04 April 2016

Gender pay gap reporting — the draft legislation explained


Key points

  • The newly published legislation is still in draft and may change before it is brought into force on 1 October 2016.
  • Only individual employers with 250 or more employees ordinarily working in Great Britain are affected by the legislation (numbers across groups of companies are not consolidated).
  • The Government has made it clear that it intends 'employee' to be widely defined to include anyone with a contract personally to do work and not only those with w contract of employment.
  • Those employers need to be ready to prepare a report based on their pay data at 30 April 2017 and in each subsequent year (the 'snapshot date').
  • The report must be published on the employer's website within 12 months of 30 April each year.
  • Preparing a report will involve identifying the gross hourly pay of every male and female employee on the snapshot date and publishing:
    • The overall mean pay gap;
    • The overall median pay gap;
    • The difference between mean bonus payments to women and men;
    • The proportion of women and men who received bonus pay in the 12 months prior to each 30 April; and
    • The numbers of women and men in each of four quartile pay bands.
  • Employers should start considering the systems they will need to capture the information needed and be ready to start implementing them once the legislation is finalised.

Background

Mandatory gender pay gap reporting has been under discussion for some years. The Equality Act 2010 includes a provision that enables the Government to require employers to publish information about differences in pay between men and women in their workforces.

After low take up of the opportunity to provide gender pay gap information voluntarily, the Government consulted on mandatory reporting between July and September last year. After receiving over 700 responses the Government has decided to proceed with a mandatory reporting regime. Draft regulations have been published for consultation until 11 March.  

The proposed legislation

  • Under the new regime, private and third sector employers with at least 250 employees will be required to publish an annual report showing the overall gender pay gap in their organisation. Legislation is expected to be extended to the public sector at a later date.
  • The gap must be calculated using both mean and median hourly pay over a specific pay period (normally a week or a month, depending on the employer's usual pay cycle).
  • The intention that 'employee' should be widely defined means that LLP members and some self-employed individuals may be included in the headcount.
  • Under the draft legislation group companies will not be required to aggregate employees across different subsidiaries. It is therefore possible that a large employer could be outside the scope of these requirements if it does not have a single entity that employs 250 or more employees.

Calculating the pay gap

  • The pay gap is calculated on a snapshot date in April each year, starting on 30 April 2017.
  • The report must include each year:
    • The difference between the mean pay of female and male employees in the pay period in which 30 April falls;
    • The difference between the median pay of female and male employees in the pay period in which 30 April falls;
    • The difference between mean bonus pay of women and men in the 12 month period to 30 April;
    • The proportion of women and men who received bonus pay in the period to 30 April; and
    • Information on the number of women and men in each of four pay quartiles (each quartile contains an equal number of employees), based on the employer's overall pay range. The first quartile will contain 25% of the employees in the workforce on a particular date, starting with the lowest paid in the organisation. The next quartile will contain the next 25% of the workforce and so on. The upper parameter of each quartile is set by the highest paid employee in that quartile.
  • 'Pay' includes basic pay, paid leave, maternity pay, sick pay, area allowances, shift premium pay, bonus pay, car allowances and other allowances paid through the payroll. It does not include overtime pay, expenses, the value of salary sacrifice schemes, benefits in kind, redundancy pay, arrears of pay and tax credits. Pay is calculated using gross figures, before any deductions.

Treatment of bonuses

  • Bonus pay is defined as:
    • Payments received and earned in relation to profit sharing, productivity, performance and other bonus or incentive pay, piecework and commission.
    • Long-term incentive plans or schemes (including those dependent on company and personal performance).
    • The cash equivalent value of shares on the date of payment.
  • Affected employers will also be required to publish their 'gender bonus gap', that is the difference between the average bonus payments paid to men and women over a 12-month period, and the proportion of male and female employees that received a bonus. Currently the regulations only require the mean bonus payments to be analysed separately, not the median.

Timing

The consultation on the draft regulations closes on 11 March 2016. It is expected that the regulations will come into force on 1 October 2016. If so, employers will be required to have a snapshot of gender pay gap data prepared for 30 April 2017 and will need to publish the first gender pay reports within 12 months of that date and annually thereafter.

Sanctions

  • There are no direct sanctions for non- compliance. It will be interesting to see how indirect sanctions operate in practice – eg, in tendering and contracting exercises, in investment decision making, in recruitment etc.
  • There will be a range of 'soft sanctions', ie the Government may:
    • Run periodic checks to assess for non-compliance.
    • Produce tables by sector of employers' reported gender pay gaps.
    • Draw attention to employers that publish full and informative explanatory information.
    • Publicise the identity of employers known not to have complied.
  • In our view the publication of information showing a gender pay gap is unlikely in and of itself to be capable of leading directly to equal pay claims. The failure to publish information on the other hand, or the publication of misleading or incomplete information, might be used in support of an individual or group equal pay claim.

What is the current pay gap?

  • Average pay for men is greater than that for women. In 2015, the gap was 9.4% for full-time employees. The gap for all employees was 19.2% because a higher proportion of women work part-time (41%, compared with only 11% of men), and part-time workers (both men and women) earn less per hour, on average, than their full-time counterparts.
  • Part-time men are actually paid less on average than part-time women (the gap is -6.5%). This could be because women in higher-paid roles are more likely to seek part-time work while their male counterparts tend to work full-time.
  • These figures do not take account of differences in rates of pay for comparable jobs, and are affected by, for example, the proportion of men and women in different occupations.
  • When looking at the differences in pay by age group for full-time employees, the gender pay gap is relatively small for full-time employees aged up to 39, with the exception of those aged 16 to 17. In fact, full-time women are paid slightly more than men between the ages of 22 and 29, on average. From 40 upwards, the gap is significantly wider. This is likely to be connected to women taking time out to have children.

(Information from the Office for National Statistics, using figures from April to June 2015).  

The reasons for the legislation

  • The Government believes that publication will increase employee confidence in pay information and the remuneration process and will help employers find ways to increase female participation rates. It also believes that sector based competition will drive employers towards best practice.
  • Voluntary pay reporting has failed, with only a handful of employers having voluntarily published pay gap data.
  • Most respondents to the consultation (82%) thought that the publication of gender pay gap information would encourage employers to act to close the gap.
  • The government believes that having a consistent measure that can be compared across employers and sectors will encourage employers to compare their gender pay data with their competitors and the national average.

Other comments

  • Whilst the publication of a narrative alongside the statistics will be encouraged, it will not be mandatory. Employers might however decide that a narrative provides an opportunity to give context and explanations for their published figures.
  • The pay gap is affected by wider cultural and social influences, in particular the prevailing assumptions about the role of women as carers (of children, disabled people and the elderly) and by the unequal assumption of responsibility for unpaid domestic work by men and women.
  • The lack of a requirement to break down figures by age may mean that the increase in the pay gap in older sections of the working population is not apparent.
  • There is also no account taken of the effect on the figures of women decide to give up work because the cost of childcare is too high, or because flexible working is not available.
  • The 'Think, Act, Report' framework, which encouraged voluntary reporting, suggests much more detailed ways of measuring the pay gap that employers might consider adopting voluntarily in the interests of greater transparency. These might include tracking changes in the pay gap over time, or analysing reward at different levels, or the representation of women and men by job role or occupational group, or patterns in the promotion of women and men.
  • It is not clear from the draft regulations how to calculate the hourly pay rate of an employee who is not working because of, for example, sickness, maternity or shared parental leave. If actual pay received is used this could have a significant and potentially distorting impact on the pay gap. An employer might want to provide an explanation for this through a narrative in the report and might want to explain what the gap would have been if the affected employees had been receipt of their normal pay.
  • The exclusion of overtime means that the gender pay gap figures will not take account of the fact that in general men may be more able to work overtime than women who take on a greater proportion of caring responsibilities. This will have more impact in some sectors than others. The reason behind this appears to be that the Government does not want to encourage employers to force women to work more overtime.

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