Gender pay gap reporting: final draft regulations now out
(Updated January 2017)
The long-awaited Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 are expected to come into force on 6 April 2017, subject to Parliamentary approval. The Regulations will require businesses with 250 or more employees to publish certain information each year about the pay of male and female "relevant employees", with the first reports due by 4 April 2018. Separate but similar requirements are expected to be introduced simultaneously for public sector employers with 250 or more employees.
The Regulations are now in final form and are unlikely to change between now and April 2017, having been amended substantially following previous consultations. Additional Government guidance is due to be published shortly before the Regulations come into force.
2. What is the gender pay gap?
The gender pay gap is the difference between the average (mean and median) pay of all male "full pay relevant employees" and the average pay of all female "full pay relevant employees", expressed as a percentage of the average pay of male "full pay relevant employees". The concept of "full pay relevant employee" is explained in more detail below.
The Regulations also require businesses to report data about bonuses and any "bonus gap" between male and female employees, not just the "full pay" employees.
3. Which businesses are caught by the Regulations?
The Regulations apply to companies with 250 or more employees on the “relevant date”, i.e. 5 April each year (also called the "snapshot date"), with the report to be published within 12 months of that date. Businesses will need to assess their workforce on 5 April 2017 to determine whether they meet this threshold, in order to prepare to report by April 2018. They will also need to assess the position each 5 April to determine whether they will need to report by the following April. In practice, businesses will need to assess whether they will need to report well ahead of April 2017 and each subsequent April.
The threshold applies to individual entities and the reporting is to be done by entity: employee numbers are not to be aggregated across group companies.
Businesses should bear in mind that:
- The wide definition of "employee" used in the Equality Act 2010 applies to these Regulations too. As well as employees and apprentices, workers (e.g. casual workers) and some self-employed contractors who are required to provide services personally to the business (e.g. many freelancers) are included.
- Although partners and LLP members are specifically excluded from the definition of "relevant employees" (and so neither pay data nor bonus data concerning them needs to be published), they are not excluded from the definition of "employee" for the purposes of this 250+ employees threshold. True equity partners are not classed as "employees" even under the Equality Act definition but the position of fixed share and salaried partners is less clear. LLP members are likely, in many cases, to be "employees" within the wider Equality Act meaning. The result is that many LLPs will be required to produce gender pay gap reports, although will not need to include data relating to their LLP members. Employing staff via a separate services company, as is common practice for partnerships and LLPs, is a possible solution.
- The threshold is not restricted to employees who work ordinarily in GB, so it appears that employees based overseas must be counted towards the threshold.
4. Whose data needs to be included?
The Regulations require businesses to publish pay gap data relating to employees employed on the relevant 5th April, with the report published by the following 4th April. For the purposes of reporting:
- As explained, "employee" is defined widely and includes workers and some self-employed individuals, but not partners and LLP members
- Employers may also exclude from their calculations pay data for workers and contractors if the employer does not have the pay data (e.g. if a contractor is not paid through the payroll) and it is not reasonably practicable for the employer to obtain it
- Data about the pay gap must only be published for employees who are not on reduced or nil pay in the relevant pay period due to holiday, sick leave, maternity, paternity, adoption, parental or shared parental leave or other forms of leave. However, data about those employees must be included in the bonus information - see further below
- Again, this definition is not restricted to employees who ordinarily work in GB, so data for overseas employees must be included unless the employer does not have the pay data for an overseas worker or contractor and it is not reasonably practicable to obtain it.
5. What must the report contain?
The annual report must contain the:
- overall gender pay gap figures calculated using both mean and median hourly pay for male and female full pay relevant employees
- numbers of male and female full pay relevant employees in each of four pay bands (quartiles), based on the employer's overall pay range. This will show how the gender pay gap differs across the organisation, at different levels of seniority
- difference between male and female employees’ mean and median bonus pay over a 12-month period (i.e. the gender bonus gap)
- proportion of male and female employees who received a bonus in the same 12 months.
Businesses may provide a narrative explaining the figures and any steps to be taken to address any gaps but this is not mandatory.
6. Calculating overall pay gap figures
The Regulations set out a formula for calculating the pay gap figures to be reported.
The employer must first calculate the gross hourly pay for full pay relevant employees in the pay period within which 5 April falls. The “pay period” is defined according to how often the relevant employees are paid. So, if they are paid monthly, the pay period will be one month.
To calculate gross hourly pay, the gross weekly pay received by that employee during that pay period is divided by the employee’s contractual working hours according to the contract of employment in force on the relevant 5th April.
If the employee does not have normal working hours, the employer should calculate their average working hours over the 12 weeks ending with the last week of the pay period (excluding any weeks during which the employee did not work). If the employee had not been working for long enough, the employer must estimate the working hours fairly, bearing in mind the employee's contract and the average hours worked by similar employees.
Bonus pay paid in the relevant period must be included in this calculation but, if the bonus relates to a period longer than the pay period (e.g. it relates to the whole financial year or a quarter rather than the monthly pay period) the figure must be pro-rated to give a figure referable to the relevant pay period only. So, for example, if a bonus paid in April's monthly payroll is paid in respect of the previous financial year as a whole, the amount should be divided by 365.25 (the number of days in the year) and multiplied by 30.44 (the notional number of days per month specified by the Regulations) to give a bonus figure for the April pay period.
Once the employer has calculated the gross hourly pay for full pay relevant employees, it must use those figures to calculate the mean and median gross hourly pay for male and female full pay relevant employees and then calculate the mean and median pay gaps as follows:
- Median/mean gross hourly pay of male employees minus median/mean gross hourly pay of female employees
- Divide that figure by the median/mean gross hourly pay of male employees
- Multiply the total by 100 to give the pay gap percentage.
What counts as pay?
Pay is defined widely to include most remuneration paid through the employer’s payroll. However, the final Regulations clarify that employers are required to publish the mean and median hourly pay gap only for employees not receiving reduced or nil pay due to holiday, sick leave, maternity, paternity, adoption, parental or shared parental leave or other forms of leave. This clarification is helpful, as these figures could otherwise skew the data.
Pay is calculated on a gross basis, before any deductions for PAYE, national insurance contributions, pension contributions, student loan repayments and voluntary deductions (such as for a season ticket loan or gym membership).
- Basic pay
- On-call and standby allowances
- Shift premiums (i.e. premiums paid for working at certain times within normal working hours)
- Bonus pay (if paid within the relevant pay period)
- Car allowances paid through payroll
- Clothing, first aider and fire warden allowances
- Pay for leave (but only if on full pay as the employee is otherwise excluded from the calculations)
- Overtime pay
- Benefits in kind
- Vouchers or benefits provided under salary sacrifice schemes
- Redundancy pay or pay referable to termination of employment
- Pay for accrued holiday on termination
- Salary arrears or pay for a different pay period
- Tax credits
7. Salary quartiles
The employer will need to list each relevant employee in order of their gross hourly rate of pay, divide the employees into four “salary quartiles” and report on the percentage of men and women in each quartile.
The final Regulations clarify that the pay quartiles should each contain an equal number of employees, ranked from the highest to lowest paid by the hour. If employees at the same hourly rate fall into different pay quartiles, employers should ensure that ensure as far as possible that the proportions of men and women in each quartile are the same (this is intended to stop employers trying to skew the quartiles to suggest a more favourable gender pay balance).
8. Calculating gender bonus gap figures
The report must also separately include:
- The difference between male and female employees’ mean and median bonus pay over the 12 month period ending on 5 April
- The proportion of male and female employees who received a bonus in the same 12 months.
Businesses should note that this is not restricted to "full pay" employees, so includes those on reduced pay due to holiday, sick leave, maternity, paternity, adoption, parental or shared parental leave or other forms of leave.
What counts as “bonus pay”?
- 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)
- Shares, share options and other interests in securities, using the value they would have for tax purposes (and treated as being paid at the point at which they are treated as taxable earnings). Valuing shares in private companies is always complex and specialist advice may be required.
The relevant period for bonus pay reporting is the 12 month period ending on the relevant 5th April snapshot date.
Bonuses paid in April will effectively be counted twice, both under the specific bonus gap reporting provisions and also under the general pay gap reporting provisions (although annual/quarterly bonuses will be pro-rated for the latter purpose). The effect of any gender imbalance in those bonus payments will therefore be magnified in the reported figures.
9. When and where must the data be published?
Businesses must publish and retain their gender pay gap information on their website for 3 years, as well as uploading the information to a centralised Government website.
The report must contain a written statement confirming its accuracy and must be signed by a director (for companies), a designated member (for LLPs), a partner (for partnerships) or the business’ most senior employee.
The report must be published within 12 months of the “relevant date” (5 April each year), with the first reports due by 4 April 2018 and annual reports thereafter.
10. Accompanying narrative
The Government has said that the forthcoming guidance will strongly encourage businesses to provide a narrative explaining any pay gaps, although this will not be mandatory, and will provide recommended content for that narrative.
Narrative could include:
- Information about overtime practices (since overtime pay is not included in the definition of “pay”, the headline pay gap figures may give a misleading impression)
- Details of any bonus schemes which are effectively double-counted (see above);
- Any historic or sector-specific reasons for any gender pay gaps
- What action is being taken by the employer to narrow any gender pay gap.
11. Sanctions for non-compliance
There are no specific penalties currently envisaged for failing to comply with the Regulations, although the Government may publicly identify those who have not complied. The Equality and Human Rights Commission may take enforcement action for non-compliance (although it is unclear whether it will be given any additional funding to do so).
The publication or non-publication may attract negative publicity and could potentially affect recruitment. The sector tables may result in greater publicity and mean that the information is used in the war for talent between competitors.
Equal pay claims could also arise. But a business with a gender pay gap is not necessarily breaching equal pay law; and it is possible to break the law on equal pay with only a small gender pay gap.
Companies who have voluntarily reported already advocate transparency with individual employees over where they are within pay scales and the actions they can take to progress within the business.
12. What should businesses do now?
Businesses have some time to prepare and should take advantage of that lead-in time to:
- Ensure that their payroll and reporting systems will enable them to generate the relevant data easily
- Identify the likely “relevant employees” and "full pay relevant employees" in scope of the Regulations and any areas of uncertainty, such as the position of any fixed share or salaried partners
- Assess whether there are "relevant employees" in respect of whom the business does not have the relevant pay data and, if so, whether it would be reasonably practicable to obtain it
- Identify which elements of their remuneration packages are reportable
- Identify what would need to be reported as "bonus pay" and consider any valuation issues in respect of shares or share options
- Carry out provisional calculations to assess how big the first reported gap is likely to be, and to identify any employee relations or external reputational issues which may arise
- Consider what (lawful) steps the business could take to narrow any gender pay gap, such as mentoring schemes or other steps intended to address under-representation of women at senior levels.
Businesses may wish to ensure that these assessments and, in particular, draft reports are prepared under legal advice privilege, involving their in-house legal team as appropriate.
For more detailed guidance, please contact Jane Amphlett or your usual Employment team contact.
Uber: Employment Tribunal ruling
In one of the most high-profile employment cases of the year, an Employment Tribunal has ruled that two Uber drivers (whose claims were supported by the GMB trade union) are not genuinely self-employed but are "workers". This means that they are entitled to receive the national minimum wage, paid holiday, statutory sick pay and other employment rights. The decision, which follows similar litigation in the US, also raises the possibility that HMRC will pursue Uber for National Insurance contributions, which could be a substantial sum.
Uber has announced its intention to appeal against the decision.
The decision is very fact-specific, as cases on employee/worker status often are. Although it has been seen as a test case for "gig economy" businesses, it does not mean that businesses cannot lawfully engage individuals on a self-employed basis. The Tribunal emphasised that Uber could have structured its business so that the drivers were genuinely self-employed. However, the case has some key lessons for businesses in all sectors.
Ensure written contracts reflect how working arrangements operate in practice
Uber was heavily criticised by the Tribunal for using contracts which sought to suggest that Uber's drivers entered into contracts directly with passengers, when commercial reality suggested that any contract was between Uber and the passenger, with the driver providing the service on Uber's behalf. As a result, it largely disregarded the written contracts and focused on how the drivers operated in practice.
Self-employed individuals should be treated as independent
The Tribunal found that Uber exercised a high degree of control over the drivers. Uber recruited and interviewed the drivers, it required drivers to accept trips and not cancel them (penalising those who did by logging them out of the app), it imposed conditions on drivers (such as what model of car they could use) and effectively performance-managed them through its ratings system. Although there is an obvious commercial benefit in exercising such control – helping to maintain a quality service for customers – businesses should be aware that it increases the risk of individuals being deemed to be workers or employees.
A contributing factor in the Tribunals decision was the fact that Uber's corporate communications used language inconsistent with self-employment to describe the drivers, such as referring to them as "Uber's drivers" and saying that Uber had generated "thousands of jobs in the UK". Businesses which engage self-employed individuals should take care to ensure that internal and external communications are consistent with that status (e.g. refer to "fees" rather than "wages").
The case looks set to run and run, as the appeal process could take some time. In the meantime, HMRC has announced that it has a new team looking specifically at "bogus" self-employment and there appears to be increasing political appetite for a review of the law on employment status, with a Government-commissioned review and a Select Committee enquiry both announced recently. Businesses will need to stay ahead of proposed changes so that they can plan effectively and those most affected may wish to make submissions to the enquiry so that they can ensure their voice is heard.
Whistleblowing and corporate governance
Having robust internal whistleblowing procedures in place can be essential when seeking to defend a whistleblowing claim in the Employment Tribunal; it is also increasingly necessary from a regulatory and corporate governance perspective. We look at three key reasons why businesses should put such procedures in place and ensure they are followed.
Under the Bribery Act a business is guilty of a criminal offence where a person associated with it (such as a director or employee) bribes another person intending to obtain/retain business or a commercial advantage for the business. However a business will have a defence a bribery charge if it can show that it has in place adequate procedures designed to prevent bribery.
The Ministry of Justice issued guidance which is intended to help commercial organisations of all sizes and sectors understand the type of procedures they can put in place to prevent bribery. Under the guidance companies are advised to have in place procedures for reporting bribery which would include "speak up" or whistleblowing procedures. Failing to have effective whistleblowing mechanisms could make it harder to defend a bribery charge, as the business may not be able to argue that it has adequate procedures in place to prevent bribery.
Deferred Prosecution Agreements
Businesses have a strong incentive to encourage early internal whistleblowing in respect of any allegations of criminal conduct. Identifying wrongdoing at an early stage can make an enormous difference to a business' position. For example, this could afford the business an opportunity to self-report (for instance to the SFO where the criminal conduct involves serious or complex fraud, bribery or corruption) which in turn may provide them the opportunity to seek a deferred prosecution agreement (under which a business may avoid a criminal conviction in exchange for full cooperation).
Avoiding a criminal conviction is likely to have significant reputational and commercial benefits. However, employees may be deterred from reporting such issues internally if the business does not have adequate whistleblowing procedures in place or has a reputation for marginalising employees who report concerns. Businesses should review their procedures and practices to ensure that legitimate whistleblowers are not being discouraged.
From March 2016, some larger financial services firms (primarily banks, building societies, large investment firms and insurers) were obliged to appoint a whistleblowers' champion and, from 7 September 2016, were obliged to put further measures in place to encourage whistleblowers, including an independent whistleblowing channel through which disclosures can be made confidentially by any person wishing to disclose a reportable concern.
Under the new rules, there is an express link between how a firm handles whistleblowers and the fitness and propriety of the firm and its employees. Detrimental treatment of a whistleblower could potentially result in regulatory approval for the firm or for its senior staff being withdrawn.
These requirements are likely to be extended to smaller financial services firms. It is therefore essential that these businesses assess now whether their whistleblowing procedures are up to standard.
Gay cake case: implications for businesses
All businesses need to be aware of the law prohibiting discrimination in the provision of goods and services. The scope is very broad: it covers everything from ensuring premises are accessible by disabled customers to ensuring that customers with protected characteristics are not placed at a disadvantage by the organisation's business practices. The risks lie primarily in the reputational damage which claims often bring.
The Northern Irish Court of Appeal has confirmed that a bakery's refusal to bake a cake with a slogan supporting equal marriage was discrimination on grounds of sexual orientation. The case has attracted considerable press interest and controversy, as an apparent clash between religious freedom and LGBT rights.
A crucial question in this case was whether the customer (who was gay himself) was discriminated against when the bakery refused to provide him with a cake with the slogan he requested as decoration. The bakery argued that, as many heterosexual people support equal marriage, it could not be regarded as discrimination against the customer because he was a gay man; the bakery was refusing to support a particular cause. However, the Court of Appeal decided that the refusal was associative discrimination: i.e. refusing to provide a customer with a service because he supported a cause closely associated with the LGBT community.
Businesses should take care when dealing with campaigns or causes closely linked to a group of people with a particular protected characteristic, due to the risk of discrimination claims. In our experience, campaign groups are increasingly savvy about using the threat of goods and services discrimination claims as a means of obtaining publicity for their cause. So, businesses need to be alive to the legal and reputational risks.
Salary sacrifice benefits reduced
The Government has confirmed in the Chancellor's Autumn Statement that it will go ahead with proposals to subject most benefits in kind provided through salary sacrifice to tax and NICs, based on the higher of the amount of salary sacrificed or the normal cash value of the benefit. This will take effect in April 2017. The following will be exempted:
- employer pension contributions;
- employer-provided pension advice;
- employer-supported childcare and provision of workplace nurseries; and
- cycles and cyclist’s safety equipment which meet statutory conditions.
Businesses which provide non-exempt benefits through salary sacrifice should review their benefits schemes and employment contracts now.
Taxation of termination – payments
The Government has also confirmed that changes to the taxation of termination payments will go ahead and will be brought into force in April 2018. The headline points are:
- HMRC will clarify that the personal injury tax exemption does not apply to payments for injury to feelings;
- Employers' NICs will be payable on termination payments over £30k;
- All PILONs will be treated as subject to tax and NICs, whether or not making a PILON is expressly permitted by the employment contract; and
- Foreign service relief will be abolished (except for seafarers).
HMRC action on "self-employment"
HMRC has announced a new specialist team to focus on businesses that use self-employed/freelance staff in what amount to full-time roles and to examine whether those individuals should be subject to PAYE tax and National Insurance contributions.
Executive pay and corporate governance
The Government is seeking views on possible reforms to executive pay and corporate governance in private companies, including the possible introduction of binding shareholder votes on executive pay in larger private companies. However, it has retreated from previous suggestions that it could be mandatory for some companies to have worker representatives on their boards. The consultation closes on 17 February 2017.
The High Court has ruled that the Government must consult Parliament before Article 50 is triggered to begin the process of the UK's exit from the EU. The Government has appealed against the decision, and the appeal was heard by the Supreme Court from 5 – 9 December, with a ruling due by the end of January. While the Prime Minister has indicated that this will not delay the anticipated timetable (with Article 50 due to be triggered in March 2017), some commentators believe that delay is now likely, particularly if the Supreme Court decides that a ruling from the European Court of Justice is necessary to decide the case. In the meantime, HR and in-house counsel should ensure that workforce planning considers the impact of Brexit. Our detailed guide is here.
Howard Kennedy Employment in the news
Jane Amphlett on when a comment you later regret could cost you your job (CityAM)
Jane Amphlett on what an employee should tell their boss when they are off sick due to a miscarriage (Financial News - subscription)
Alex Mizzi on the implications of the Uber case for the gig economy (BBC)
Alex Mizzi quoted in People Management magazine on the HMRC crackdown on self-employment and on hiring autistic staff(People Management)
Gill White and Alex Mizzi on Board diversity (People Management)
HR network breakfast for tech, media and the creative industries
The second of our HR Network Breakfast will take place on 18 January 2017 at 8.00 am for an 8.30 am start. This breakfast will focus on employment status and the gig economy, staff incentives and bonuses and business protection.
Our roundtable breakfasts create a network for those responsible for staffing/HR matters in particular sectors to discuss key current workforce issues. The aim is to connect attendees with ideas, knowledge and people who can share and discuss their views.
We take this opportunity to wish you all a very happy festive season and a happy and prosperous 2017.
This newsletter is for general information only and is not a binding offer to provide legal services. Nothing in this newsletter constitutes advice, nor does the transmission of any information or materials create any contractual relationship or retainer. Individual circumstances vary and you must instruct us formally if you would like us to assist you with a specific legal issue. We disclaim all liability and responsibility arising from any reliance placed on any materials in our newsletter by any recipient of our newsletter or by anyone who may be informed of its contents.