What does the future hold for ethnicity pay gap reporting?

United Kingdom

While the media has focussed its attention on what the report by the Commission on Race and Ethnic Disparities (“CRE”) (the “Report”) says about institutional racism in the UK, there are several aspects of this Report that are relevant to employers, in particular in relation to ethnicity pay gap reporting. Indeed, one of the Reports’ 24 recommendations is to “Investigate what causes existing ethnic pay disparities”.  Although the Report stopped short of recommending mandatory ethnicity pay gap reporting, where employers do publish their ethnicity pay gap on a voluntary basis, the Report recommends that this should be accompanied by a diagnosis and action plan which should set out the reasons why any disparities exist and what will be done to address them. Voluntary reporting is certainly a trend we are seeing amongst clients. Organisations that have signed up to the Race at Work Charter will also be aware that one of the five pledges in the charter includes capturing ethnicity data and publicising progress. Capturing data is not the same as reporting an ethnicity pay gap, but it does demonstrate the fundamental importance of data collection in starting the conversation about how to tackle workplace inequality. In this Law-Now we discuss these recent developments and look at what employers should consider if they decide to voluntarily report their ethnicity pay gap.

What is an ethnicity pay gap?

An ethnicity pay gap is a calculation of the difference between the median hourly earnings of e.g. White or White British employees and other ethnic groups as a proportion of median hourly earnings of the reference group.  An ethnicity pay gap report can therefore evidence how different ethnic groups are represented in an organisation, across different pay bands, and will therefore enable employers to understand if there are unfair disparities and help drive strategies for the recruitment and retention of ethnic minority groups.

What happened to the Government consultation on ethnicity pay gap reporting?

The Government first carried out a consultation on this issue over two years ago, but has yet to publish the results of its consultation. To be clear, the Report is not the Government’s response to the consultation. Given the extensive delay by the Government in responding to the consultation, a petition for the introduction of mandatory ethnicity pay gap reporting was subsequently launched in March 2020. This passed the 100,000 signature threshold required to be considered by parliament in June 2020. In response, the Government stated: “The Government ran a consultation from October 2018 to January 2019 on the introduction of mandatory Ethnicity Pay Reporting. We are currently analysing these and will respond by the end of the year.”  There have been no further developments and this deadline has clearly now passed. It seems unlikely that the Government will make reporting mandatory with a preference for issuing guidance for companies who decide to report on a voluntary basis.

The Commission on Race and Ethnic Disparities

The CRE was set up in the summer of 2020 with the aim of examining the state of race relations in the UK and to try to gain an understanding of why disparities still exist. The CRE explains that “the spirit of the Black Lives Matters movement was the original trigger for our report.

It is important to note that the CRE’s remit goes beyond employment, also covering education, crime and policing and health. On the topic of employment, a number of topics are covered, including the ethnicity pay gap which we discuss in further detail below.  However, there are two other points from the employment section of the Report worth flagging:  

  • The Report recommends that employers should move away from unconscious bias training and work with experts to determine what works to advance fairness in the workplace. The Report says that the landscape of diversity training is highly mixed, and the Government can play a role in guiding organisations to high quality materials and resources.

  • The use of ‘BAME’ (Black, Asian, Minority Ethnic) is heavily criticised as being outdated and a collective term that does not reflect individual experience of different ethnicities. The Report itself refers to ‘ethnic minorities’.

What did the Report say about ethnicity pay gap reporting?

In short, the CRE recommended that where employers do choose to report an ethnicity pay gap on a voluntary basis, they should also publish a diagnosis and action plan to identify reasons for disparities and a strategy to solve them. They felt there was a clear difference between gender pay gap reporting and ethnicity pay gap reporting, with the biggest challenge lying in the unreliability of sample sizes.

“If an employer with 250 employees …. reports a gender pay gap, on average they will be comparing 125 men with 125 women. If they report an ethnicity pay gap as well, on average they will be comparing 225 White employees with 25 ethnic minority employees. Any findings from such a comparison will be unreliable and make it impossible to look at the workforce stratified by the 18 ONS ethnicity classifications.”

In addition, in some areas of the country (they refer to the Lake District which is 98% white) there is very low ethnic minority population and this will also affect the sample size.

Who is currently reporting?  

Many progressive employers have decided to get on with reporting themselves. PWC reported that 23% of employers in their study calculated their ethnicity pay gap in 2020.  This includes large employers such as NatWest and Deloittes. CMS are planning to publish their ethnicity pay gap in 2021. As the Report explains Discussions with businesses have revealed that, like the Commission, they are aware of the pitfalls around the execution of ethnicity pay reporting, but feel that this work needs to start somewhere.”

The position in Scotland and Wales

In March 2021 the Scottish Government said that the public authorities in Scotland that are caught by the specific equality duties should voluntarily record and publish their ethnicity pay gap and produce an action plan to deliver identified outcomes. Just over 20% of the Scottish workforce is employed in the public sector, (although not all of these employees will be caught by the specific duties). The Scottish Government commitment was made at the Public Sector Leadership Summit on Race Equality in Employment on 24 March 2021. This follows a report carried out by the Scottish Parliament’s Equalities and Human Rights Committee in 2020 Race Equality, Employment and Skills: Making Progress? which unlike the Report by the CRE, was more forthcoming in its recognition that institutional racism exists. “Institutional racism, whether overt or indirect, exists. It's an issue in Scotland for all employers which must be addressed.”

The Welsh Government is currently carrying out a Consultation on a Race Equality Action Plan for Wales with responses by 17 June 2021. The vision is for Wales to be a country that is anti-racist with the action plan covering a wide range of areas including education and health in addition to employment.

How should employers report their ethnicity pay gap?

There is no general consensus among employers on how ethnicity pay gap reporting should be broken down, with some favouring reporting the pay gap between white and all ethnic minority staff, and others in favour of a breakdown of ethnic groups, or in addition reporting a separate ‘black pay gap’ recognising that individuals of Afro Caribbean ethnicity are often less represented in higher paid and leadership roles than some Asian ethnic groups. The Report does add to this debate by recommending that the data should be disaggregated by different ethnicities to provide the best information to facilitate change. Although the ONS in England use 18 different classifications most employers do not capture that level of data, and employers may decide to report using broader categories of ethnic classification.

An important step is to stop comparing ethnicity pay gap reporting with gender pay gap reporting. Reporting only one figure may have the benefit of simplicity, but it does mask significant disparities between ethnic groups.  According to the latest ONS data for instance, the pay gap for Pakistani employees is 16% and for Black African employees it’s 8%. Yet when you include all ethnicities in one reference group, the overall pay gap figure is 2.3%. Ethnicity pay gaps - Office for National Statistics (ons.gov.uk). Clearly this does not tell the full story.

Steps to consider with voluntary reporting

  1. We would therefore recommend that employers apply a number of ethnic minority categories when they are deciding to report their pay gap.  The ONS has categorised ethnicities into 5 overall categories, which are: White, Mixed or multiple ethnic groups, Asian or Asian British, Black, African, Caribbean or Black British, and Other ethnic groups, with further sub categories in each category (for further information see the List of ethnic groups on the government pages.)

  2. Once an employer has decided how they are going to classify ethnicity, they need to take active steps to gather the data. Data capture is a significant first step in understanding where inequalities lie within the workforce. The Race at Work Charter has a number of steps employers can follow to improve how they gather ethnic minority data. Meeting the Race at Work Charter: An employer’s guide. Where there is a low uptake of employees providing this data on a voluntary basis, some employers have launched a focussed campaign to encourage their employees to voluntarily provide data on their ethnicities. Employers need to look beyond application forms/ diversity monitoring forms to also include questions in staff surveys. Good communication and transparency is essential to encourage employees to provide the data.

  3. Employers will also need to be aware of the various layers of data protection compliance when gathering this data and ensure that they identify the lawful basis for processing this data. Often this is one area where employers will rely on explicit consent, and if this is used then it should be clearly set out in the application or diversity monitoring form with the employee signing to confirm. Ethnicity data is also special category data and therefore additional steps must be taken regarding data protection compliance.

  4. The recommendation by the CRE is that reporting a pay gap is not enough. Employers should then take the next step, carry out an analysis of the results and develop an action plan to map out solutions to tackle any disparities. This action plan should ideally be summarised in the published ethnicity pay gap report.

  5. As we have learned from gender pay gap reporting, it is only when an organisation crunches the numbers that they find out where the problems lie. While there are obvious differences with gender pay gap reporting, the same theory applies that an organisation needs to use the data to start to build the solution.