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Ethnicity pay gap reporting: Preparing for the future

In January 2019 the Government closed its consultation on the introduction of mandatory ethnicity pay gap reporting. Since then, momentum from the black lives matter movement and the impact of the coronavirus pandemic has meant that issues around race inequality have rightly continued to rise up the public agenda. At the same time, pressure has mounted on employers to tackle inequality in the workplace and there has been renewed interest in the introduction of ethnicity gay gap reporting. In June 2020, a public petition to the Government to introduce mandatory ethnicity pay gap reporting reached over 100,000 signatories. This growing pressure, combined with widespread coverage over the last year of racism in the UK, means that ethnicity pay reporting will likely become mandatory in the near future.

The complexities of ethnicity pay gap reporting

It is not yet clear what any ethnicity reporting requirements will look like and how employers will be required to calculate and report ethnicity pay gaps. Each of the options proposed by the Government’s consultation have their own complexities and, regardless of what approach the Government opts for, there are a number of issues which employers will need to grapple with. Those employers who start to proactively address some of these issues now will be best placed to meet the requirements of ethnicity pay gap reporting and make the most of the opportunity it presents to tackle any inequalities in their organisation and build trust with their workforce.

Disclosure rates

For ethnicity pay gap analysis to be meaningful, organisations will need to be comfortable that a sufficient proportion of their population have disclosed their ethnicity. Whilst a recent PwC survey suggests that 67% of employers now appear to be collecting ethnicity data, a significant number of employers still do not hold the data required to carry out reliable ethnicity pay gap reporting.

If an organisation has low ethnicity disclosure rates, reporting an ethnicity pay gap based on this limited sample of employees will not provide them with a true picture of their ethnic demographic and how it pays employees of different ethnic backgrounds. This creates the risk of an organisation effectively understating or overstating its actual ethnicity pay gaps (i.e. the gaps that would exist if all employees disclosed their ethnicity). Both can be problematic. If low disclosure rates result in an organisation understating its ethnicity pay gaps, this may disguise pay gaps that actually exist and prevent employers taking the necessary steps to close them. Alternatively, an overstated ethnicity pay gap may heighten tensions amongst employees and increase the risk of challenge from employees and potential legal action.

To improve their ability to analyse ethnicity pay gaps that truly reflect their workforce, organisations which currently have low rates of disclosure should be implementing initiatives to collect ethnicity data. This is likely to involve communication and transparency with employees about how their personal data will be used and the positive outcomes ethnicity pay gap reporting can achieve. Organisations might also consider how they can practically and openly build data collection into their standard processes, such as making sure ethnicity disclosure is part of recruitment or asking employees to disclose their ethnicity during training or as part of any system updates.

Data privacy

Whilst meaningful ethnicity pay analysis relies on organisations having sufficient data, employers need to be mindful of the data privacy risks which can arise in any data collection exercise.

There is still no legal obligation for individuals to disclose which ethnic group they identify with or for employers to collect this information. Ethnicity data is classified as a special category of personal data under UK data privacy laws and, as a result, employers will need to take particular care when collecting and analysing it. Key considerations for employers include what data can legally be collected, how to collect, store and process such data and how to protect employee anonymity. Organisations that wish to take a global approach to ethnicity pay gap reporting will also face challenges in complying with data privacy laws in different jurisdictions and will need to be mindful of the difference in historical and contextual factors related to ethnicity in different countries.

Ethnicity categorisation

As has been highlighted by recent events, ethnicity categorisation is a deeply sensitive and complex personal issue. Individuals do not always identify or associate themselves with a set classification and using a broad category may not highlight the differences faced by discrete ethnic groups. If categories are too broad, the value of ethnicity pay gap reporting could be undermined, as nuances which are relevant to specific ethnic groups may be lost. For example, the most recent pay gap report from the Office of National Statistics (ONS) showed that Pakistani workers’ hourly pay in the UK was 31.4% less than Chinese workers on average. This nuance would be lost if both ethnic groups were included in a broader “Asian” category for the purposes of ethnicity pay gap reporting. Conversely, if employers adopt ethnicity categorisations that are too narrow, this could lead to data privacy challenges with employees potentially being identifiable if they are one of only a small number of employees who identify with a particular ethnic group.

Enforcement and reputational risk

It is unknown at this stage what, if any, penalties will be imposed for failure to report ethnicity pay gaps or for reporting high ethnicity pay gaps. Looking at the gender pay reporting regime as a potential guide, there are currently no financial penalties imposed for employers who fail to report or who constantly report high gender pay gaps. However, there certainly continues to be significant reputational risk for employers who report large gender pay gaps and the same will undoubtedly be true for employers who report a significant ethnicity pay gap across their organisation.

As well as public reputational damage, there is also the very real risk for employers that reporting a high ethnicity pay gap could damage the trust between employers and their workforce and may impact an organisation’s ability to attract and retain talent from a diverse range of ethnic backgrounds.

Ethnicity pay gap reporting and race discrimination

Aside from any reputational risk, the reporting of any ethnicity pay gap also increases the risk of potential allegations and legal claims from employees that their employers’ practices are discriminatory on the grounds of race (which includes colour, nationality, ethnic origins and national origins).

Whilst we do not yet know exactly what the ethnicity pay reporting requirements will be, the Government’s consultation suggests that employers will be required to report their overall ethnicity pay gaps at an organisation-wide level in a similar way to existing requirements under the gender pay reporting framework.

Importantly, there is a key distinction between reporting an organisation-wide pay gap and a pay gap amongst groups of employees performing similar roles. If an employer reports an overall ethnicity pay gap across their entire organisation, this does not necessarily mean that they pay employees of different ethnic backgrounds differently for performing similar roles. Instead, an organisation-wide ethnicity pay gap will be reflective of average pay differences across all levels of an organisation and will therefore be heavily influenced by the representation of employees of different ethnicities at senior levels. For example, a company with predominantly White British representation at senior levels will most likely report a high ethnicity pay gap. Whilst this is not necessarily indicative of pay disparities between employees performing the same role, it would undoubtedly increase awareness of any potential inequalities and may increase the legal risk to employers of claims relating to pay. Additionally, a high overall ethnicity pay gap could be indicative of discriminatory recruitment or promotion processes which prevent employees from ethnic minority backgrounds progressing through the business.

If employers do not take steps to address any practices that may have a discriminatory effect, or underlying pay disparities between employees of different ethnic backgrounds, they may face legal challenge in the near future, as the introduction of mandatory ethnicity pay gap reporting is only likely to heighten awareness of any inequality between employees of different ethnicities.

How can employers prepare for mandatory ethnicity pay gap reporting?

Regardless of exactly how employers will be required to calculate ethnicity pay gaps, they will need to have access to reliable data on the ethnicity of their employees. As a first step, employers should start considering how they collect data relating to ethnicity and ensure they are in the best position possible when ethnicity pay gap reporting becomes mandatory. Employees who communicate openly with their employees about how their personal data will be used and the potential positive outcomes of ethnicity pay reporting are likely to see increases in their ethnicity disclosure rates.

For employers who already hold ethnicity data for their employees, voluntarily analysing ethnicity any ethnicity pay gaps at this stage will allow them to understand if they do have any underlying issues with how they pay employees of different ethnic backgrounds and take steps to redress any imbalances quickly. As well as mitigating the legal risks of potential discrimination claims which may be increased by the introduction of ethnicity pay gap reporting, organisations that take a proactive approach and see this as an opportunity to build stronger relationships with their workforce and embrace inclusion and diversity will likely see real benefits for their reputation, talent and culture.

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Anna Sanford

Anna Sanford

Director - Employment Legal, PwC United Kingdom

Tel: +44 (0)7711 562458

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