Closing in: the gender pay gap rules

In December the Government published what we expect will be the final Equality Act 2010 (Gender Pay Gap Information) Regulations. They contain a number of significant differences from the previous version of February 2016. Employers who had adapted their payroll systems based on the earlier version will need to update their plans. Of particular significance to law firms is the fact that the final regulations specifically exclude LLP partners.

Getting to grips with the rules will mean investing a fair amount of time, although it is hoped that payroll systems can be automated to make the process easier to run future reports. Otherwise the concern is that employers spend disproportionate time and energy on process at the expense of outcomes. Reporting is supposed to be the first step: if it is the only step, the pay gap will not reduce.

In this article I have highlighted the changes from the previous draft regulations (described at Journal, May 2016, 44), and the various steps employers should follow to publish their pay gap.

What has changed?

• The snapshot date to carry out the data analysis is now 5 April 2017, and annually thereafter. (Previously this was 30 April 2017.)
• When it comes to calculating the pay gap figure, the regulations apply to relevant full pay employees. If an employee receives less than full pay for any reason, such as statutory maternity pay or being on half pay while on sick leave, they should not be counted in that calculation. However, relevant employees should still be included for the purposes of the bonus pay gap figure and to determine whether the 250 employee threshold has been met.
• Non-cash bonuses such as securities and cash values of shares should be included in the calculations at the point when the employee becomes liable to tax.
• The gender pay gap calculation should include ordinary pay plus the pro-rated amount of the bonus payment. So, for example, where salary is paid monthly and bonuses annually, one-twelfth of the bonus payment should be added to the ordinary pay before calculating the gross hourly rate.
• It is only employees in employment on the snapshot date who should be counted.
• The regulations apply to the wider definition of employee under s 83 of the Equality Act 2010, to include employees who perform their services personally; this includes workers and some categories of contractors.
• Partners and LLP partners are excluded from the definition of “relevant employee” in the regulations. There is some debate that LLP members may still be classified as employees, meaning they should be included when assessing whether the 250 total has been reached.
• It is now clear that pay quartiles involve dividing the workforce into four equal parts based on hourly pay.
• While the previous version of the regulations was silent on enforcement, the explanatory notes make it clear that failure to comply with the publication duty may amount to an unlawful act, which could prompt an investigation and possibly enforcement action from the EHRC.

Who is in scope?

The regulations apply to private and voluntary sector businesses that employ 250 employees at the relevant date, 5 April 2017. Separate regulations will be published which cover public sector employees in England & Wales. Scottish public sector employers covered by the specific equality duties have been obliged to publish their gender pay gap since 2013.

Employers will not be required to publish the information until 4 April 2018, but the first data gathering exercise (or data snapshot) should take place on 5 April 2017, and annually thereafter. The obligation to report applies to each employer within a group structure: there is no scope to amalgamate reports.

Employers who are in scope will be required to publish:

• the median and the mean gender pay gap figure for pay;
• the mean and median gender pay gap figure for bonuses;
• the percentage proportion of men and women receiving a bonus;
• the number of men and women in each quartile of their pay distribution.

Which employees should be counted?

Employees should be included, but also casual workers and some categories of contractors if they are not able to delegate service personally. The regulations will also cover some employees who work abroad but satisfy the close connection test to the UK.

Employers will have to take a practical commonsense view to employees who may sit at the margins of the definitions. The regulations explain that an employer is not obliged to include a contractor if they do not hold the data on the worker, and where it is not reasonably practicable for them to do so.

What pay is compared?

The gender pay gap is based on the definition of gross hourly pay, which is made up of ordinary pay plus bonus pay. The regulations are prescriptive in the approach employers should take.

Not all pay is included when calculating the ordinary pay figure, and here the rules are not entirely logical. Benefits like car and housing allowance should be included, in addition to shift premiums, but overtime should not. Pay is calculated using gross figures, before any deductions for PAYE, national insurance, pension contributions, student loan repayments and voluntary deductions. The following table sets out what is and is not included:

Assessing weekly hours

Once the pay details have been assessed, employers will also need to assess the weekly working hours. If an employee has set hours every week and their pay does not vary, this is straightforward.

If the employee’s working hours vary from week to week, the regulations adopt the 12 week average hours approach in the Employment Rights Act. If the employee has not worked for 12 weeks, or there is some reason the 12 week period cannot be used, then employers should provide a number that fairly represents the hours worked in a week. Separate rules also apply for pieceworkers.

Calculating the bonus pay gap

Employers are required to report on the mean and median bonus pay gap figure in addition to reporting on the proportion of men and women who receive a bonus. Unlike the gender pay gap, this is not defined by reference to average hourly rates, and deals with total pay rather than assessing the amount of bonus relative to total pay. Since many more women work part-time and will have a correspondingly lower bonus figure, it is likely that workplaces with higher numbers of female part-time workers will have a larger bonus gap. In addition, any bonus which is reduced because someone has joined mid-year will distort the overall figure.

Bonus payments include anything that relates to profit sharing, productivity, performance, incentive and commission. They also include vouchers, securities, securities options and interests in securities.

In the final regulations it is clear that employers should assess the value of bonuses paid in securities at the same time that the employee incurs a charge to income tax.

Bonus payments made in the 12 months prior to 5 April 2017 will be caught in the calculation, provided the employee is still in employment on the snapshot date.

Quartiles

Employers will be required to report on the number of men and women in each of four pay bands or quartiles:

• pay band A is from the lowest pay to the first quartile;
• pay band B is from the first quartile to the second quartile;
• pay band C is from the second quartile to the third quartile;
• pay band D is from the third quartile to the highest pay.

This involves dividing the workforce into four equal-sized groups. These will be separated according to the hourly pay rate, from lowest paid to highest paid. Therefore a workforce of 1,000 would have four quartiles of 250 employees.

Publication

Publication is to be on the company website, must be publicly available for three years and should be accompanied by a written statement of accuracy by a company director or equivalent. Employers must also submit information to the Government, which will publish the gender pay gap information in league tables.

While there is no legal requirement, the Government recommends that employers produce a narrative explaining the background behind their gender pay gap figure and any distortions which may have affected this average figure. The narrative is incredibly important, as it puts the information in context and sets out any actions which will be taken to address the pay gap. A number of companies who have been early adopters of gender pay reporting also produce adjusted gender pay gap figures to provide a better way of explaining the pay gap within their organisation.

Enforcement

There is no enforcement mechanism for employers who fail to produce their gender pay gap information. However, the final regulations do say that failure to publish would amount to an unlawful act and could merit further investigation by the EHRC. The Government has indicated that it may take a “naming and shaming” approach to those who fail to comply. It hopes internal pressure from employees and external reputational pressure will drive change and ensure compliance.

Next steps

Employers should review their payroll systems with a view to conducting a trial run before April 2017. This will involve:

• assessing who is in scope as a relevant employee and dealing with the grey areas of contractors and/or overseas employees;
• understanding what is included and not included in ordinary pay;
• excluding those who do not receive full pay;
• assessing bonus pay and understanding how to pro-rate this in the gender pay gap figure;
• calculating the value of non-cash bonuses;
• discussing whether to exceed the statutory minimum reporting by carrying out an adjusted pay gap report;
• identifying what information should be included in the narrative to explain the context for the pay gap and what actions will be put in place going forward.

Guidance is also expected to be published soon which may help clarify some of the grey areas within the legislation.

The big question of course is how, and to what extent, employers will use their pay gap information to reduce their pay gap.

As I have written before, the overall solution to the gender pay gap extends beyond employers. Affordable childcare, better careers advice and wider education pathways all play a part in redressing occupational segregation in the labour market. If an employer is not responsible for all the problems, they cannot be held accountable for all the solutions.