What does the new guidance say about employer ethnicity pay gap reporting?

In 2019, the Office of National Statistics (ONS) reported that the pay gap between white and ethnic minority employees in England and Wales had narrowed to its smallest level since 2012. Most ethnic groups analysed earned less than white British employees but those in several groups such as Chinese, white Irish, white and Asian, and Indian earned higher hourly pay than white British employees.

Ethnicity pay gap reporting involves calculating and reporting whether employees in a certain ethnic group earn less or more per hour than employees of a different ethnicity. It is expressed as a percentage of one group's earnings so employers will need to calculate whether employees in a certain ethnic group earn less or more than employees in a different ethnic group per hour. A pay gap can be calculated either across the whole workforce or for particular ethnic groups within the workforce.

In April 2023, the Department for Business and Trade (DBT) published new guidance for employers on ethnicity pay reporting. There is no obligation on employers to disclose this information publicly but the DBT explains that it can help to build trust amongst employees. The new guidance states that developing and providing a consistent approach to measuring pay differences will enable meaningful comparisons to be made with the aim of leading to meaning action.

Collecting Ethnicity Data

Employers tend to face challenges when attempting to collect ethnicity data. The Equality and Human Rights Commission Research Report from 2018 found that half (51%) of employers said they face barriers when collecting this data from employees. The process has been described as intrusive, onerous and in some cases, employees outright refuse to share this ethnic information.

As special category data under GDPR, employees must be made aware of how their data will be used and how it will be kept safe and secure, including ensuring that they cannot be identified from it or any analysis that is published.

Employers should consider the size of an ethnic group when looking at a breakdown of pay statistics, particularly if they intend to publish the results. The guidance recommends that each ethnic group has a minimum of 50 employees to ensure results are statistically robust and to avoid possible identification of individual employees. Where a group is smaller than 50, the DBT suggests that the group should be combined with another group.

Preparing your Payroll Data

The advice laid out in this section mirrors that of the Gender Pay Gap Report (GPGR) guidelines and has been kept mostly the same. Employers are advised to:

• Determine who are “full-pay relevant employees” and “relevant employees”;
• Make a list of these categorised employees and their ethnicity data, plus their ordinary pay, bonus pay, and weekly working hours - and then work out what their hourly pay is; and
• Use that data to make the ethnicity pay calculations.

Making your Calculations

This section includes step-by-step instructions on how to do the recommended calculations. The following calculations are suggested for employers to carry out:

• Percentage of employees in different ethnic groups in each hourly pay quarter;
• Mean (average) ethnicity pay gap using hourly pay;
• Median ethnicity pay gap using hourly pay;
• Representation of ethnic groups in your organisation; and
• Percentage of employees who did not disclose their ethnicity by answering “unknown” or “prefer not to say”.

The guidance also recommends separating any bonus pay that employees’ receive, particularly if this is a substantial percentage of their salary by using the following calculations:

• Percentage of employees in different ethnic groups receiving bonus pay;
• Mean (average) ethnicity pay gap for bonus pay; and
• Median ethnicity pay gap for bonus pay.

Understanding and Reporting your Data

As mentioned above, employers do not have to publish their results but, if they do, they should ensure that they explain their calculations so that it is clear why a pay difference may exist and what is being done to improve it.

The guidance advises employers to publish a range of calculations broken down by ethnicity categories to ensure that privacy is protected and to make sure that the statistics are meaningful; using just one measure or percentage will not be very insightful. Employers should also disclose the percentage of employees who did not disclose their ethnicity or responded "prefer not to say".

As with gender pay gap reporting, employers can include a supporting narrative to explain the figures, why they believe pay differences exist and what they have done (and are doing) to tackle them.

In 2020, a survey carried out by PWC of more than 100 employers found that 67% collect ethnicity data, 23% calculate their ethnicity pay gap, and 40% of these published it voluntarily. However, in 2021, a study carried out by HR DataHub found that out of 170 UK organisations, just 64 published their ethnicity pay gap. This was down from 129 in 2020 and even lower than 2019 at 98.

The guidance also adopts a sensible approach by following GPGR as far as is possible whilst not shying away from addressing the more complex issues that apply to EPGR.

Labour have pledged to make EPGR mandatory if they get into power at the next general election in 2024. Employers who want to make meaningful progress in diversity, equity and inclusion can be prepared for this change by engaging with the proposed methods outlined in the guidance before it becomes law.

If you have any concerns or questions about the ethnic pay gap and this new guidance, contract our Employment Team by emailing employment@warnegoodman.co.uk or calling 023 8071 7717.