On 11 October 2018 the UK government launched a consultation on proposals for ethnicity pay reporting. This article provides details of that consultation and highlights some of the difficulties with the proposed reporting arrangements.

Authors: Colin Leckey; Tom Heys

Firm: Lewis Silkin LLP

There is a trend in employment law towards transparency being used as a method of driving change. We see it in the ‘name and shame’ regime for National Minimum Wage contraventions, the new CEO pay ratio reporting regime, the publication of age demographic statistics suggested by the Women and Equalities Committee, and (of course) in gender pay gap reporting. And now, with the Government’s consultation, it looks like ethnicity pay reporting will be next.

What is in the consultation?

The consultation seeks feedback on the sort of information that employers should be required to publish. It sets out some different ways in which this could be done, including having a single pay gap figure of ‘white vs non-white’, multiple pay gap figures for all of the different ethnicities, or publication of pay information by £20,000 pay band or by quartile. The Government’s position is that employers with 250 or fewer employees should not be required to publish, but other views are sought.

Gender pay gap reporting and the small groups problem: the inherent unreliability of ethnicity pay gaps

The consultation also seeks comments on the extent to which it would be helpful to mirror the requirements of the gender pay gap reporting regime: for example with the same definitions of ‘pay’, ‘bonus’ and ‘relevant employee’, and the same six reportable statistics.

There would, however, be difficulties in such a ‘copy and paste’ approach to legislating, because of how gender pay gaps are calculated.

The gender pay regulations require comparison of the average woman to the average man – if a company hires no or few women in either the lowest paid shop floor manufacturing jobs, or the highest paid board roles, and only a few women in decently-paid mid-level roles, it could end up with a very ‘good’ looking gap. But that doesn’t necessarily tell you much about what that workplace is like for women.

For example, imagine a workforce with 300 people, but which is 90% male (not wholly unheard of in some industries with a dearth of female talent, such as technology or manufacturing). Because the average female pay is determined by just 30 people, the hiring (or firing) of one more woman in the lowest paid job, or one woman on the board, can have a big effect on the average female hourly rate, and therefore the pay gap.

The above applies by analogy to ethnicity pay gap reporting, but to a much greater extent because the size of the groups will be even smaller. If, for example, that same employer with 300 people employs black individuals in proportion to the wider population (3% of the UK is black according to the Office for National statistics, the ‘ONS’), it means their average pay would be calculated from just nine individuals.

Ethnic minorities are exactly that: a minority. Many large employers will only have a small proportion of non-white employees. The consultation recognises this issue. It notes that a headline pay gap figure does not reflect overall representation. A company with a highly paid non-white CEO might have good pay gap figures, but low minority representation in the wider workforce.

Classification of ethnicities

The consultation paper also identifies the classification of different ethnic groups for the purposes of reporting as a potential difficulty.

Firstly, and unlike gender, many employers do not hold ethnicity data on all of their staff. Because ethnic origin is a special category of personal data (what used to be called sensitive personal data), employers will need to be careful about how they collect, store and process it.

Secondly, the granularity of ethnicity could have a big impact on the complexity of the reporting obligations. In the last census, the ONS grouped individuals into 18 specific ethnic classifications and five broader ones.

To avoid the complexity, one option suggested in the consultation is simply to calculate a pay gap of ‘non-white’ against ‘white or white British’. By pooling all BAME individuals together, as sample sizes get bigger more reliable statistics may be produced (although samples are still likely to be smaller than with a gender pay gap).

But if a pay gap is to be used as a proxy for the workplace chances afforded to someone, conflating ethnicities might do little to show this. The issues faced by one minority group are unlikely to be identical to those faced by another. For example, ONS data shows an overrepresentation of Asian workers in financial services, but an underrepresentation of black workers.

Another approach suggested in the consultation is a more granular reporting regime, with several pay gaps being reported across either five or 18 different ethnicity categories. However, this would exacerbate the ‘small groups’ problem discussed above, and add to the complexity of compliance for employers.

Conclusion

Legislative action on ethnicity pay reporting in the UK will either require new laws, or the amendment of the existing Equality Act to allow for secondary legislation on this issue. In either case, Brexit means that it will face a lot of competition for debate in the parliamentary timetable.

A simple copy and paste of the gender pay gap regulations for ethnicity is likely to result in dubious statistics of limited value. Whatever the underlying merits of the proposal, it is clear that a different approach is needed. An alternative approach which does not require the publication or calculation of pay gaps is more likely to yield reliable statistics.

The consultation closes on 11 January 2019.