The Government has published guidance to assist employers who wish to analyse and report on their ethnicity pay data (Guidance).
Ethnicity pay gap reporting involves calculating and reporting upon whether employees in a certain ethnic group earn less or more per hour than employees of a different ethnicity. A pay gap is calculated – either across a whole workforce or for particular groups within a workforce, to help understand if certain groups are affected more than others.
In Inclusive Britain, published in March 2022, the Government confirmed that it would not legislate for mandatory ethnicity pay gap reporting (EPGR), but pledged to support employers with voluntary reporting by publishing new guidance, which had been expected last summer.
So, was the Guidance worth the wait? And why does it matter?
Why does EPGR matter?
The latest data from the ONS shows wide variations in gross earnings between different ethnic groups. Employers who analyse EPGR can identify and investigate differences in the average pay between ethnic groups in their workforce to help understand whether unjustifiable disparities exist and provide an evidence base to use to develop an action plan.
At a time when environmental, social, governance, diversity, equity and inclusion strategies are high on corporate agendas, employers need to show that they are identifying and breaking down any barriers to pay and progression within their workforce.
Since 2017 it has been mandatory for employers with over 250 employees in the UK to measure and report gender pay gaps (GPGR). Although EPGR is not yet mandatory, it is likely that it will be in the future, so employers are encouraged to make a head start now.
What does the Guidance say?
The Guidance seeks to develop a consistent and methodological approach to ethnicity pay reporting, with the aim of leading to meaningful action. Much of it mirrors the approach for GPGR, to avoid employers having to run separate processes to collect pay data for both sets of calculations.
The Guidance splits into an Introduction and four further sections containing advice on:
- 1. Collecting ethnicity pay data
Collecting ethnicity data is a key challenge for employers. In 2018, the EHRC found that half (51%) of employers said they face barriers to collecting employee ethnicity data, including data collection being intrusive and employees not wanting to share the information.
After confirming that employers should adopt the GPGR guidance on who counts as an employee, the Guidance acknowledges that collecting data on employee ethnicity can be complex and asks employers to approach this with sensitivity and transparency, by:
- asking employees to tick one option from a list to report their ethnicity, but always with the option to opt-out of answering, such as 'prefer not to say';
- using harmonised country-specific standards, which are the questions from the 2021 Census for England and Wales, the 2022 Census for Scotland or the current ethnicity harmonised standards for Northern Ireland (as employees should be reasonably familiar with these categories). For companies operating across the UK that want to take a UK wide approach, the Guidance links to using a UK harmonised approach on the GSS Harmonisation webpage.
As special category data under General Data Protection Rules, employees must be made aware of how their ethnicity data will be used and how their ethnicity data will be kept safe and secure, including ensuring that they cannot be identified from it or any analysis that is published.
- 2. Preparing Payroll Data
The advice in this part of the Guidance mirrors the approach set out in the GPGR guidance. Employers are advised to:
- determine who are full-pay relevant employees and relevant employees from their employee headcount;
- make a list of employees and their ethnicity data, plus their ordinary pay, bonus pay, and weekly working hours - and then work out hourly pay for each employee; and
- use that data to make the ethnicity pay calculations.
- 3. Making the Calculations
The Guidance includes step-by-step instructions on how to do the recommended calculations and suggests that employers carry out the following five calculations:
1. Percentage of each ethnic group in each hourly pay quarter;
2. Mean (average) ethnicity pay gap using hourly pay;
3. Median ethnicity pay gap using hourly pay;
4. Percentage of employees in different ethnic groups in the organisation; and
5. Percentage of employees who did not disclose their ethnicity – by either answering ‘prefer not to say’ or giving no answer when asked for details of their ethnicity.
If bonus pay makes up a large proportion of employee pay, the Guidance recommends that employers also calculate the:
6. Percentage of each ethnic group receiving bonus pay;
7. Mean (average) ethnicity bonus gap; and
8. Median ethnicity bonus pay gap.
Crucially, the Guidance recognises that EPGR is much more complex than GPGR and employers may have to make decisions about how best to combine different ethnic groups to both (a) ensure results are reliable and statistically sound; and to (b) protect confidentiality.
The Guidance recommends the following minimum numbers for each reporting group:
- Internal analysis: Minimum category size between 5 and 20 employees to protect confidentiality;
- If publishing the analysis: Minimum category size at least 50 employees to protect confidentiality and statistical robustness.
After calculating the minimum category size, employers should count the number of employees within each ethnic group. If any groups are below the minimum category size, some ethnicities may need to be aggregated into larger groups. Doing this appropriately requires judgement and understanding of the ethnicity of the workforce, so employers should:
1. Try to show as many ethnic groups as possible;
2. Aggregate to 5 larger ethnic groups (Asian, black, mixed, white, other) and 'prefer not to say'. Whilst this risks hiding differences between different ethnic groups, it may be the most proportionate way of avoiding the identification risk of reporting on a more granular level;
3. Where possible, avoid aggregating to 2 groups in isolation (binary reporting) because this masks nuance and detail. However, the Guidance acknowledges this may be unavoidable if employees' confidentiality would be at risk if further details were released, especially for small employers or those who have a small number of employees in certain ethnic groups.
The Guidance explains that:
- a positive percentage figure in the mean and median calculations above would reveal that, typically or overall, employees in the second ethnic group have lower pay than those in the first group;
- a negative percentage figure in the same calculations would mean that employees in the first group have lower pay or bonuses than those in the second group; and
- a zero percentage figure would mean there is no gap between the pay or bonuses of employees in the 2 groups.
- 4. Understanding and reporting the data.
Understanding why a disparity may exist is vital to determine whether and what type of action is needed. The Guidance lists questions to consider when seeking to understand the cause of the pay gap:
a. Are some ethnic groups more likely to be recruited into lower paid roles in your organisation?
b. Is there an imbalance in individuals from different ethnicities applying for and achieving promotions?
c. Do people from certain ethnic groups get ‘stuck’ at certain levels within your organisation?
d. Are some ethnic groups more likely to work in specific roles than other ethnic groups in your organisation, and is this reflected in pay?
e. Are some ethnic groups more likely to work in particular locations, and does this have an impact on pay?
f. Do employees from different ethnic groups leave your organisation at different rates?
g. Do particular aspects of pay (such as starting salaries and bonuses) differ by ethnicity?
There may be internal reasons, such as company practices, external reasons, such as location or qualification requirements, or even broader external issues, such as geographical differences in where different ethnic groups live in the UK or educational/cultural differences or interest in certain roles/sectors impacting why an ethnic group might be underrepresented in an organisation.
Employers are encouraged to conduct further research or analysis to understand the underlying reasons behind any ethnicity pay or representation gaps, including by:
- running further calculations by ethnic categories for different parts of the organisation (e.g. by job role, location/site/division, permanent or temporary, full or part-time etc);
- considering whether the company is in multiple locations, whether pay differs by location and/or the representation of ethnic groups differs by location – and comparing workforce data against local ethnicity population data.
When reporting, employers should avoid relying on a single calculation but instead present a range of calculations, broken down by ethnicity categories and including both the representation of ethnic groups in the organisation and the percentage of employees who have chosen 'prefer not to say', whilst also maintaining individual privacy.
A supporting narrative can explain the pay figures and any disparities, wider workforce statistics and efforts already undertaken/underway to help employers and employees understand why a pay disparity may exist.
An action plan with clear targets within a chosen time period can send a strong signal about your commitment to understanding and addressing any unfair ethnic disparities, potentially attracting a wider pool of potential recruits and improving workplace culture by fostering a sense of fairness and inclusivity. This could include actions to:
- improve the evidence base (to encourage more employees to disclose their ethnicity data); and
- obtain data on recruitment/progression and consider the legalities of hiring policies and practices targeted to employ people from certain ethnicities (including consulting the recently published government positive action guidance).
In 2020, a survey of more than 100 employers found that 67% collect ethnicity data (up from 53% in 2018), 23% calculate their ethnicity pay gap, and 40% of these published it voluntarily. However, in 2021, an analysis of company pay gap disclosures by HR DataHub, found just 64 UK organisations published their ethnicity pay gap. This was down from 129 in 2020 and even lower than 2019 when 98 organisations reported their data. Since HR DataHub started collecting data on this in 2018, just 170 organisations have at some point reported their ethnicity pay gap, and, of these, only one in four have reported their data every year since then.
Clearly, there is more to be done to encourage wider data gathering and EPGR. The Guidance adopts a sensible approach by following GPGR as far as is possible whilst not shying away from addressing the more complex issues that apply to EPGR.
Labour have pledged to make EPGR mandatory if they get into power at the next general election in 2024. Employers who want to make meaningful progress in diversity, equity and inclusion are now equipped to get ahead of the curve by engaging with the proposed methodology outlined in the Guidance before it becomes law.
Senior Knowledge Lawyer, Employment & Immigration