Private employers with 250 or more employees will be required to publish gender pay gap information by the end of April 2018 and annually thereafter. While publication is some way off, employers need to ensure they have their houses in order now with bonus payments paid from 1 May 2016 needing to be included in the 2018 reports.
The principle that male and female colleagues should receive equal pay for equal work has been enshrined in law since the Equal Pay Act 1970 was brought into force, but the last set of data published by the Office of National Statistics placed the gender pay gap at 19.1%, with much higher gaps in certain industries. Following the 'Closing the Pay Gap' consultation which ran over the summer, the Government has now published draft regulations for final comment by 11 March.
Regulations are scheduled to come into force from 1 October 2016, with the first reports needing to be published by the end of April 2018 based on pay data as at 30 April 2017. While the 'pay' information will relate to a 'snapshot' as at 30 April 2017, the specific requirement for disclosing 'bonus pay' information (which includes commission) will cover the 12 month period from 1 May 2016 to 30 April 2017.
Employers may be feeling daunted by the prospect and potential cost of gathering the data required under the regulations, and by what they might unearth in the process. Although there are no civil or criminal penalties for non-compliance with the regulations, reporting will nevertheless be 'mandatory', and organisations may have concerns about the reputational damage of non-compliance as well as pressure from the workforce, trade unions or the media.
Here, our employment and equalities experts unpack the 'who, when, where and what' of the draft regulations and their potential impact on employers.
Who will be caught by the regulations?
The regulations will apply to private and voluntary sector employers based in England, Wales or Scotland, with 250 or more 'relevant employees' on the 'relevant date'.
250 employee threshold
For the purposes of the 250 employee threshold, a relevant employee is:
- Someone "who ordinarily works in Great Britain and whose contract of employment is governed by UK legislation".
- The reference to 'contract of employment' appears to limit the application to 'employees' rather than the wider category of 'workers', generally covered under the Equality Act. Whether this is intended or a drafting error is currently unclear and one to watch out for in the final version of the regulations.
- On the face of the regulations, it appears that that it is only 'relevant employees' of the employer who count towards the threshold, not those employed by group companies. However, the Government has indicated that it will clarify its position in further guidance.
On the face of the draft regulations alone, public sector employers do not appear to be excluded: 'relevant employer' is simply defined as "a person who has 250 or more relevant employees on the relevant date". However, the regulations are made in exercise of powers contained in section 78 of the Equality Act 2010 which expressly excludes public sector employers.
Back in October, the Government indicated that the gender pay gap reporting obligations will be extended to cover public sector employers under separate legislation (section 153 of the Equality Act would enable this). Future regulations are expected and of course public sector employers are already subject to the public sector equality duty.
In future, private sector contractors are likely to be required to confirm compliance with the new reporting duty when tendering for public sector contracts.
When are the 'relevant' employees counted?
The headcount is taken on 30 April 2017, and every subsequent anniversary of that date. So for employers whose headcount fluctuates throughout the year it is only the employees employed on 30 April that will count towards the threshold.
When and where will you need to publish?
If your organisation is caught by the regulations, you will need to publish an annual gender pay gap report by April 2018 and annually thereafter.
The report must be accompanied by a statement signed by a director or equivalent, published on your searchable UK website, and remain there for three years. The report will also need to be uploaded to a Government designated website.
What will you need to publish?
Employers will have a duty to publish information relating to pay and bonus pay. To ensure compatibility with national gender pay gap figures, the definition of pay reflects that used by the Office of National Statistics in the Annual Survey of Hours and Earnings.
In relation to pay, your report must include the following:
- The mean gap (as a percentage) in pay between all relevant male and female employees.
- The median gap (as a percentage) in pay between male and female pay in each quartile pay band.
- The number of male and female employees in each quartile pay band.
For the purpose of the calculations:
- 'Pay' includes basic pay, paid leave, maternity pay, sick pay, area allowances, shift premium pay, bonus pay and other pay (including car allowances paid through payroll, on call and standby allowances, clothing, first aider or fire warden allowances).
- 'Pay' does not include overtime pay, expenses, salary sacrifice schemes, benefits in kind, redundancy pay, arrears of pay or tax credits.
- You must use employees' pay received during the 'pay period' in which 30 April falls. A 'pay period' is the period over which an employee is usually paid - so if they're paid weekly, you would use the pay for the week including 30 April, or if they're paid monthly, you would use all payments received in April.
- You must compare employees' gross hourly pay rates (even if they're not paid by the hour). The regulations state that this should be calculated by dividing 'weekly pay' by 'weekly basic paid hours'. For employers who pay on a monthly basis this will add to the complexity.
- You must include pay for all employees who fell within the definition of "relevant employee" on 30 April, even if they no longer work for your organisation when the report is published.
Unfortunately, no guidance is provided on how to calculate weekly hours if an employee has an irregular work pattern. This may involve complex working time calculations, as is the case with National Minimum Wage and Working Time Regulations. Further, how employers calculate hourly pay rates for those on maternity or sick leave also needs clarification.
Quartile pay bands
Employers must identify quartile pay bands. What is a quartile? This is a question that is causing some confusion.
Quartiles split an ordered data set into four equal groups, where each group contains a quarter of the data. For the gender pay gap regulations, this will illustrate the bottom 25% of earners in an organisation, then the next 25% and so on.
Each quartile is one quarter of the organisation's range of pay as opposed to one quarter of the number of employees. Given the significant variation in remuneration between employers and sectors, the Government has opted to allow employers to calculate four equal pay bands that reflect the full range of their employee pay rather than legislation imposing specific pay bands (e.g. £10-20K, £20-30K) for reporting purposes.
A further calculation will then also be necessary to show what the proportion of women and men is in each quartile.
Separate mean bonus pay gap information must also be reported as otherwise the 30 April pay 'snapshot' would capture relatively few bonuses which are often a significant contributor to the overall difference in average male and female pay.
In relation to bonuses (which include commission payments), your report must include:
- The mean gap (as a percentage) between bonus payments made to male and female employees in the 12 months preceding 30 April 2017, and each anniversary of that date (i.e. all payments from 30 April 2016 to 30 April 2017 must be included in your April 2018 report).
- The proportion of male and female employees who received a bonus payment in the 12 months preceding 30 April 2017, and each anniversary of that date.
'Bonus Pay' includes payments received and earned in relation to profit sharing, productivity, performance and other bonus or incentive pay, piecework and commission. It also includes long term incentive schemes and the cash equivalent values of shares on the date of payment. It is not clear what "the date of payment" means in this context.
Employers are entitled to include an explanatory narrative with their reports, but it is not compulsory to do so.
The Government has indicated that the future accompanying guidance will 'strongly encourage' inclusion of an explanatory narrative. Employers may wish to provide additional narrative that provides context to explain any pay gaps and actions that are being taken. While overtime pay is specifically excluded from the scope of the regulations, for those sectors where overtime is a significant element of remuneration, inclusion of further voluntary details will be encouraged.
What happens if you don't comply?
There are no civil or criminal penalties for non-compliance, and for most employers, the main concerns will be reputational. The Government will be storing the data submitted by employers, and has indicated that it may publish lists of employers who have shown "good compliance", name and shame employers who have not complied, and/or publish sector-wide statistics or league tables.
The Government has also stated that it will review the regulations within five years of commencement (i.e. by October 2021) and closely monitor the levels of compliance to ensure the measures are effective. On the one hand the Government has the power under the enabling legislation to introduce criminal and civil penalties for non-compliance, so it is possible that sanctions will be introduced in the future if compliance levels are low. On the other hand, the draft regulations give the Government scope to replace the system with one that "imposes less regulation" following the review.
What you should be doing now?
Although the regulations are still in draft form, the Government is pushing to have these in force by October 2016. We will be watching closely for developments, but in the meantime, there are certain steps employers can take to prepare.
- Establish whether you are likely to be a large enough employer by April 2017 to come within the scope of the regulations.
- Review your bonus structures, given that the first set of data to be published must include all bonus payments made from 30 April 2016. If you anticipate any problems, now is the time to take steps to get your house in order.
- Consider how easily you will be able to collect the required data, and whether any changes to your payroll system before April 2017 will make this an easier process.
- Consider undertaking a preliminary audit of your pay levels, to establish whether you are likely to have any issues, and consider what steps you might take if this process does reveal a pay gap. We would recommend obtaining legal advice before taking this step, as audit findings may be discloseable in equal pay or discrimination litigation unless protected by legal professional privilege.
- Consider when would be the best time of year to publish your data - under the draft regulations, you can publish your first report at any time before 30 April 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.