GENDER PAY GAP REPORTING WHAT IT MEANS AND WHAT EMPLOYERS NEED TO DO

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1 GENDER PAY GAP REPORTING WHAT IT MEANS AND WHAT EMPLOYERS NEED TO DO This note provides a series of Q&As concerning the final draft gender pay gap regulations. It is intended to provide a helpful overview of the regulations and what employers will be required to do. It is not intended to provide legal advice or cover all aspects of the relevant law. We may update the note in due course, when additional guidance is available. Any questions regarding compliance, or any specific requests for legal advice, should be directed to Nic Hart at nhart@steptoe.com in the first instance. The government has published separate regulations, which extend the duty to publish annual gender pay gap reports to public sector employers. Broadly speaking, the duties are the same but there are a number of differences. This note does not address the duties of public sector employers. There has been a lot of commentary about gender pay gap reporting. Have the final draft regulations now been published? Yes subject to parliamentary approval, the regulations are expected to come into force on 6 April Who is required to comply with the new reporting regime? The reporting regime applies to all private or voluntary sector employers with 250 or more employees on the snapshot date of 5 April each year. It does not matter what the employees earn or their seniority. As soon as an employer meets the threshold of 250 or more employees, it must report in respect of all relevant employees (see below). Within a group of companies, and subject to any further guidance, each company in a group will be considered to be a separate entity and must therefore report separately. Some groups of companies may only have some entities that meet the threshold. Who is an employee? The starting point is that a relevant employee is any employee employed on the snapshot date of 5 April each year. The regulations use the broad definition of employee under the Equality Act The broad definition of employee catches anyone employed under a contract of service, a contract of apprenticeship or a contract personally to do work. This potentially covers many self-employed workers, including so-called consultants, who are obliged to personally perform work for and under the direction of another. There is, however, a new exception where it would be difficult to obtain pay data for some individuals. It is not clear exactly how this new exception will work in practice. 1

2 Casual workers and bank staff engaged directly by an employer will fall within the scope of the regulations, including workers engaged under a zero hours contract. Agency workers will generally be regarded as being as employed by the employment business that supplies them. Where this is the case, we understand that it will be for the employment business to comply with the reporting obligations, as appropriate, and the hirer will not need to take the agency workers into account when complying with its reporting obligations. Employees on sick leave, family-related leave or sabbatical are excluded from the reporting obligation if they are receiving less than full pay on the snapshot date 5 April each year. All relevant employees must, however, be included when calculating the gender bonus gap. It remains unclear the extent to which employees working overseas may need to be taken into account, but such employees are not expressly excluded from the definition of relevant employee under the regulations. The government has indicated that those employees with a close connection to Great Britain will need to be taken into account. The draft Acas guidance (please see the link at the end of this note) provides additional information. When do we need to start doing anything? Employers who meet the threshold are required to analyse their gender pay gap and publish a report within 12 months of the snapshot date of 5 April each year. This means that an employer s first gender pay report in respect of its 2017 information - will be due by 4 April At the end of this document, there are some practical steps you can be taking now. What do we need to report on? 1 Difference between the mean hourly rate of pay of male and female full-pay relevant employees, based on the pay period including a snapshot date of 5 April each year 2 Difference between the median hourly rate of pay of male and female full-pay relevant employees, based on the pay period including a snapshot date of 5 April each year 3 Difference between the mean bonus pay of male and female relevant employees 4 Difference between the median bonus pay of male and female relevant employees 5 Proportion of male and female relevant employees who were paid bonus pay during the relevant bonus pay period (the period of 12 months ending with the snapshot date of 5 April each year) 6 Proportions of male and female full-pay relevant employees in each of four quartile pay bands An employer that meets the above threshold must report on each of the above. It does not matter, for example, if only 20 employees receive a bonus. Each separate reporting requirement must be met. What counts as pay? The regulations differentiate between ordinary pay and bonus pay. For the purposes of gender pay gap reporting, ordinary pay includes: 2

3 Basic pay Allowances (but note comments below) Pay for piecework Pay for leave (where an employee is receiving full pay) Shift premium pay (the difference between basic pay and any higher rate of pay for work during different times of the day or night) Ordinary pay does not include: Overtime pay Redundancy or termination payments Pay in lieu of leave Remuneration provided otherwise than in money (e.g. benefits in kind) Expenses incurred wholly and necessarily in the course of employment The regulations define allowances as any sum paid in respect of: Any duty of the employee (e.g. fire warden) ancillary to the employee s main duties The location of the employment in a particular area (e.g. London weighting) The purchase, lease or maintenance of a vehicle The recruitment and retention of an employee The purchase, lease of maintenance of an item An employee s ordinary pay and bonus pay must be calculated before deductions made at source e.g. for income tax. As overtime pay is excluded from ordinary pay, the gender pay gap figures will not take into account that men may be able to work more overtime than women with caring responsibilities. If women s earnings are affected by not being able to work overtime, the government has suggested that employers may wish to highlight the impact of wider cultural drivers for any gender pay gap in any voluntary narratives they provide. How is bonus pay defined? Firstly, bonus pay is included both when calculating an employee s hourly rate of pay (see below) and in the separate gender bonus gap figures. Secondly, bonus pay is defined as remuneration in the form of money, vouchers, securities, securities options or interests in securities which relates to profit sharing, productivity, performance, incentive or commission. Securities, securities options and interests in securities have the same meaning as in section 420 of the Income Tax (Earnings and Pensions) Act Discretionary bonuses, annual performance bonuses and awards of shares are therefore some of the types of bonuses that may be included in bonus pay. Bonus pay does not include ordinary pay (see above), remuneration referable to overtime or remuneration referable to redundancy or the termination of employment. 3

4 The final draft regulations have made it clear that any non-cash bonus awards (e.g. shares, share options and interests in securities) are deemed paid at the time, and in the amount in respect of which, they give rise to taxable earnings income. The relevant period for bonus pay reporting is the 12-month period ending 5 April each year. As such, the first gender pay gap report must take into account bonuses paid between 6 April 2016 and 5 April Where any bonus relates to a period of longer than a year (e.g. in respect of long term incentive awards), there is no provision for pro-rating. The whole amount paid in the relevant year ending 5 April must be taken into account in the gender bonus gap figure for that year even if it relates to performance in other years. However, a pro rata amount must be used when calculating the difference in hourly pay. How do we calculate the gender pay gap for hourly rate of pay? The gender pay gap, both for hourly rate of pay and bonus pay, is always expressed as a percentage. To calculate the overall gender pay gap figures, employers will first need to calculate an hourly rate of pay for each full-pay relevant employee. The final draft regulations set out a six-step process for doing this: 1. Identify all amounts of ordinary pay and bonus pay paid to the employee during the relevant pay period. (The pay period is the period in respect of which the employer pays the employee basic pay. So for a monthly-paid employee the pay period is a month and for a weekly-paid employee the pay period is a week. The relevant pay period for calculating an employee s hourly rate of pay is the pay period within which the snapshot date of 5 April falls.) 2. Exclude any amount of ordinary pay that would normally fall to be paid in a different pay period. 3. In the case of bonus pay which is paid for a period other than the pay period (for example an annual bonus paid in April), divide the amount by the length of the bonus period and multiply it by the length of the relevant pay period. The bonus pay is therefore pro-rated for the relevant pay period. A year is always treated as days for these purposes, and a month is always treated as days. 4. Add together the amounts identified under Step 1 (once adjusted). 5. Multiply the amount calculated under Step 4 by the appropriate multiplier (7 divided by the number of days in the relevant pay period, which for a month is always treated as days). 6. Divide the amount by the number of working hours in a week for that employee. An employer then has an employee s hourly rate of pay. 4

5 Difference in mean hourly rate of pay The difference between the mean hourly rate of pay for male full-pay relevant employees and female full-pay relevant employees must be expressed as a % of the mean hourly rate of pay of male full-pay relevant employees by using the following formula: A B x 100 A A = the mean hourly of pay of all male full-pay relevant employees B = the mean hourly rate of pay of all female full-pay relevant employees Difference in median hourly rate of pay The difference between the median hourly rate of pay for male full-pay relevant employees and female full-pay relevant employees must be expressed using the same formula: A B x 100 A A = the median hourly of pay of all male full-pay relevant employees B = the median hourly rate of pay of all female full-pay relevant employees Remember: when calculating the difference in mean and median hourly rates of pay, you must take into account full-pay relevant employees only. This means that employees employed on the relevant snapshot date of 5 April each year who are in receipt of less than full pay because they off sick or on maternity leave, for example, do not need to be taken into account when calculating the differences in median and mean hourly rates of pay. What about calculating an employee s weekly working hours? There are three options: Option 1 Normal working hours (which don t differ from week to week) The weekly working hours are the contractual hours under the contract of employment in force on the relevant snapshot date. Option 2 - No normal working hours Take the average number of weekly working hours using a 12-week reference period, ending with the last complete week of the relevant pay period (see above); or Where the employee has not been at work for a sufficient period, or the average cannot be calculated, take a number which fairly represents the number of weekly working hours (having regard to the average number of working hours in a week which the employee could expect under their contract of employment, and the average number of working hours of other employees engaged in comparable employment with the same employer). Option 3 Piecework Weekly working hours are calculated in the same way as under the National Minimum Wage Regulations

6 How do we calculate the gender bonus gap? 1. Identify how to treat various types of bonus pay and decide which elements of bonus pay fall within the reporting requirements. This is likely to be the difficult bit. 2. Use the same formulas as detailed above to calculate the difference in mean and median bonus pay for male and female relevant employees. A will be the mean (or median) bonus pay of all male relevant employees. B will be the mean (or median) bonus pay of all female relevant employees. In order to calculate average bonus pay, an employer must add together the different types of bonus pay received by an employee during the relevant 12-month period. This is the period of 12 months ending with the snapshot date of 5 April each year. This may include commission, a discretionary annual bonus and a productivity bonus for example. It is not necessary to include bonuses for relevant employees who have left employment before the relevant snapshot date of 5 April each year. However, employees not in receipt of full pay will need to be taken into account when calculating the gender bonus gap. How do we calculate the proportion of male and female employees who received bonus pay? The regulations set out the following calculation: A x 100 B A = the number of male or female relevant employees paid bonus pay during the relevant period B = the number of male or female relevant employees Remember: you will be performing one calculation for female employees and one calculation for male employees. This means that the proportion of female relevant employees who were paid a bonus will be expressed as a % of female relevant employees (and the same for men). As detailed above, all relevant employees (i.e. who are employed on the snapshot date of 5 April each year) not only those receiving full pay are included in the gender bonus gap calculations. 6

7 How do we identify the quartile pay bands? In addition to providing the information detailed above, an employer must provide the numbers of men and women in each of four quartile pay bands. The four-step process is as follows: 1. Determine the hourly rate of pay for each male and female full-pay relevant employee and rank those employees from lowest paid to highest paid. 2. Divide the ranked employees into four sections, each comprising (so far as possible) an equal number of employees to determine lower, lower middle, upper middle and upper quartile bands. 3. Apply the formula A/B x 100 to calculate the proportion of male full-pay relevant employees within each band. 4. Apply the same formula for female full-pay relevant employees within each band. A = number of male (or female) full-pay relevant employees in each quartile band. B = number of full-pay relevant employees in the particular quartile band. The rationale for reporting on salary quartiles is that it enables employers to identify where women are concentrated in terms of their remuneration and to consider any blockages to progression. The figures will also reveal how the gender pay gap differs at different levels within an employer organisation. The regulations do not require employers to publish the actual monetary range of each pay band. Where do we report? Employers must: 1. publish their report on their own website and retain the information online for three years. The information must be presented in a way that is accessible to all employees and the public. 2. upload the information to a designated government website. The information provided must be accompanied by the name and job title of the person who signed the applicable compliance statement. This statement is a written statement confirming that the gender pay gap information is accurate. In a company, this will be someone at director level. If an employer does not have its own website, for example where it is part of a group of companies, the government has previously suggested that an employer may want to create 7

8 its own webpage to present the information or publish a website hosted by a parent company. What about our normal corporate reporting requirements? How does gender pay gap reporting sit alongside this? The gender pay gap reporting regime is separate and in addition to other corporate reporting requirements. There is currently no requirement to publish gender pay gap information in a company s annual report (although listed companies are required to provide certain genderbased information in their strategic reports). Can we provide any additional information in our report? Yes but there is no obligation to do this. Employers may, however, want to provide narratives that attempt to provide some context e.g. to explain any gaps or anomalies and set out actions that will be taken to close any gaps. Examples of information that could be included in any narratives are: Skills shortages for certain roles, which means that they attract a higher salary. Historic discrepancies in an organisation (e.g. because of a previous TUPE transfer or due to regional or sector issues). Details of overtime routinely worked, and the proportion of men and women regularly working overtime. It may be, for example, that junior employees may be receiving more than the hourly rate used in the gender pay gap calculations when overtime is taken into account. Are there any enforcement mechanisms or sanctions? In short, no there are no specific enforcement mechanisms or any specific sanctions for failing to comply with the new reporting regime (including the publication of misleading or inaccurate reports). The government has, however, indicated that it will carry out periodic checks to assess non-compliance, produce sector-specific tables and highlight employers publishing full and explanatory information. In particular, the government has stated that it will be producing a database of compliant employers. The government appears to be considering making this database public. However, there is currently no explicit suggestion that non-compliant employers will be publicly named and shamed. When awarding government contracts, it is possible that the government may take any gender pay gaps (and compliance with the regulations) into account. Employers who tender for government contracts should keep this in mind. In addition, the government has attempted to give the regulations the appearance of having some teeth by remarking in the Explanatory Notes (not in the regulations themselves) that failure to comply with the regulations is an unlawful act, which can empower the Equality and Human Rights Commission ( EHRC ) to take enforcement action. In theory, therefore, the EHRC may be able to take action against employers who fail to comply. However, it seems unlikely that the EHRC is currently resourced to take such an active role even if it were to have the relevant powers. 8

9 Where does this leave us as an employer? As an employer, there are a number of things you can do now in readiness for the reporting requirements: Identify whether or not you are likely to meet the required threshold and therefore be required to report. Plan a strategy to comply with your obligations. Have regard to data protection legislation and ensure that you comply with the requirements of the relevant legislation. Also have regard to commercially sensitive information. Identify what information you will need to gather to comply with the obligations. Consider what voluntary narratives you may want to add to any report to put your organisation s figures in context. Consider your communication strategy, both internally and externally, for the time when you publish your gender pay gap report. How are you going to address any gaps? What message are you going to be sending out to employees? How are going to address any potentially adverse publicity? At the time of publication, Acas has produced draft guidance on managing gender pay reporting in the private and voluntary sectors. A link to the guidance is here: Finally, keep in mind that any internal correspondence (e.g. between managers and HR) will be disclosable in the context of any litigation. Be careful what you commit to writing and involve external counsel if you want communications to be legally privileged. Steptoe & Johnson January 2017 For more information, visit 9