Last reviewed 12 June 2019

As employers are being urged to commence voluntary reporting on their ethnicity pay gap while a mandatory scheme is under consideration by the Government, many are currently considering whether a second set of pay reports will cause any more issues than gender pay gap reporting.

Compulsory annual gender pay gap reporting was introduced through the enacting of regulations in 2017, applying to all public and private sector organisations which employ 250 or more employees on the “snapshot date” each year. With two reporting deadlines having passed since their introduction, the 2019 reporting deadline saw more than 10,000 organisations publicly report their gender pay gap statistics relating to 2018 data.

A 2017 report into race in the workplace estimated that encouraging organisations to have full representation of ethnic minority groups within their workforce would lead to an increased workplace output totalling around £24 billion a year. At the time, the Government urged organisations to voluntarily review and report on ethnicity pay gaps within their workforce; however, the “One Year On” review of the report found only 11% of organisations had voluntarily acted by February 2018.

It is estimated that those from ethnic minority backgrounds are subject to significant workplace disadvantages when compared to employees from a white British background. A 2018 pay audit carried out across public sector organisations in the Greater London Authority group found significant ethnicity pay gaps, including gaps of 16.7% in the Metropolitan Police Service and 9.8% at Transport for London.

The Government has since revealed it is considering introducing mandatory ethnicity pay gap reporting, with a consultation released which concluded in January 2019. There has also been some movement on voluntary reporting; earlier this year, diversity campaigners Involve revealed 15 large organisations, including Deloitte, KPMG and the Bank of England, had agreed to voluntarily publish ethnicity pay gaps. Other organisations may also be carrying out internal pay audits and reviews which examine whether there is pay disparity among their workforces based on their ethnicity or nationality.

With the consultation response and any further movement on mandatory reporting still awaited, we examine below three difficulties that may arise for employers should mandatory ethnicity pay gap reporting be introduced in the future.

Categorising ethnicity

Under the gender pay gap reporting regulations, pay gaps are calculated on the differences between pay rates for employees based on their gender, ie whether they are categorised as male or female. Although there may be some employees who do not fall within this gender classification, and some who may select “prefer not to say” on a diversity survey, this is much clearer cut than categorising ethnicity.

The Office for National Statistics (ONS), the independent UK statistical institute, recognises that categorising ethnicity can be complex due to the many different ways ethnicity can be measured, whether by birth country, nationality, language, skin colour, geographical origin or religion. In order to address this, the ONS advises using either five broad ethnic groups or, alternatively, 18 detailed ethnic groups to categorise the ethnicity of individuals. There are obvious difficulties with both methods however, with broad ethnicity groups such as “White” and “Asian/Asian British” perhaps being too broad to analyse where an ethnicity pay gap exists because of the high number of employers who are likely to fall within these wider categories. On the other hand, having detailed ethnicity categorisation may lead to higher reluctance for ethnic minorities to submit their personal details as they may feel that they will be identified by this, for example, where an organisation with fewer ethnic minority employees requires detailed categorisation this creates a risk that an individual’s pay is disclosed.

When introducing a mandatory scheme, the Government will need to come up with a categorisation that achieves the balance between being too wide and too detailed, while providing sufficient data categorisation to review and analyse an internal ethnicity pay gap.

The ease of collecting data

There is currently no legal obligation on employers to collect particular ethnicity information and, in parallel, no obligation on employees to disclose their ethnicity to prospective or current employers. This could cause significant difficulties if a mandatory obligation to disclose ethnicity pay gap data is introduced, especially where no such information recording has taken place in the past.

While easier methods may be available to collect ethnicity data from new starters, for example extending current diversity questionnaires to include questions relating to ethnic origin, collecting this information from current employees may be more difficult. This could be particularly emphasised where employees do not understand the purpose of the data collection and fear reprisals or poor treatment based on their disclosure.

It is clear that a longer lead in time to reporting obligations may be needed, in line with the year provided for organisations to officially report their gender pay gap statistics, and this period can be used constructively by organisations to help ease their employees’ concerns. It will be key to explain the purpose of the data, including how this will be collected and eventually used. Allocating responsibility for gathering the data to a department such as HR may ease fears about management use of this data, while providing an option to include “prefer not to say” will prevent false information, although may adversely affect the accuracy of any ethnicity pay gap data gathered.

The complexity of calculations

It has long been claimed that gender pay gap reporting carried out by organisations has been inaccurate, although it is unknown whether figures are deliberately misstated or errors are caused by uncertainty over the complex calculations required. Following a 2017 review by the Financial Times that highlighted inaccurate data by a number of organisations, it was later revealed that some companies had accessed and amended the data that was published on the Government’s reporting portal.

It is clear, therefore, that errors have been caused by the gender pay gap reporting calculations that only require employers to look at pay figures relating to employees who are separated into two categories. How much more complex do these calculations become when employees are separated into several categories based on their particular ethnicity which can be, as recognised by the ONS, up to 18 different categories? With employers being placed under a legal obligation to report accurate figures, and this obligation being actively monitored by the Equality and Human Rights Commission, it will be crucial that employers understand these complex calculations.

The Government’s consultation asked respondents whether they should require organisations to publish one pay gap figure, which compares hourly earnings of all ethnic minority employees as a percentage of the earnings of white British employees; several pay gap figures relating to particular ethnicity groups; or publish the numbers of each ethnic group in pay bands or quartiles. Each method has its disadvantages, such as data being skewed by high earners or combining ethnicity groups which can conceal the true picture, and the Government will need to properly analyse the calculation methods to ensure they remain simple for employers but also provide sufficient data to allow appropriate action to be taken to close any pay gaps identified.