Gender pay gap reporting: 5 years on

This article looks at what has worked, what isn’t working, and whether we can learn from what other countries are doing about gender pay gap reporting.

Gender pay gap reporting: what works

In this section, we set out our thoughts on what is working well with the existing gender pay gap reporting regime.

High gender pay gap compliance: lots of employers are reporting their gender pay gaps

Around 10,000 employers have been publishing their gender pay gaps each year. Previously, the EHRC has proudly stated 100% compliance rates. Many employers (but far from all) are also publishing detailed narratives explaining their gaps and setting out their diversity agenda.

More employers are also voluntarily reporting their gaps. In 2017 just 285 small employers (with less than 250 employees) reported their gaps. In 2021, there were 517 small employers. Even in 2019 – when no employers were legally required to report any gaps – nearly 7,000 employers voluntarily provided them.

Gender pay gap reporting has increased attention on gender diversity

Many employers were surprised when they calculated their gender pay gaps for the first time over 5 years ago. Issues that had previously gone unnoticed or unaddressed were thrust into the spotlight, especially issues around the types of work that women tend to do, the underrepresentation of women in senior or more highly paid roles across many sectors and the impact of motherhood on pay and career.

Our experience is that it has caused employers to think about gender diversity in a much more structured way. The requirement to annually calculate and report statistics has forced gender diversity to be a high and recurring priority on many employers’ agendas. Even though it will only be voluntary, ethnicity pay gap reporting could achieve the same. This culture change has been an important success of gender pay gap reporting that can’t be overstated.

When gender pay gap reporting first came into effect, the mainstream press was rife with stories about employers and their high gender pay gaps. Today, they are less common but the more niche industry-specific publications continue to expose employers with high gender pay gaps. Moreover, employers are facing greater pressure from their workforce and their customers for action on their gender pay gaps. Questions about pay gaps can often be included in pitch and tender documents.

Stubborn pay gaps can be hard to shift, especially when they are caused by lack of women in senior or highly paid roles. Turnover in the highest paid roles tends to be low, so opportunities for change are limited. Moreover, change can be challenging if there is a lack of diversity in the existing talent pool, and particularly since the scope for taking positive action is heavily restricted by UK law. However, 5 years is long enough for diversity initiatives to have started to show some results, even if they are limited and the pace of change is slow. Employers that have made no progress to date may face difficult questions. Given employers’ finite resources, their time and effort should be spent on only those initiatives that are proven to deliver results – helpfully, research is available to show what these are.

The UK’s gender pay gap has reduced since 2017. Does this mean the Regulations have helped? It’s difficult to say for sure. Gender pay gaps were already falling before 2017 and there has been no obvious change in trend since then. Despite a small covid-related bump, they continue to fall.

Gender pay gap reporting: what doesn’t work

In this section, we consider the problems with the existing gender pay gap reporting regime and discuss how it might be improved.

The detail: definitions in the gender pay gap reporting regulations

Gender pay gap reporting should be simple – the calculations that are required have their quirks, but are relatively straightforward. However, it is the definitions set out by the Regulations that make gender pay gap reporting a headache for employers. We’ve written before about the common problems employers can face with gender pay gap reporting. The government guidance is useful and covers many of these issues, but could be further enhanced.

Partners excluded from gender pay gaps

Partners and members of an LLP are expressly excluded from the definition of “employee”, meaning that they aren’t included in any of the gender pay gap reporting figures. They do not even count towards headcount.

The reason they were excluded is that partners are not “paid”. They instead receive “drawings” that can vary a lot over time. Taking a snapshot of just one month is therefore potentially not representative of their actual income.

However, since partners are the most well paid in a business, excluding them from the gender pay gap misses a vital piece of the diversity puzzle. It creates a bizarre incentive for employers to promote men into the partnership but leave senior women lingering just below.

The Law Society has published guidance to law firms that want to calculate and voluntarily report gender pay gaps including partners. They suggest that, instead of taking a snapshot of just April, partner remuneration over 12 months is used to calculate an hourly rate. We, like some other law firms, follow this guidance and publish figures including our partnership (as well as the mandatory figures). This shows that it is perfectly possibly to calculate sensible gender pay gaps including partners.

Individual choice can affect gender pay gaps

Gender pay gaps must be calculated using gross pay. But since salary sacrifice is an agreement to reduce gross pay (rather than being a true net deduction), the gender pay gap is based on post-sacrifice pay. However, the degree to which men and women choose to reduce their pay in this way can influence the gaps. If all men and women sacrificed the same proportion of pay, there would be no difference in gaps but this is not what we see in practice.

With the winding down of childcare vouchers, pensions are where the biggest salary sacrifices are made. Although not all employers have adopted salary sacrifice schemes, our experience is that most have. Women tend to more likely to be in low paid roles and so less likely (or able) to contribute into their pensions. High paid men on the other hand will make bigger contributions into their pension, so their pay reduced to a greater extent. It is this imbalance that can mean that gaps can be artificially reduced.

Bonus gaps may be affected by individual choice to an even greater extent. Because they are calculated from a smaller population to begin with (averages are calculated only from those that actually received a bonus), the decision by individuals to sacrifice some or all of a bonus into their pension could change the bonus gaps.

Changing the definitions so that calculations would either not take salary sacrifices into account, or so that it would take into account the value of benefits that an employee receives (i.e. the employer’s pension contributions) would fix this issue.

Accuracy of statistics and the enforcement of gender pay gap reporting

The EHRC is the body that has taken responsibility for enforcing gender pay gap reporting and, to date, it operates a light touch style of enforcement. Perhaps because of its under funding and lack of resources, its actions to date have been limited to the sending of letters to employers that it believes have not published gaps. It doesn’t routinely check the accuracy of published figures in any meaningful way.

Its approach may also be influenced by legal uncertainty over its powers. The EHRC is empowered to take action against any “unlawful acts” i.e. things that are against the Equality Act 2010 (“EqA”). However, although the gender pay gap reporting regulations were created pursuant to a power contained in the EqA, they are a separate piece of legislation that sets out no additional powers for the EHRC. The EHRC says it has the power to investigate employers, but it is not clear that it actually does. Despite this, it makes only a few targeted investigations.

The gender pay gap reporting regime will work best when employees and members of the public are confident that gaps are accurate, and have been correctly calculated. Employers’ gaps must be confirmed by a statutory director as being accurate, but even this step does not prevent the publication of obviously incorrect statistics.

Ideally, the EHRC would be adequately funded and supported to adopt a new approach aiming to increase the accuracy of published statistics. Any new approach should not penalise those employers that already do things properly.

Gender pay gap reporting in other jurisdictions

When the gender pay gap reporting regulations were created, the UK was something of a legislative trailblazer. Few other countries had (or were planning) any sort of gender pay gap reporting regime.

Today, the position is much different with gender pay gap reporting being more common around the world. What can UK legislators looking at reviewing gender pay gap reporting learn from other countries’ experiences?

Different approaches to gender pay gap reporting

The UK’s gender pay gap reporting regime is, on the face of it, fairly straightforward (what complicates gender pay gap reporting in the UK is the methodology and definitions around what to include). It involves calculating simple average statistics and reporting them. It is a blunt measure that makes no adjustment for differences in jobs. Ireland is adopting a similar approach. The EU Pay Transparency Directive will require all EU member states to enact similar legislation.

However, other jurisdictions take completely different approaches that are much more statistical. This different approach aims to find out the degree of bias women suffer when differences in job roles are accounted for. They involve calculating adjusted gender pay gaps. These show what level of unexplained bias women face, when everything else is kept equal.

Adjusted gender pay gaps are a useful thing to know and calculate, but not in isolation. They are only part of the diversity equation. The crude averaging of the existing UK regime may not be perfect and can be often misinterpreted, but it does at least provide some information about the issues of underrepresentation of women.

Headcount and the scope of gender pay gap reporting

UK gender pay gap reporting applies to employers with 250 or more employees. Compared to other jurisdictions, this is a little on the high side (Germany being a big exception – their reporting covers employers with 500 or more employees). Australia’s reporting obligations to employers with 100 or more employees. In Norway, France, South Africa and Sweden, they apply to employers with 50 or more employees. New regulations in Ireland will only initially apply to employers with 250 or more employees, but will quickly drop down to those with just 50. In Finland, gender pay gap reporting obligations apply to employers with just 30 employees.

The draft EU Pay Transparency Directive currently applies to employers with 250 or more employees, (which would cover around a third of all employees in the EU) but the EU parliament recently proposed that it should go further and apply to those with 50 or more employees. In the UK, there have been calls to decrease the headcount to employers with 100 or even just 50 employees. Although some small employers could benefit from gender pay gap reporting, in our view, without any new measures to ensure the accuracy of gaps, forcing all smaller and less-resourced employers to publish gaps risks throwing lots more new statistics into the public domain that may not be accurate. Bad stats are worse than no stats and, already, around a sixth of published statistics may contain errors. Gender pay gap reporting can only be effective when gaps are accurate.

Ensuring accuracy: employer calculations vs data upload

In Australia, employers are not required to calculate their own gaps. They must instead upload a dataset to a government site which then calculates the gaps automatically. Employers in Italy must do similar.

Should the UK adopt a similar regime? Although it might save employers a bit of work, it might not result in accuracy of statistics increasing overall. Errors in data are often only thrown up during the calculation phase. If that is done automatically using a government “black box”, then gender pay gap statistics could potentially be less accurate, not more. Bad data gives bad results. Moreover, creating extra distance between employers and their gaps makes it more difficult for them to identify the causes of the gaps – not legally required but something that is absolutely critical for any employer that wants to do something about their gaps. A useful middle ground to help employers might be for the government to produce some sort of free tool that employers can use to calculate their statistics, but one which also identifies possible errors and helps employer accuracy.

Equal pay audits, action plans and other transparency measures to address pay discrimination

In its current draft, the EU Pay Transparency Directive will require employers to publish pay gaps for the workforce as a whole, and also report internally on pay gaps within categories of workers doing the same work, or work of equal value. Pay gaps greater than 5% in any category of worker will mean that the employer must carry out a detailed equal pay assessment and develop an action plan. The EU parliament proposes that this threshold be reduced to 2.5% - a tougher level than that recommended by the EHRC (5%).

As we’ve written before, a gender pay gap can exist despite perfect pay equality (and vice versa). Equal pay is about pay discrimination whereas gender pay gaps are (mostly) about demographics and the roles women do within the workplace. The draft Directive includes other measures to target pay discrimination, including a ban on asking job applicants about their salary history, an obligation on employers to publish information about pay ranges on job adverts, and a right for workers to know the average pay for workers doing the same job or jobs of equal value. Similar rights already exist in other countries – for example, salary history questions are banned in many US states, German laws entitle employees to find out what comparable employees are paid and French rules require employers to implement an action plan if they do not score sufficiently highly on an equality index.

Increasing transparency around pay has been found to be effective for reducing gender pay gaps. This includes making expectations around salaries and negotiation clearer at the recruitment stage. The current UK government is unlikely to introduce further pay transparency legislation along these lines, but employers may wish to consider adopting similar measures, especially if evidence continues to demonstrate their effectiveness.

What next for gender pay gap reporting?

The government was obliged to carry out a review of the gender pay gap regulations by now, but there is no sign that it has done so. Any changes to the technicalities of gender pay gap reporting – the definitions in the Regulations –would mean past figures would not necessarily be comparable with later figures, making it harder to identify real change. If figures were to calculated according to the existing regime and then also according to any revised regime, it might help to show what impact any methodological differences have on gaps. In addition to reviewing and perhaps refreshing some of the technicalities of gender pay gap reporting, it would be helpful if the government considered new approaches to improve the accuracy of gender pay gaps. Any reporting regime is only effective is the figures being reported are accurate. People need to have confidence that one employer can be fairly compared to another. The government should consider how they can do this.

For more information about how we can help with gender pay gap reporting, find out more and contact us.