The Government has published its response to the consultation on the principles which will underpin the new gender pay gap reporting regime.

Employers with 250 or more employees will have to publish: (i) mean and median overall pay gap figures (including bonus, commission, LTIPs and the cash value of shares); and (ii) mean bonus gap figures on an annual basis. In addition, affected employers must also publish the numbers of men and women paid across salary quartiles within their business and the proportion of men and women who received a bonus payment within a 12-month period. The response confirms that the regulations are likely to come into force on 1 October 2016, with a first reporting date of not later than 1 April 2018. A further consultation covering the details of the draft regulations has also been published and will close on 11 March 2016.

The Government’s response to the Closing the Gender Pay Consultation (Consultation) was published on 12 February 2016. For more information about the Consultation you can read our detailed report here. We report below on the conclusions set out in the response paper (Response), and the draft Equality Act 2010 (Gender Pay Gap Information) Regulations 2016, which clarify how the gender pay gap reporting regime will operate.

Who will be covered by the gender pay gap reporting regulations?

Employers

The Response confirms that the new pay transparency regulations will be made under section 78 of the Equality Act 2010 and will apply to employers with at least 250 "employees" in Great Britain. This threshold means that approximately 7,960 employers, employing 34% of the total workforce, will be covered by the new rules. The Government may review this threshold 5 years after the commencement of the regulations.

All employers with 250 or more employees will be required to comply with the regulations once they are introduced. There is to be no phased introduction with larger employers going first.

Employees

For the purposes of the regulations, "employee" is defined as someone who ordinarily works in Great Britain and whose contract of employment is governed by UK legislation. The Consultation had suggested that a wider definition of employment would apply and that the regulations would cover those employed under a contract of employment or apprenticeship or a contract personally to do work. In other words, employees, workers and self-employed individuals provided that their contract obliges them to perform the work personally (i.e. they cannot subcontract or employ their own staff to do it).

The wording of the draft regulations is not clear on whether the wider definition of employment is intended to apply. However, the Government Equalities Office confirmed to Addleshaw Goddard on 24 February 2016 that it remained the Government's intention that the wider definition will apply. This will mean that a wider pool of people will be caught by the regulations, for example, LLP members will be covered.

When will gender pay gap reporting come into force?

The Government had originally intended to introduce the pay transparency regulations by the end of March 2016. The Response confirms that the regulations are likely to come into force on 1 October 2016.

The regulations will require employers to produce a preliminary “data snapshot” within 6 months of the regulations coming into force. The first publication of the pay gap figures must take place within 18 months of the regulations coming into force, with annual publication thereafter.

This translates to the following timetable:

• 1 October: gender pay gap regulations in force.
• 30 April 2017: employer must have produced a preliminary data snapshot
• 30 April 2018: employer must have publicly reported their gender pay gap information. This can be published on a date of the employer's choosing, provided it is done by 30 April 2018.

What gender pay comparisons have to be made?

The Response confirms that employers must “separately analyse” pay gap calculations for

• pay; and
• bonus payments made in a 12-month period (only those employees who have received bonus payments should be included in this calculation).

The requirement to report on bonus pay is designed to tackle the existence of the “gender bonus pay gap”. This aspect of the new rules will have the greatest impact on the financial services sector. In 2009 the Equality and Human Rights Commission conducted an inquiry into the gender pay gap in the finance sector and reported that the gender pay gap for annual gross earnings (i.e. all earnings) in the sector stood at 60% and in the majority of cases the gap for discretionary performance-related pay stood at 45% or more.

What is "pay"?

The draft regulations provide that "pay" includes: basic pay; paid leave; maternity pay; sick pay; area allowances; shift premium pay; bonus pay and other pay (including car allowances, standby / on call allowances, clothing allowances, first aider and fire warden allowances).

However, pay does not include: overtime pay; expenses; the value of salary sacrifice schemes; benefits in kind redundancy pay; arrears of pay and tax credits.

Pay must be calculated before deductions for PAYE, NICs, pensions, student loan repayments and any voluntary deductions.

What is "bonus pay"?

The draft regulations provide that "bonus" includes:

• 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); and
• the cash equivalent value of shares on the date of payment.

How should the gender pay and bonus gap figures be calculated?

The Response confirms that employers will be required to calculate the gender pay gap figure in two ways.

• Median figure comparison: the median figure is the middle pay figure where half earn more and half earn less. The Government considers this is the best representation of the “typical” difference as it is unaffected by very high earners. This approach is also consistent with how the UK’s overall gender pay gap is calculated.
• Mean figure comparison: the mean pay figure is the average pay figure (i.e. all pay added together and then divided by the number of employees)

The view is that the publishing both median and mean comparisons will provide greater depth to the analysis.

By contrast, the gender bonus pay gap must be produced by reference to the mean figure only.

Will gender pay and bonus gap figures have to be broken down according to hours of work?

The Consultation had sought views on whether the gender pay gap figure should be broken down by full-time and part-time status. The Response confirms that whilst calculating separate gender pay gap figures for full-time and part-time employers would provide useful information where an employer has a large part-time workforce, this approach may not be appropriate for many employers. Accordingly, there will be no obligation to break down pay gap figures in this way.

However, some employers may voluntarily choose to break the figures down in this way given that the gender pay gap figures for full-time and part-time workers are likely to be lower when looked at in isolation.

By way of example, the UK’s gender pay gap for all employees is 19.1%. The numbers of men and women in employment are broadly comparable (13.2 million male employees and 12.9 million female employees in 2014). However, a much higher proportion of women work part-time (12% of male employees and 41% of female employees). When broken down by hours, the UK’s gender pay gap is 9.4% for full-time employees and -5.5% for part-time employees (i.e. there is a negative gender pay gap for part-time employees). This means that women working part time are, in fact, paid more than their male equivalents on average. The reason why the UK’s overall gender pay gap stands at 19.1% is because there is a far higher proportion of women performing part-time work which is typically much lower paid (£8.44 per hour for a part-time female employee against £13.59 per hour for a full time male employee). It is this that has a significant impact on the overall gender pay gap figure.

Will pay gender pay and bonus gap figures have to be broken down according to grade / job type?

The Consultation also sought views on whether the gender pay gap figure should be broken down by grade or job types. The Government has concluded that this would not be workable for all, as many employers do not have standardised grading structures, particularly those with complex and changing structures resulting from mergers and acquisitions. Therefore, employers will not be obliged to break down the pay gap figures in this way.

However, as with hours of work, some employers may elect to provide this further layer of information in order to present a more favourable picture. Although presenting pay gap figures by grade or job role is clearly a more onerous exercise, it is likely to reveal pay gap figures which are considerably lower than the overall figure (assuming there is no pay discrimination).

Are employers obliged to provide a "contextual narrative"?

The Consultation sought views on whether the provision of an additional contextual narrative should be on an entirely voluntary basis, on a voluntary basis but covered in non-statutory guidance, or compulsory. The Response confirms that the provision of a contextual narrative will be entirely voluntary but that this will be “strongly encouraged” within the guidance accompanying the regulations.

It is likely that many employers will elect to provide some form of contextual narrative, particularly where the pay gap is relatively high. As stated above, some may choose to provide more granular figures (i.e. broken down by hours and/or job grade) where this would help to present a more favourable picture.

Many employers will also wish to accompany their pay gap figures with details of any remedial steps they are taking, or propose to take, to close the gap. A recent survey of over 1,000 private sector employees by Business in the Community revealed that 91% of employees would expect their employer to discuss the pay gap figures with them and outline their strategy for tackling the gap.

Are employers obliged to publish anything in addition to the gender pay and bonus gap figures?

In addition to reporting the pay and bonus gap figures, employers will also be required to report on the numbers of men and women working across salary quartiles. Employers will calculate the salary quartiles themselves based on their overall pay range. This is not the same as breaking down the pay gap figures by job grade or type. No comparison of pay is required here. Instead, what is required is a simple statement of the numbers of employees in each pay quartile by gender.

In addition, employers will also be required to publish the proportion of men and women that received a bonus.

Where will employers have to publish their gender pay and bonus gap information?

The Consultation sought views on where employers should publish their gender pay gap information. The Response confirms that the regulations will require employers to publish the gender pay and bonus gap information on their website in English and in a manner that is accessible to all employees and the public. The information must be retained online for 3 years.

In addition, employers will be required to send evidence of compliance with the reporting regulations to a Government-sponsored website.

How often will employers have to publish their gender pay gap information?

The Consultation sought on whether employers should report on an annual basis, every 2 or 3 years or some other level of frequency. Despite the majority of respondents to the Consultation favouring either a 2 or 3 year reporting cycle, the Response confirms that employers will be required to report on an annual basis. The Government’s logic is that annual reporting will help demonstrate progress, promote transparency and embed gender pay analysis.

The remedial measures needed to tackle a high gender pay gap will generally involve longer-term actions by the employer (e.g. increasing promotion / recruitment of women into senior roles or better support for women returning to work following maternity leave). This is another reason why employers may wish to accompany gender pay gap information with a contextual narrative. Employers can use the narrative to explain the proposed remedial steps and, importantly, set expectations on how long these measures will take to make an impact.

What support is available for employers?

The Consultation sought views on what measures would help support employers implement the new regulations. The Response simply confirms that an “appropriate package of guidance and support” will be developed to help employers understand the regulations and the required metrics.

What are the penalties for non-compliance?

The Consultation sought views on whether the introduction of civil enforcement procedures (e.g. the issue of an enforcement notice) would help ensure compliance with the proposed regulations. The Response confirms that civil penalties will not be introduced, but this will be kept under review in the light of rates of compliance by employers in the first few years of implementation.

It is surprising that a penalties system has not been adopted. Other European jurisdictions which have gender pay gap reporting systems in place, such as France, Sweden and Denmark, all operate penalties for non-compliance. By contrast, no penalties system operates in Austria and the Ombudsman for Equal Treatment there has recently reported that few employers have complied with their reporting obligations.

However, the Government does intend to:

• run periodic checks to assess for non-compliance;
• produce tables by sector of employers’ pay gaps;
• highlight employers who publish particularly full and explanatory information; and
• name and shame employers who fail to comply.

Further, the Equality and Human Rights Commission will be able to investigate employers who fail to comply.

What's next?

A further consultation covering the details of the draft regulations has been published. This will close on 11 March 2016.

The Government intends to put the draft regulations before Parliament this summer. It is expected that the regulations will come into force on 1 October 2016.

Employers will have to produce a preliminary data snapshot by 30 April 2017 and have publicly reported their pay gap information by 30 April 2018.

Comment

Employers should familiarise themselves with the regulations and identify who within their business will produce the information needed. Although the first reporting deadline is some time away, it would be advisable for employers to begin gathering data and calculating the figures now. This will allow businesses to understand what they are dealing with and consider what remedial steps to put in place now in order to reduce the gap by the reporting deadline.

We will be holding Breakfast Seminars at our London office on this topic on 10 March 2016 and 7 April 2016. If you are interested in attending please email Amanda Steadman on amanda.steadman@addleshawgoddard.com , specifying which date you would prefer.

Government Response and Draft Regulations