is structured. The definition of ‘ordinary pay’ in the Regulations states that it includes “any sum paid with respect to...the recruitment and retention of an employee”. This would seem to indicate that any bonus aimed at recruiting and retaining an employee, ie a sign on bonus, will be ordinary pay – meaning that, unless the sign on bonus is paid during the relevant pay period, it will never need to be reported on. If, however, the award letter contains a performance condition, this may have the effect of excluding the bonus from ‘ordinary pay’ if the payment can no longer sensibly be said to be a sum paid with respect to the recruitment and retention of an employee – this will be a question of degree and the wording of the award letter will need to be carefully reviewed.

If a sign on bonus is delivered wholly or partly in non-cash form, which is often the case where the sign on bonus is a buy-out award of forfeited awards with a former employer, the non-cash portion of the bonus will fall to be reported as ‘bonus pay’ - remuneration provided other than in money is specifically excluded from the definition of ‘ordinary pay’. The cash element would still be included as ‘ordinary pay’ provided that it can properly be classified as a payment to recruit and retain the employee. If a retention bonus constitutes bonus pay, presumably the ‘bonus period’ (for the purpose of Step 3 of Regulation 6(1)) would be the retention period set by the bonus award letter. The wording in the Regulations that in order to be ‘ordinary pay’ the payment must be with respect to the “recruitment and retention” of an employee suggests that a sign on bonus has to satisfy both elements to fall within the definition of ‘ordinary pay’ – if this is the case this would mean that a simple retention bonus which involves no recruitment aim would not constitute ‘ordinary pay’ but should be reported as ‘bonus pay’.

7. What constitutes the ‘bonus period’ for option exercises?

When a bonus is paid during the relevant pay period and is paid in respect of a period (the ‘bonus period’) which is not the same length as the relevant pay period, Regulation 6 provides, that when calculating the hourly rate of pay, the employer should divide the bonus amount by the length of the bonus period (in days) and multiply it by the length of the pay period. So, for example, where an annual bonus is paid during the relevant pay period and the relevant pay period is a month, the situation is straightforward - the employer should divide the bonus by 365 and multiply it by 30.44 (the number of days deemed to be in a month by Regulation 6(3)).

The situation is not always so straightforward, however. Where an employee exercises an option during the relevant pay period in circumstances where the award becomes chargeable to income tax (and so falls within the definition of bonus pay), what period should the employer choose as the ‘bonus period’ – the period from grant date to vesting date (ie the performance period) or the longer period from grant date to exercise date? We believe that the better approach is to use the performance period, ie from grant date to vesting date – this is the period in respect of which the option was in truth granted (since it is the performance period) and also has the advantage that it applies equally to all employees irrespective of how long they hold onto their awards after vesting - in keeping with the spirit behind the legislation of equal treatment. It would be advisable to set out the approach taken and the reasons for doing so in the supporting statement.