Regulations taking effect this year will oblige larger employers in the private sector to report on their gender pay gap. There will be similar regulations covering public sector employers operating in England.
The Regulations will require employers to publish the difference between the median and mean average hourly rate of pay paid to male and female employees; the difference between the median and mean average bonus paid to male and female employees; the proportions of male and of female employees who receive bonuses; and the relative proportions of male and female employees in each quartile pay band of the workforce.
In the private sector, employers’ first gender pay reports will have to be published no later than 4 April 2018, based on hourly pay rates as at 5 April 2017 and bonuses paid between 6 April 2016 and 5 April 2017. The public sector regulations will require the first pay reports to be published no later than 30 March 2018, based on hourly pay rates as at 31 March 2017 and bonuses paid between 1 April 2016 and 31 March 2017.
In this note we answer some frequently asked questions about the new rules.
WHICH PRIVATE SECTOR EMPLOYERS ARE IN SCOPE?
In the private and voluntary sectors, the new regime will apply to employers in Britain with at least 250 employees on the ‘snapshot date’. The snapshot date is 5 April in each year. Group companies report only in respect of their own employees and if a group company has fewer than 250 employees of its own it does not have to report at all.
In many cases, it will be obvious whether or not an employer has to comply with the regulations. In some cases, however, it will be less straightforward, particularly for employers who use casual staff.
WHICH PUBLIC SECTOR EMPLOYERS ARE IN SCOPE? The new duty will apply only to public authorities in England (including relevant cross-border authorities in England and Wales) and certain public authorities operating across Great Britain in relation to non-devolved functions.
The new regime will take effect as an amendment to the Specific Duties Regulations made under the Equality Act 2010 and so will apply to public bodies that are subject to those existing regulations. The government has said it proposes to apply the new reporting obligations only to public bodies with at least 250 relevant employees.
The new rules will sit alongside the existing duty for public bodies operating in England with 150 or more employees to publish information on the diversity of their workforce, in order to show how they are complying with the public sector equality duty. Although gender pay gap reporting is not mandatory under this existing duty, the Government Equalities Office and Equality and Human Rights Commission issued guidance at the time the duty was introduced making it clear that employers should consider including gender pay gap information in the data that they publish. This duty will remain in place but the reporting date will be brought into line with the new pay gap reporting duty.
Public bodies in Scotland with more than 20 employees are already required to publish gender pay gap data. In Wales, public bodies are required to have due regard to the need to have equality objectives that address the causes of pay differences, including those relating to gender, between their employees.
WHAT INFORMATION MUST BE PUBLISHED? Affected employers will have to report annually:
- the difference between the mean hourly rate of pay of relevant male employees and that of relevant female employees;
- the difference between the median hourly rate of pay of relevant male employees and that of relevant female employees;
- the difference between the mean bonus pay paid to relevant male employees and that paid to relevant female employees;
- the difference between the median bonus pay paid to relevant male employees and that paid to relevant female employees;
- the proportions of relevant male and female employees who were paid bonus pay in the relevant 12 month period; and
- the proportions of relevant male and female employees in four notional quartile pay bands.
WHICH EMPLOYEES ARE COUNTED? In determining whether an employer is within scope of the regulations, all employees who are employed on the snapshot date (5 April in the relevant year) are counted.
All such employees are also taken into account when determining differences in bonus pay and the proportions of relevant male and female employees who were paid bonuses.
In working out mean and median hourly rates of pay and the proportions of male and female employees in notional pay bands, however, the only employees who are counted are those who are both employed on the snapshot date and who are not paid at a reduced or nil rate during the relevant pay period due to being on leave. So someone who is on maternity leave, for example, would only be counted in these calculations if they receive full pay throughout the relevant pay period.
The term ‘employee’ is defined in the Equality Act 2010 as someone who works under a contract of service, a contract of apprenticeship or a contract to do work personally. This could encompass some self-employed, non-PAYE workers who are not on the employer’s payroll. With a view to avoiding administrative difficulties, the regulations make it clear that employers need not include data about such self-employed workers if it is not reasonably practicable to obtain the relevant data. Partners are also excluded from the definition of employee for these purposes.
The regulations do not say whether employees who work wholly or partly outside Great Britain should be counted, although this may be covered in guidance to be published in due course.
HOW SOON WILL EMPLOYERS HAVE TO PUBLISH THEIR GENDER PAY GAP DATA? Employers’ first gender pay reports will have to be published no later than 4 April 2018, based on hourly pay rates as at 5 April 2017 and bonuses paid between 6 April 2016 and 5 April 2017.
HOW IS THE DIFFERENCE IN MEAN HOURLY RATES OF PAY DETERMINED? The difference in mean hourly rates of pay for relevant male and female employees is expressed as a percentage of the mean hourly rate of pay for relevant male employees.
Example: if the average hourly rate of pay is £9.48 for relevant female employees and £15 for relevant male employees, the difference between in the mean hourly rate of pay is 36.8%. This figure represents the difference between men's and women's average hourly rates (£5.52) as a percentage of men's average hourly rate of pay.
HOW IS THE DIFFERENCE IN MEDIAN HOURLY RATES OF PAY DETERMINED?
The median hourly rate of pay of a group of employees can be calculated by listing all relevant employees in the group in order of their earnings and identifying the hourly rate paid to the individual who appears in the middle of the list. So if there are 501 relevant female employees in a group, median earnings for that group would be represented by the amount paid to the 251st highest earner. If there are 500 employees in a group, median earnings for that group would be represented by the average between the 250th and 251st highest earners.
The difference in median hourly rates of pay for relevant male and female employees is expressed as a percentage of the median hourly rate of pay for relevant male employees.
Example: if the median hourly rate of pay is £10 for relevant female employees and £15 for relevant male employees, the median gender pay gap is 33.3%. This figure represents the difference between men's and women's median hourly rates (£5) as a percentage of the median hourly rate of pay for men.
WHAT EARNINGS ARE TAKEN INTO ACCOUNT WHEN CALCULATING THE MEAN AND MEDIAN HOURLY RATES OF PAY? The figures are based on gross ‘ordinary pay’ and ‘bonus pay’ paid in the pay period spanning 5 April. The length of the pay period depends on how frequently the particular individual is usually paid, be it weekly, fortnightly, monthly or a shorter or longer period.
‘Ordinary pay’ includes: basic pay; allowances (other than payments to reimburse necessary expenses); shift premium pay; piecework pay; and pay for leave. It does not include: overtime pay; pay in lieu of leave; benefits in kind; redundancy pay; and other payments referable to termination.
The definition of bonus pay is considered in more detail below.
HOW IS THE HOURLY RATE OF PAY CALCULATED? A relevant employee’s hourly rate of pay is calculated, broadly, by dividing the employee’s weekly pay for the reference period by the number of working hours in a week for that employee (excluding overtime).
An employee’s weekly pay is calculated as follows:
- Add together: (a) all ordinary pay paid during the relevant pay period (excluding any payments that would normally have fallen due in a different pay period); and (b) any bonus pay paid during the relevant pay period, pro-rated where the bonus pay is paid in respect of a longer period (as would be the case for, say, an annual bonus that is paid on 5 April).
- Multiply that total by seven.
- Divide that amount by however many days are in the relevant pay period for that employee.
There are detailed rules setting out how weekly working hours are to be calculated for employees whose hours are not always the same from one week to the next and for pieceworkers.
HOW ARE THE DIFFERENCES IN MEAN AND MEDIAN BONUS PAY DETERMINED? The differences in mean and median bonus pay for male and female employees are expressed as percentages of the mean and median bonus pay for male employees.
Only those employees who actually received bonus pay during the period of 12 months ending on the 5 April snapshot date, and who are still employed on the snapshot date, are taken into account in these calculations. Any bonus payments paid to such employees in the relevant 12 month period are factored in.
Median bonus pay can be determined using the method explained above in relation to hourly rates of pay ie by identifying the mid-point when all employees in the relevant group are listed in order of the amount of bonus pay they are paid.
HOW ARE THE PROPORTIONS OF MEN AND WOMEN WHO RECEIVED BONUS PAY TO BE DETERMINED? The proportion of male and female employees who received bonus pay are expressed as percentages.
To work out the appropriate figures, divide the number of male employees who were paid bonus pay in the period of 12 months ending on the 5 April snapshot date by the total number of male employees and then multiply that figure by 100. Then perform the same calculation for female employees. Only those still employed on the snapshot date are taken into account for these purposes.
WHAT IS BONUS PAY? ‘Bonus pay’ means remuneration that (a) is in the form of money, vouchers, securities, securities options, or interests in securities, and (b) relates to profit sharing, productivity, performance, incentive or commission. It does not include ordinary pay, overtime pay, redundancy pay or payments referable to termination.
The regulations make it clear that remuneration in the form of shares and share options count as bonus pay at the time when the shares or share options concerned give rise to a liability to income tax and that the value to be included in the calculation in respect of the shares or share options is the amount that is subject to income tax.
HOW ARE THE QUARTILE PAY BANDS WORKED OUT? Employers need to divide their overall pay range into four notional pay band and report the gender split (as a percentage) in each of those bands. Each pay band needs to contain the same number of employees (so far as is possible) ie a quarter of the workforce.
To identify the pay bands:
- Compile a single list of all relevant employees (male and female), ranked in order of increasing hourly pay. As noted above, the relevant employees are those who are employed on the 5 April snapshot date and who are not paid at a reduced or nil rate during the relevant pay period due to being on leave.
- Split the list into four groups, with each group containing the same number of employees (so far as possible) ie a quarter of the workforce. This can be done by drawing a line a quarter of the way down the list, a second line half way down the list and a third line three-quarters of the way down the list (these dividing points are known as ‘quartiles’).
- The group containing the lowest earners is the lower quartile pay band; the next group is the lower middle quartile pay band, the next is the upper middle quartile pay band and the fourth group, containing the highest earners, is the upper quartile pay band.
For each pay band, employers need to report the gender split ie what percentage of employees in the pay band are women and what percentage are men.
There is no obligation to set out the pay range covered by each of the four bands when publishing the pay data.
WHERE MUST THE INFORMATION BE PUBLISHED? Employers will need to publish their pay data on their website in a manner that will be accessible to employees and the public for at least three years. The information will have to be accompanied by a statement confirming its accuracy, signed by a director, or equivalent.
In addition, employers will have to publish the data, and the name and job title of the person who signed the statement of accuracy, on a government-sponsored website.
MUST/SHOULD PAY GAPS BE EXPLAINED? Although there is no legal obligation to publish an explanation, many employers are concerned that highlighting pay differences in this way could damage their reputation for fair treatment or undermine efforts to redress under-representation at certain levels of their workforce. Many will, therefore, be keen to provide additional information, explaining the context for any pay gap, to give a more nuanced and accurate picture, even though this is not required by the legislation.
Employers should also formulate a communications plan well before they publish any data, to ensure they present information in a considered way and are ready to respond to challenging questions from employees, unions and the media.
WHAT HAPPENS IF AN EMPLOYER DOES NOT COMPLY? For private sector employers there are no specific penalties for non-compliance. Instead the incentive to comply with the new rules comes from the risk of adverse publicity and reputational damage. Defaulters are likely to be easy to identify and unions, campaigners and the media could well be keen to name and shame those who try to keep their gender pay record under wraps, particularly in the case of well-known brands and those competing for work in the public sector. Indeed the Equality and Human Rights Commission could well decide to investigate an employer who does not appear to have complied and the Government has said it may decide to publicise the identities of defaulters.
Brand values, corporate reputations, goodwill, share prices and, importantly, the ability to recruit and retain key talent are all at risk if businesses do not take this seriously. Furthermore, organisations failing to engage with gender pay gap reporting risk losing work, reflecting increasing demands for gender equality data as part of tendering processes.
Public sector employers who do not comply with their new duties also risk adverse publicity and reputational damage. In addition, the Equality and Human Rights Commission will be charged with monitoring compliance by public bodies and will be able take enforcement action through the courts if necessary.
IS THERE A RISK OF EQUAL PAY CLAIMS? While gender pay gaps and equal pay gaps are not the same, there is clear potential for one to affect the other. The recent spike in public sector equal pay claims was spurred by the introduction of new pay and grading systems, which drew attention to historical gender pay anomalies including unequal bonus arrangements. There is a risk that gender pay gap reporting, particularly where significant differences are reported, could similarly focus attention on pay differentials and possibly lead to equal pay claims. This broader implication of gender pay gap reporting should be considered as part of risk assessment planning.
WHAT SHOULD EMPLOYERS BE DOING NOW?
- Now the government has published the final draft regulations, ensure you can collect the range of data through your payroll systems as a first step towards analysing it.
- Review all current pay practices across your organisation in order to understand the differentials which may exist. Be proactive – doing nothing is not an option. Understanding your pay arrangements will help you manage and present information meaningfully and in context.
- Consider gender pay gaps which exist on a departmental/geographical/functional level and compare these with the composition of your workforce.
- Analyse the rationale behind your current arrangements to identify potential risk areas.
- If pay gaps are due to underrepresentation of women at more senior levels, look critically at what you are doing to attract, recruit, develop and retain female employees.
- Prepare a communications plan so that you are better placed to present information in a considered way and are ready to respond to challenging questions from employees, unions and the media.