The long awaited final draft of the Gender Pay Gap Regulations was published on 6th December 2016. The Regulations are scheduled to come into force on 6th April 2017. This OnPoint summarises the provisions of the Regulations and reports on the changes made from the original draft regulations issued in February of this year.
By way of overview of the reporting regime which the Regulations will introduce:
The Regulations will apply to employers in the private sector employing 250 or more employees – similar regulations will follow in due course for public sector employers.
The reporting obligation is to publish gender pay gap information by reference to the position in April each year in relation to the mean and median hourly gender pay gap and also the annual bonus gap, including the difference between the proportions of men and women receiving bonuses.
Employers must also publish the proportion of male and female employees in each of the employer’s lower, lower middle, upper middle and upper quartile pay bands.
- The relevant information must be provided for the first time – in relation to the position in April 2017 – by no later than April 2018 and thereafter annually (assuming the employer still falls within the scope of the Regulations), and must be made available on an appropriate website for three years.
In the process of finalising the Regulations, the Government has addressed a number of the criticisms made of the draft and some welcome clarification has been provided in relation to certain issues. However, a number of areas remain unclear. Guidance on the Regulations will be forthcoming in due course and may address some of the remaining uncertainties but this has not yet been published.
The “snapshot date” and the “relevant pay period”
In order to comply with its reporting requirements under the Regulations, an employer will need to take a “snapshot” of pay at what the Regulations call the “snapshot date” each year. This snapshot is taken in respect of the “pay period” in which the snapshot date falls. For these purposes, a “pay period” is in essence the period in respect of which pay is paid by the employer – which may be monthly, weekly, fortnightly or by reference to some other period.
Under the Regulations the snapshot date is now to be 5th April whereas the original draft of the Regulations provided for this to be 30th April. As the relevant date is no longer a month end this may make the employer’s task more complex. The justification for this change is to avoid employers having to report figures which fall into different tax years.
Information to be published
Employers must publish the following six pieces of information in respect of the relevant pay period:
the difference between the mean hourly rate of pay for men and women;
the difference between the median hourly rate of pay for men and women;
the difference between the mean bonus pay paid to male employees and female employees;
the difference between the median bonus pay paid to male employees and female employees – this was not required under the previous version of the Regulations;
the proportions of male and female employees who received bonus pay; and
the proportions of male and female employees in each of the employer’s lower, lower middle, upper middle and upper quartile pay bands.
The Regulations will apply to any employer with 250 employees on the snapshot date of 5th April each year. The Regulations appear not to require employee numbers to be aggregated across groups of companies. On this basis, some groups may have to publish several sets of information for different group companies – but others whose individual group companies employ fewer than 250 employees will not be caught by the Regulations, even if their aggregate workforce numbers 250 or more. Whether the Regulations will apply to a particular employer each year may vary in the case of an employer whose workforce numbers are on the margins and whose workforce numbers vary from time to time. This uncertainty is only compounded by the definition of who qualifies as an employee for these purposes.
Who is an employee for the purposes of the Regulations?
The definition of an employee for the purposes of the Regulations is wider in scope than the original draft. Whilst the position is not as clear as it might be, it appears that for these purposes the Equality Act 2010 definition of employee applies – which extends beyond "traditional" employees to those employed under a contract of employment, a contract of apprenticeship or a contract personally to do work. Those who are not “traditional” employees in the sense of having a contract of service and being entitled to claim, for example, unfair dismissal, but nonetheless qualify as workers for employment law purposes will count for the purposes of whether the threshold of 250 employees is met and for the purposes of the information to be disclosed. This is potentially a significant issue for employers in terms of assessing the coverage of the Regulations.
Partners in an entity that constitutes a “firm” for the purposes of certain tax legislation are specifically excluded from the definition of an employee for these purposes. An LLP, for example, is a firm for these purposes.
The original draft of the Regulations extended only to employees working in Great Britain under a contract of employment governed by UK legislation. This qualification has not been carried over into the final Regulations so it is not clear whether overseas workers of UK employers fall within the scope of the Regulations. Hopefully the Guidance to be published in due course will address this issue.
The final Regulations in effect acknowledge that the broader definition of employee that is being applied may mean that employers may not easily have access to all the information needed in relation to some workers who are not traditional employees on the payroll. If the employer does not have that information and it is not reasonably practicable to obtain it, then the employer does not need to include that information in compiling the data to be provided under the Regulations, even though the employees in question will presumably still count for the purposes of whether the 250 employee threshold is met.
“Full-pay relevant employees”
The Regulations adopt a new concept of full-pay relevant employees. The employer only needs to take account of full-pay relevant employees in compiling information that it is required to provide under the Regulations and those employees who are on leave and who are being paid at a reduced or nil rate fall outside the scope of this definition. Consequently, employees on leave who are on full pay will need to be included in the calculations in relation to the difference in hourly pay rates, but these statistics will not be skewed by, for example, an employee on maternity leave who at the snapshot date is only receiving statutory maternity pay. Those on leave will still count for the purposes of the bonus pay disclosures required by the Regulations. The Regulations apply in respect of part-time employees and the full-pay relevant employees definition is only used for the purposes of removing from the calculation process in relation to hourly pay those who are on leave and not being paid.
Definition of pay
The definition of pay in the Regulations has been made more specific. The previous draft of the Regulations gave examples rather than a definitive list and it was not clear whether some types of pay – such as pay during family related leave other than maternity leave – were included. The Regulations now use a definition of "Ordinary Pay" for these purposes which specifically includes:
pay for piecework;
shift premium pay (for example, where an employee is paid at a higher rate for working during the night); and
pay for leave – which is defined as annual leave, maternity, paternity adoption, parental or shared parental leave, sick leave and “special leave”. There is, however, no explanation of what is meant by “special leave”.
Pay for these purposes does not include overtime, redundancy or termination payments, remuneration in lieu of leave and non-monetary remuneration – such as the provision of benefits such as a company car or health insurance – nor does it include expenses. Pay is to be calculated gross, i.e., before deductions for tax and national insurance.
Bonuses and incentives
The Regulations now include some important clarifications about how incentives are to be treated for the purposes of the required pay disclosures. Incentives by way of securities, securities options and interests in securities – for example, share options and LTIP awards – count as bonuses for these purposes. Bonuses and incentives are to be included for the purposes of the information that the employer is required to disclose essentially by reference to the point in time at which the relevant interest become taxable for the purposes of the income tax legislation. For example, this may be the date of the award in the case of an award of free shares or the date of exercise of an unapproved share option. The previous version of the Regulations was unclear on this point as it referred to bonuses being included in the reporting requirements when they were “received and earned”.
In addition, bonuses and other similar incentives are now effectively pro-rated so that the pay gap calculations are not skewed by, for example, an employer paying annual bonuses in April. The employer must now calculate the percentage of the bonus which is attributable to the pay period being used for the purposes of the employer’s calculations.
Calculating hourly rate
The method of calculating each employee’s hourly rate under the previous version of the regulations was also criticised for being too vague. The Regulations now set out precise steps for employers to follow in order to calculate an hourly rate of pay for each employee.
As part of the hourly rate calculation, the Regulations now prescribe specifically how to work out an employee’s weekly working hours. The previous draft of the Regulations had only referred to the employee’s “basic” hours. Now there are detailed provisions for different types of working pattern. For example, for an employee who has no normal working hours, average weekly hours can be calculated over a 12 week reference period or, if that is not a fair representation, a number of hours that the employer considers reasonably represents weekly working hours. There is also some helpful flexibility built into the calculations for employees who have been absent for a period.
The method of calculating pay band quartiles has been clarified. The Regulations confirm that the employer should have equal numbers of employees in each quartile pay band. The labelling of the bands as lower, lower middle, upper middle and upper quartile is now more meaningful than the previous labels (which were A, B, C and D).
The gender pay gap information to be disclosed under the Regulations must be published within 12 months of the snapshot date – so the first reporting date will be no later than 4th April 2018 – and reports must be made annually thereafter.
Responsibility and publication
The information disclosed by the employer must be accompanied by a written statement which confirms that the information is accurate. The statement must be signed by a senior employee or officer. Where the employer is a company this should be a director (or “equivalent”, whatever that means). In a partnership, a partner must sign, and in other types of organisation the most senior officer, employee or member of the governing body must sign.
The required information must be published on the employer’s website in a format which is accessible to employees and the public and remain available for three years. The original draft of the Regulations had required the information to be on a UK website and in English.
Employers will also have to upload the information to a government designated website, and must include the name and job title of person who signed the statement of accuracy. This is also a new requirement.
Contextual information – in terms of explanations of gender pay discrepancies and action being taken to address the position – is not mandatory. The explanatory notes published with the Regulations suggest that, given the media interest in and reputational risk arising from the issue of the gender pay gap employers may wish to provide additional narrative with their published information to explain, for example the context in which their gender pay gap has arisen or action they are taking to remedy pay gaps.
Under the original draft of the Regulations, there was no apparent consequence for employers who failed to comply with their reporting requirements under the Regulations. The explanatory notes to the Regulations indicate say that failure to comply will be an “unlawful act” in respect of which the Equalities and Human Rights Commission may take enforcement action. The EHRC can, for example, investigate organisations where it suspects there has been unlawful action, and it has certain enforcement powers including unlawful act notices. Naming and shaming and more general reputational risk will also be potential consequences of failure to comply.
Employers preparing for compliance with the Regulations will want to consider carefully how the changes made from the original draft will affect their preparations and will wish to keep an eye out for the promised Guidance which may provide further assistance on some of the areas which remain uncertain and more generally. Considering at an early stage how the relevant data will be collated and whether there are practical or legal issues that need to be resolved will be essential to ensuring smooth compliance with the new obligations.