Ethnicity Pay Gap Reporting – an essential part of your ESG strategy?

Since the introduction of mandatory gender pay gap reporting in 2017, which compels companies with over 250 employees in the UK to analyse and publish their gender pay gaps, there have been calls for similar legislation for ethnicity pay gap reporting. However, despite evidence that black and ethnic minorities face multiple disadvantages in the workplace and pressure from campaign groups, the Government has stopped short of making ethnicity pay gap reporting compulsory.

In a measure designed to support employers who wish to voluntarily report on pay disparities, the Department of Business and Trade has recently published guidance on ethnicity pay gap reporting in line with its strategy to promote a more “Inclusive Britain” and to help employers “to build transparency and trust among employees.”

 

Direction of Travel

The very fact that the Government has published guidance on voluntary ethnicity pay gap reporting suggests the direction of travel in this area.
Businesses increasingly recognise the importance of having an Environmental, Social and Governance (“ESG”) strategy and its impact on culture, values, brand and, ultimately, profit. 
The “S” of any ESG strategy relates to how a company treats its employees, clients and suppliers. Diversity and Inclusion is, of course, a key component of this. For many businesses, creating fair inclusive environments which reflect the diversity of society is fundamental to the social aspect of their strategy.
Even without legislation forcing compliance, the majority of employers recognise that reporting pay gap disparities and addressing their underlying causes is a meaningful way in which they can demonstrate their commitment to this cause and drive positive change.

How does the guidance help employers?

The new guidance recognises that some employers may wish to undertake ethnicity pay gap reporting as part of an internal exercise. However, some may wish to publish their results externally. It supports both options with different recommendations depending on which approach is taken.
The guidance recommends that if an employer wishes to publish its ethnicity data, an ethnic group should have a minimum of 50 employees to ensure that the data set is robust, and employees are not identifiable. 
For internal reporting only, the guidance recommends that a minimum category size of between 5 and 20 employees should be used.

 

Methodology 

The aim of the guidance is to create a common and consistent approach. It largely mirrors the gender pay gap reporting regulations and suggests that a comparison is made between the mean and median pay, and bonus gaps and the representation of ethnicities across pay quartiles. However, the guidance recognises that ethnicity pay gap reporting is far more complex than gender pay gap reporting, which requires the comparison of two groups, whereas ethnically diverse employers will potentially need to undertake numerous comparisons across multiple ethnic groups.
The guidance advises against comparing all ethnic groups against white British employees as the statistics will not be meaningful. Instead, the Government recommends that employers should attempt to analyse the disparities between as many ethnic groups as possible using the self-classification system used by the Government for the 2021 census, which contains 17 ethnic groups.

Obtaining the data

The other problem anticipated by the Guidance is that employees may not wish to disclose their ethnicity and, of course, are not obliged to do so. The guidance suggests that any collation of data is handled “with sensitivity and transparency" and employers are "encouraged to devote time and resources to this part and to seek expert advice as needed".
The starting point for employers is to send out a questionnaire or survey to employees in order to gather this data on a voluntary basis and encourage employees to provide this information.

What about GDPR?

Personal data revealing racial or ethnic origin is considered special category personal data and is subject to additional protection under the GDPR. This means that employers require a lawful basis for collecting and processing the data.

As there is no legal obligation to rely upon as the reporting is not mandatory, the most relevant ground is the pursuit of a legitimate interest which requires the employer to undertake a balancing exercise. This involves considering the impact of the processing on employees against the interest being pursued by the employer. In some cases, this may mean a data protection impact assessment is required.  Transparency and communication are, of course, key to ensure employees are fully aware of the purpose and intended benefits of analysing the data and to encourage full participation.

 

What about employees that refuse to provide their data?

Some employees will respond with “prefer not to say” and will not wish to disclose their ethnic background, some will simply not respond at all. The guidance recommends identifying the proportion of employees in each category rather than including all in one category as this will provide important context for the statistics.

What if a pay difference is revealed?

If a pay difference is found, employers are encouraged to analyse the reasons and consider what steps should be taken to address the causes of the disparity. Any action plan should set out clear achievable objectives, a deliverable timescale and an explanation of how success will be measured. The Government advises that, where possible, the approach and the calculations should be checked with analysts.

As with gender pay gap reporting, employers can also choose to publish a supporting narrative that includes a contextual explanation and reasons for the pay gap.

The future

The government is launching a new “Inclusion at Work” panel to support employers with action plans. The panel’s work will feed into a new “Inclusion Confident Scheme” which employers will be able to join on a voluntary basis to demonstrate their commitment to diversity and inclusion.

 

What should employers do now?

Whilst ethnicity pay gap reporting is not yet mandatory, prudent employers should consider voluntary pay gap reporting as a strategic opportunity and demonstration of their continued commitment to any ESG action plan.
Given the current direction of travel and the Labour party’s published intention to impose compulsory reporting if it forms a government, companies are advised to take steps now to understand and analyse their ethnicity pay data, so that they are well placed to address any disparities if further legislation is introduced in the future. 

Need advice and assistance?

We work with businesses to develop Diversity and Inclusion strategies, analyse and prepare gender pay gap and ethnicity pay gap reports, identify areas for improvement and support with implementation. Please contact Claire Taylor-Evans, Senior Associate on [email protected] for further information.