UPDATE: On 13 July 2023, the government also published its response to consultation on ethnicity pay reporting, again confirming that the government will not be legislating to make ethnicity pay reporting mandatory at this stage.

Just over a year after the government confirmed that it would not introduce a legal requirement for employers to publish their ethnicity pay gaps, it has now published guidance for employers wishing to report voluntarily. The aim of the guidance is to develop a consistent, methodological approach to ethnicity pay reporting, which the government hopes can then lead to meaningful action.  However, the government recognises that ethnicity pay reporting is much more complex than gender pay reporting.

The guidance is in five parts:

• Introduction and overview
• Understanding and reporting your data
• Collecting ethnicity data
• Preparing your payroll data
• Making your calculations

Background

In 2018/2019 the government consulted on options for employer-level ethnicity pay reporting. Following this, the government met with businesses and representative organisations to understand the barriers to reporting and to explore what information could be published to allow for meaningful action to be taken. This data was then analysed by the government.

In May 2021, as part of its response to a Women and Equalities Committee report, the government indicated that it would be publishing a response to its consultation in due course. In September 2021, a petition to introduce mandatory ethnicity pay gap reporting was debated in the House of Commons and, separately, in October 2021, the issue was debated in the House of Lords.  In March 2022, however, the government confirmed that it would not be introducing any mandatory requirements on employers to report ethnicity pay gaps but committed to publishing guidance in the summer of 2022. This guidance has now finally been published.

What is an ethnicity pay gap?

The guidance describes an ethnicity pay gap as a measure of the difference between ethnic groups’ average earnings across an organisation or the labour market as a whole over a period of time, regardless of role or seniority. It is not a like-for-like comparison of employees of different ethnicities. Even if an employer has a fair pay and reward policy, and even if it has equal pay, it could still have a pay gap.

Methodology of reporting an ethnicity pay gap

The guidance very much follows the same methodology as the requirements for gender pay reporting.  However, unlike gender pay reporting, which involves only a comparison between two groups, employers will have to make decisions about how best to combine different ethnic groups to ensure their results are reliable and statistically sound and to protect confidentiality. Employers are encouraged to devote time and resources to this exercise and to use harmonised standards. In this regard employers are directed to additional guidance, including the Race Disparity Unit’s Standards for Ethnicity Data.

Causes of pay disparities

Employers are encouraged to scrutinise and explore the underlying causes of any pay disparities and the guidance suggests that the following questions can help employers to understand the cause of any pay gaps:

• Are some ethnic groups more likely to be recruited into lower paid roles in your organisation?
• Is there an imbalance in individuals from different ethnicities applying for and achieving promotions?
• Do people from certain ethnic groups get ‘stuck’ at certain levels within your organisation?
• Are some ethnic groups more likely to work in specific roles than other ethnic groups in your organisation, and is this reflected in pay?
• Are some ethnic groups more likely to work in particular locations, and does this have an impact on pay?
• Do employees from different ethnic groups leave your organisation at different rates?
• Do particular aspects of pay (such as starting salaries and bonuses) differ by ethnicity?

 Reporting the calculations

The guidance suggest that care should be taken in explaining the results. Any report should aim to help employers and employees understand why a pay disparity might be present and what has been – or will be – done to analyse and improve it.

Rather than relying on any single calculation for ethnicity pay reporting, the guidance recommends that employers present and consider a range of calculations as set out in the guidance, broken down by ethnicity categories. However, the privacy of individuals must be ensured.

The suggested calculations include:

• pay quarters that measure the representation of employees in different ethnic groups at different levels of pay in an organisation;
• representation of ethnic groups across the organisation as a whole;
• mean and median pay gaps that measure the difference between average earnings and bonuses in an organisation for different groups;
• proportion of employees that did not disclose their ethnicity when asked by their employer – this is one measure of the level of engagement of employees.

The guidance also recommends that a supporting narrative is included.

Employer action plan

The guidance suggests that employers may want to consider publishing an action plan that explains how they intend to address any pay gaps in their ethnicity pay figures. A good action plan should name clear, measurable targets that the employer commits to achieving within a chosen time-frame. These can relate to actions aimed at better understanding the pay statistics and addressing any unfair disparities.  Instead of setting arbitrary targets for reducing any pay gaps, employers should instead commit to addressing specific issues identified as likely causes of unfair pay gaps.

Next steps for employers

No legally required steps need to be taken following the publication of this guidance.  However, many businesses may see ethnicity pay reporting as the next step in their diversity and inclusion journey and/or the next milestone towards fulfilment of the social aspect of their Environmental Social and Governance strategy. For these businesses, as well as those who are already on the curve with ethnicity pay reporting, the guidance provides a helpful framework for managing some of the complexities and achieving a consistent approach.  With much of the methodology drawn from gender pay reporting, and with the deadline for 2023’s reports having just passed, the data already at hand could provide a useful impetus for employers to at least begin scoping out their approach to ethnicity pay reporting.   Our Employment team is able to help in this regard; please just get in touch your usual DLA Piper contact or email employment@dlapiper.com.

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