On 17 April 2023, the Department for Business & Trade (DBT) published new guidance for employers on ethnicity pay reporting. There is no obligation to report on the ethnicity pay gap but the DBT explains that it can help to build transparency and trust among employees. It states that providing a consistent approach to measuring pay differences will enable meaningful comparisons to be made between different periods of time at the same organisation, and between different employers.
There are two important points to note:
- Employers can decide to publish their pay gap internally only, or internally and externally.
- Contrary to what the Government said previously, employers who voluntarily publish their ethnicity pay gap data will not be required to publish an action plan setting out how they intend to close the gap.
Comprising a suite of five documents, the guidance explains how to measure, report on and address any ethnicity pay differences within the workforce.
The guidance notes that the UK workforce is increasingly diverse but data shows that there are wide variations in gross earnings between ethnic groups.
The Office for National Statistics last reported on ethnicity pay gaps in 2019. At that date, 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 – Chinese, white Irish, white and Asian, and Indian – earned higher hourly pay than white British employees.
In 2019, the ONS found that the ethnicity pay gap was larger for men than women. Looking at the regions, it was largest in London and smallest in Wales.
Ethnicity and gender pay reporting
Much of the guidance mirrors the approach set out in the guidance for gender pay gap reporting, to avoid employers having to run different processes to collect pay data for the two sets of calculations. However, ethnicity pay reporting is much more complicated than gender pay reporting: employees may refuse to disclose their ethnicity, meaning that the statistics may not be meaningful, and gender pay analysis only involves a comparison of two groups (men and women) whereas ethnicity pay analysis can involve many different ethnic groups if the workforce is ethnically diverse.
Those managing the improvement of the experience of ethnic minority staff in the workplace may also be keen to see other ethnicity data beyond that relating to pay; for example seniority statistics, entry-level information and promotion-related data can all help organisations understand their achievements and challenges in terms of ethnic diversity and accessible processes.
What is an ethnicity pay gap?
An ethnicity pay gap is a measure of the difference between ethnic groups' average earnings across an organisation over a period of time. It is not a comparison of employees of different ethnicities. It is expressed as a percentage of one group's earnings so employers who wish to report on their ethnicity pay gap will need to calculate whether employees in a certain ethnic group earn x% less or x% more than employees in a different ethnic group per hour. A pay gap can be calculated either across the whole workforce or for groups within the workforce.
An employer can have a fair pay and reward policy and have equal pay (ie everyone performing equal work or work of equal value is paid the same) but could still have an ethnicity pay gap if a higher proportion of people from one ethnic group are in the lowest pay bands.
Collecting ethnicity data
Employers should consider the size of any particular ethnic group when looking at a breakdown of pay statistics, particularly if they are intending to publish the results. The guidance recommends that each ethnic group has a minimum of 50 employees to ensure the 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 aggregated with another group.
Reporting ethnicity pay calculations
As mentioned above employers do not have to publish their results but, if they do, they should ensure that they explain their calculations carefully so that it is clear why a pay disparity 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 (such as the mean pay of white British employees compared to the mean pay of all other ethnic groups) 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 disparities exist and what they have done (and are doing) to tackle them.
The causes of pay disparities
The guidance is careful to point out that there may be legitimate reasons for pay variations across ethnic groups - disparities may not have arisen as a result of discrimination. For example, an ethnic group may on average receive lower pay than another group because the first group disproportionately applies for more junior lower paid positions. On the other hand, there could be a disparity because the employer does not provide access to promotion opportunities for people from the first group. Without looking into the reasons for the differences in pay, the employer will not know what is causing them and, most importantly, will not be able to take steps to address them.
The guidance includes a list of questions that an employer can consider in seeking to understand the cause of their pay gap, such as whether people from certain groups get stuck at certain levels within the organisation and whether some ethnic groups are more likely to work in particular locations, which could have an impact on pay.
Where pay differences are found, employers are encouraged to explore the causes and decide what further action is needed to address any disparities through tackling the causes they have identified. An action plan should set out clear achievable targets, include a timescale and explain how success will be measured. An important element of the action plan could be encouraging employees to disclose their ethnicity data in future in order to improve the quality of the statistics over time.
Although it is not compulsory, reporting on ethnicity pay and taking steps to address any disparities uncovered should improve employee engagement. For any organisation that is looking at ESG compliance and, in particular, the "S" pillar, ethnicity pay gap reporting will be an important component.