Government Guidance on Ethnicity Pay Gap Reporting

In 2017, the Government introduced mandatory gender pay gap reporting for all companies with over 250 employees. Since then, figures have consistently been used as a base line for identifying potential systemic discrimination within organisations and started to decline. The gender pay gap has, albeit slowly, started to decline according to an analysis by PwC.  

Ethnicity pay gap reporting was therefore the next logical step in combatting inequality of contractual terms in the workplace. A government consultation, set up with the intention that mandatory reporting would be introduced, closed in January 2019. However, the impact of the Covid-19 pandemic combined with the Black Lives Matter movement saw a sharp increase in its discussion in 2020, leading to a public petition receiving over 130,000 signatures to make ethnicity pay gap reporting mandatory in 2020, and before the result of the consultation was published. Despite this, a HR DataHub study found that only 64 organisations voluntarily disclosed their ethnicity pay gap data in 2021, down from 129 in 2020 and 98 in 2019. 

In spite of the mounting pressure, the government reneged on the plans for mandatory reporting for ethnicity pay gaps in 2022 as part of the Inclusive Britain consultation response, citing the need to avoid putting additional pressure on employers in the wake of the Covid-19 pandemic. They did, however, promise to deliver guidance for employers who wish to report on a voluntary basis. The “Ethnicity pay reporting: guidance for employers” (“the Guidance”) was delivered this year (at a lengthy 66 pages), and we summarise some of the key contents in this blog. 

What does the Guidance cover?

Generally, the government guidance is that employers should mirror the gender pay gap reporting regime, but note that amendments are required given that ethnicity pay reporting is much more complex than gender pay reporting due to the number of potential ethnic groups involved. The Guidance therefore covers five main topics: 

1. How to collect employees’ ethnicity data.

2. How to gather the required payroll data for ethnicity pay calculations. 

3. How to make ethnicity pay calculations. 

4. How to analyse and understand the results of the calculations.

5. How to develop an action plan to address any disparities in pay identified by the calculations. 

1. Collecting employees’ ethnicity data

The Guidance acknowledges the difficulty employers can face in collecting the necessary data. It notes that the Gender Pay Gap Guidance should be adopted in determining who can be considered an “employee”. To gather data, the Guidance suggests using the harmonised country-specific standards, which are the questions from the 2021 Census for England and Wales. For companies operating across the UK that want to take a UK wide approach, the Guidance suggests employers follow the approach on the UK harmonised approach on the GSS Harmonisation webpage. 

2. Gathering payroll data 

This section of the Guidance mirrors the Gender Pay Gap Guidance, such that employers are advised to make a list of employees and their ethnicity data, plus their ordinary pay, bonus pay, and weekly working hours and use this information to work out the hourly pay. 

3. Ethnicity pay calculations

Unlike the Gender Pay Gap calculations, given the number of groups requiring analysis, there is more than one calculation involved. The calculations include: 

1. Pay quarters that measure the representation of employees in different ethnic groups at different levels of pay in an organisation;

2. Representation of ethnic groups across the organisation as a whole;

3. Mean and median pay gaps that measure the difference between average earnings and bonuses in an organisation for different groups; and

4. Proportion of employees that did not disclose their ethnicity when asked by their employer.

If bonus pay makes up a large proportion of employee pay, the Guidance recommends that employers also calculate the:

5. Percentage of each ethnic group receiving bonus pay;

6. Mean (average) ethnicity bonus gap; and

7. Median ethnicity bonus pay gap.

Category sizes

The Guidance provides minimum category sizes for gender pay gap reporting, in an effort to avoid incorrect conclusions being drawn from sample sizes that are too small to give an accurate overview of the workplace. For internal reports, the Guidance recommends that there be a minimum category size between of 5 and 20 employees. For external reports, the Guidance recommends that there must be a minimum of 50 employees. These figures are also to guard against individuals being capable of identification where numbers are too low. 

The Guidance strongly recommends that employers do not report on a binary basis, i.e., white and ethnic minorities. Ideally, employers would be able to report gaps by all of the 17 ethnicity groups. Where such grouping would prevent reporting, the government suggests that five broad categories be used, including white, black, Asian, mixed and other but emphasises that the employer’s understanding of the workforce should be used to decide what broader categories are most appropriate. 

Incomplete Data

Where employees do not disclose their ethnicity, they should not be included in the calculations, but the percentage abstaining from disclosure should be presented to give context for the figures represented. 

4 Reporting the pay gap

The Guidance suggests that where pay gaps are identified, employers consider the following questions: 

• Are some ethnic groups more likely to be recruited into lower paid roles in the 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 the organisation?

• Are some ethnic groups more likely to work in specific roles than other ethnic groups in the 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 the organisation at different rates?

• Do particular aspects of pay (such as starting salaries and bonuses) differ by ethnicity?

When reporting the data, the Guidance suggests including a narrative with such considerations and why the employer believes the disparities exist. This could includer wider factors such as geographical location or internal figures such as qualification requirements. 

Where ethnicity pay gaps are identified, employers are strongly encouraged to conduct further calculations to reflect specific parts of the organisation, such as by job role, department, full or part-time work etc. 

Action plans

A key part of the Guidance suggests to employers that they publish an action plan, explaining how any unfair pay gaps will be addressed. The Guidance states that a good action plan “should name clear, measurable targets that you commit to achieving within a chosen time frame. These can relate to actions aimed at better understanding your pay statistics and addressing any unfair disparities.” 

Next Steps

It remains to be seen if the Guidance will have a positive influence on organisations choosing to voluntarily report, but it is clear that more needs to be done to encourage ethnicity pay gap reporting. Labour have also pledged to make ethnicity pay gap reporting mandatory if successful in the next general election, so it is unlikely that this will be the last discussion on the topic. 

Farore Law is a leading boutique law firm that has a wealth of experience in advising on pay gap reporting. Farore Law is a strong advocate for equality of opportunity, and we boast considerable experience in advising a wide range of companies – from multinationals, barristers’ chambers to university departments – on proper equality and diversity practice.

Please contact us if you require legal advice.