Ethnicity pay gap reporting – key focus areas for employers

In this article, we take a closer look at recently published government guidance on voluntary ethnicity pay gap reporting.

Reporting on ethnicity pay data

In March last year the government confirmed that it would not be making ethnicity pay gap reporting mandatory at the current time. Instead it committed, in its ‘Inclusive Britain’ policy paper, to supporting employers with voluntary reporting. The new government guidance published in April forms part of that support and aims to give employers the tools to identify, analyse and tackle ethnicity pay gaps. It is not statutory and is not binding on employers who chose to voluntarily report ethnicity pay gap data.

The world of work has moved on since the government consultation on ethnicity pay gap reporting in 2019. ESG strategies are now much higher up the corporate agenda and there is an increased focus on employer diversity and inclusion initiatives with pressure on employers to show they are identifying and tackling any barriers. Many already voluntarily report on their ethnicity pay gap data and the steps they are taking to address any disparities, mindful, in part, that reporting may become mandatory at some point in the future.

Ethnicity pay gap data is often reported alongside gender pay gap information, however, the new government guidance acknowledges that ethnicity pay gap reporting is more complex for a number of reasons:

• Many employers do not hold employees’ ethnicity data. When asked, employees may be reluctant to disclose their ethnicity and where limited information is available, it’s hard to produce results from which meaningful conclusions can be drawn.
• Gender pay reporting involves a comparison between two groups, but ethnicity pay gap reporting may require a comparison between many different ethnic groups, depending on how diverse a workforce is.
• If there are only a few employees of a particular ethnic group within the workforce, publication of granular pay calculations would risk breaching employee confidentiality.

The guidance

‘Ethnicity pay reporting: guidance for employers’, which can be found here, aims to help employers tackle these complexities and to provide a consistent approach to measuring pay differences. It has 5 sections which provide guidance on how to:

• collect ethnicity data;
• gather the required payroll data;
• make ethnicity pay calculations;
• analyse and understand the results; and
• develop an action plan to address any disparities identified.

We have reviewed the guidance and have identified four key areas of focus for employers either currently reporting or planning to report, on their ethnicity pay gap:

1. Obtaining comprehensive data

To get the most benefit from any pay gap analysis, you need to collect comprehensive data, so success hinges on employee confidence in and engagement with, the process. The guidance advocates a sensitive and transparent approach which it envisages will, in part, be achieved by ensuring there is an option to opt-out (for example, a “prefer not to say’ option).

Communication with your employees is crucial; you should explain why you are collecting the data, how it will be used and why ethnicity pay reporting is useful. The guidance suggests emphasising how analysing pay information can help you identify and investigate any disparities in pay between different groups and then use that information to feed into an action plan to tackle them. Being open and transparent may help to reduce the numbers who select the ‘prefer not to say’ option.

The guidance highlights the importance of complying with the General Data Protection Regulation (GDPR) when processing data about employees’ ethnicity. You should assess the GDPR implications of asking employees for their ethnicity data (including identifying a lawful basis for processing that data). The guidance recommends that you provide employees with a description of how their ethnicity data will be used, how it will be kept safe and secure, and how you will ensure that no individual will be identifiable from the data or analysis you publish.

2. Identifying ethnic groups

The guidance suggests that, when asking about ethnicity, you should use questions from the 2021 Census and, to the extent possible, the ethnicity classifications in the ethnicity harmonised standard (available here). As these classifications are used in the Census and other government data collection, employees should be familiar with the categories used.

It is critical from a GDPR and confidentiality perspective, that no individual is identifiable from any ethnicity pay gap data you report. The guidance suggests that you do not publish or report statistics for any ethnic group with small numbers in it to avoid that happening. Using larger data sets should also improve the robustness of your analysis – in a very small data set, minor fluctuations (for example, a single employee leaving) can have a significant impact.

The guidance recommends the following minimum numbers for each reporting group:

• Where analysis is for internal use only (where the primary concern is confidentiality), the minimum number in any reporting group should be between 5 and 20; and
• Where you are publishing your analysis (so the concern is for both confidentiality and statistical robustness), the minimum number should be 50.

Where these minimum group sizes mean that reporting cannot be done across all 17 ethnicity groups, the guidance gives two options:

The first (which appears to be the guidance’s preferred option) is to use the following aggregated groups:

• Asian
• black
• mixed
• white
• other
• prefer not to say

The second option is to use the binary approach of aggregated groups of white/all other or white British/all other. The guidance suggests this approach may be appropriate for smaller employers or where the employer operates in a geographic area which has limited representation from some ethnic groups. If this approach is adopted, the guidance suggests keeping that under review with a view to reporting on a more granular level in future years.

The guidance acknowledges that this richer data will better inform action plans.

3. Deciding which calculations to report

You should think carefully about which calculations you will include in your analysis or in any published data. The guidance warns against looking at some of the measures (such as the mean or median ethnicity pay gap) in isolation because they may provide only limited information on the barriers or challenges your workforce faces.

The guidance recommends using the following five measures:

• Percentage of each ethnic group in each hourly pay quarter;
• Mean (average) ethnicity pay gap using hourly pay;
• Median ethnicity pay gap using hourly pay;
• Percentages of employees in different ethnic groups in your organisation; and
• Percentage of employees who did not disclose their ethnicity – those who answered ‘prefer not to say’ or did not respond.

In addition, if bonus pay makes up a large proportion of employee pay, the guidance recommends that employers calculate the percentage of each ethnic group receiving bonus pay and the mean (average) and median ethnicity bonus pay gap.

The guidance explains how to carry out the calculations, giving examples. Unsurprisingly, these reflect the methods used for gender pay reporting. The guidance suggests presenting the mean hourly pay gaps between each of the ethnic groups in tabular format. Fewer calculations will be required if you are using the binary approach.

Larger organisations may wish to analyse and potentially publish more granular data; for example site specific data (to allow for geographical differences) or role specific data (which might identify barriers to progression or retention).

Being consistent, from year to year, in the data you analyse and publish will allow you to compare data meaningfully and identify the impact of any remedial measures you take.

4. Diagnosing the causes of any gap and implementing an action plan

As the guidance makes clear, having an ethnicity pay gap does not mean pay is unequal. Unequal pay arises when employees performing equal work do not receive equal pay. A pay gap, on the other hand, is a measure of the difference between different ethnic groups’ average earnings even where they are receiving equal pay and can arise where the proportions of different ethnic groups are greater in the lower pay quartiles than in higher ones. This is something you will wish to make clear, if you identify that your organisation does have an ethnicity pay gap.

The next step is to understand the causes of the gap so that you can identify what actions you can take to address it. Anonymous staff surveys can help you gain an insight into barriers or perceived barriers to career development, and recruitment and progression data can help you can spot any trends.

There may be a variety of internal and external factors contributing to any pay disparity. The guidance recommends asking a series of questions to understand the cause of any ethnicity pay gap, including:

• Are some ethnic groups more likely to be recruited into lower paid roles in your organisation?
• Is there an imbalance in individuals from different ethnic groups applying for and achieving promotions?
• Are some ethnic groups more likely to work in particular locations, and does this have an impact on pay?

Asking these questions will help you develop a narrative to accompany your published ethnicity pay data, which could include an explanation of the factors that could be causing or contributing to any disparities you have identified. The narrative can set the data into a broader context and can include relevant external factors that could be contributing to your pay gap. For example, the guidance notes that geographical differences in where different ethnic groups live in the UK can have an impact on employers’ ethnicity pay gaps. If your data suggests this is a factor, the guidance suggests comparing your data to the local ethnicity population data available from the 2021 Census which will give you better insight than comparing against national averages. The guidance notes that looking at the data at a local level could help employers work out if that reflects the local populations or if there are other factors driving differences in pay. 

As well as detailing the potential reasons for any disparity, your narrative should describe the steps you are currently taking and any future plans to tackle any disparity and to remove any barriers to diversity. The guidance encourages you to “identify targeted and effective actions that will have a real impact on any ethnic disparities in pay in your organisation” and to commit to measurable targets achievable within a set time frame. Your focus should be on addressing specific issues that you have identified as likely causes of any pay disparity. This could include details on changes to your recruitment processes or promotion routes, and any particular initiatives you have in place to encourage progression of individuals from different ethnicities within your organisation. When reviewing your recruitment and promotion processes, you might want to review the government’s newly published guidance on positive action. That guidance, which can be found here, looks at when an employer can treat those with a protected characteristic more favourably than others, including where they are seeking to enable or encourage those with the protected characteristic to overcome or minimise a disadvantage or to take part in a particular activity.

There are many good reasons for reporting ethnicity pay gap data. If you do decide to voluntarily report, it is worth considering, at an early stage, how you will address each of the above issues to make sure you get the richest and most useful data. Getting good data will give you the platform from which to take action to address any disparities that you identify, and to remove barriers to recruitment, promotion and progression.

We have considerable experience of advising employers on pay reporting obligations. If your organisation is considering reporting on ethnicity pay gap data and you would like advice and/or want to know more about the approaches you could take, please contact Luke Bowery or Annelise Tracy Phillips.

Disclaimer

This briefing gives general information only and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, you should not rely on it as legal advice. We do not accept any liability to anyone who does rely on its content.