Following the introduction of the Gender Pay Gap (GPG) Reporting Regulations, there were calls on the Government to introduce mandatory Ethnicity Pay Gap (EPG) reporting for UK employers. EPG reporting remains voluntary. But this gives employers who do report an opportunity to create and sustain a competitive advantage through strengthening their Inclusion, Diversity and Social Equality (IDSE) programmes; supporting the social dimension of their Environmental, Social and Governance (ESG) strategies – and positioning themselves as employers of choice in the competition for talent. This article reviews the UK Government’s recently published guidance on EPG reporting and how you might use it to drive future success though a diverse and engaged workforce.

What does the new guidance cover and why does it matter?

In April 2023 the UK Government published guidance for employers on how to measure, report on and address ethnicity pay differences within the workforce.

In addition to an introduction and overview, substantive pieces of guidance cover:

Unlike GPG reporting, there is no statutory requirement for employers to report ethnicity pay gaps, though voluntary reporting is encouraged. The new guidance is important as it’s the first Government guidance which aims to set out a consistent approach to EPG reporting to enable employers to prepare and present their data on a consistent basis. This should make it easier for stakeholders to compare and evaluate different organisations approaches to measuring and interpreting any EPG.

The new guidance – including the methodology for the calculations –mirrors the approach for GPG reporting, but acknowledges that ethnicity pay reporting is more complex. In particular, that the reasons for ethnicity pay disparities do not arise from the same reasons as gender pay disparities, and therefore gaps should be carefully examined with the assistance of specialist advisers where required.

What does the new guidance propose?

Collecting and preparing data

Collecting data on employee ethnicity can be complex and due to the nature of the data should be approached with sensitivity and transparency.

An ‘employee’ for EPG reporting purposes is the same as for GPG reporting. The guidance recommends that employers collect ethnicity data by asking employees to self-report, but with an option to opt-out of answering (such as ‘prefer not to say’). The guidance also recommends that employers use the Government Statistical Service harmonised standards for collecting an employee’s ethnicity data.

Employers should note that ethnicity is a special category for data protection purposes and so ensure that employees are aware of how their data will be used and stored safely.

The guidance on preparing payroll data is the same as the approach set out in the GPG regulations.

Measuring pay gaps

The guidance recommends that employers use the following measures to provide a clear understanding of any disparities:

  • percentage of each ethnic group in each hourly pay quarter;

  • mean (average) ethnicity pay gap using hourly pay;

  • median ethnicity pay gap using hourly pay;

  • percentages of employees in different ethnic groups in the organisation; and

  • percentage of employees who did not disclose their ethnicity (i.e., they either answered ‘prefer not to say’ or gave no answer when collecting ethnicity data was attempted).

Bonus pay gaps may also be calculated in a similar way to GPG reporting, including the:

  • percentage of each ethnic group receiving bonus pay;

  • mean (average) pay gap for bonus pay; and

  • median ethnicity pay gap for bonus pay.

To ensure that ethnic categories that are below a minimum category size are also included, the guidance recommends that ethnic categories are aggregated. Detailed knowledge of the workforce is essential in order to do this.

When aggregating data or ethnic groups it’s worth considering the following:

  1. Try to show as many ethnic groups as possible to provide a clearer picture and inform action plans.

  2. Aggregate to 5 larger ethnic groups and the ‘prefer not to say’ option:

  • Asian

  • Black

  • Mixed

  • White

  • Other

  • Prefer not to say

The guidance notes that this method may hide differences between ethnic minority groups and the analysis may therefore not be as clear. This will depend on the structure of the workforce.

3. Aggregate to 2 groups (‘binary’ reporting):

  • White and all other ethnic minorities combined

  • White British and ethnic minorities.

This method is strongly discouraged in isolation and may only be of use where employees’ confidentiality may be at risk if any further details were released.

The guidance recommends that data is still collected and published for employees who ‘prefer not to say’ or who did not respond to ethnicity data collection.

The ‘prefer not to say’ category can indicate if there are employees who have responded to the data collection but do not feel comfortable disclosing their ethnicity.

Where employees have not responded, this may indicate how many employees are not engaging with activities to collect diversity data and employers should consider how best to ensure engagement and build trust.

These categories should not be aggregated with other ethnic groups but can help contextualise the other ethnicity pay calculations, as well as highlight whether further work is needed to improve data collection.

Gaps between each ethnic group should be presented clearly in line with the above.

Understanding pay gaps and action planning

The complexities of EPG reporting are highlighted in the guidance. To understand the true drivers of pay gaps between ethnic groups a detailed approach is recommended. Analysing as many ethnic groups as possible provides a basis for employers to understand where gaps may indicate wider problems in pay between those groups.

The guidance also suggests that further investigations on the following categories could help in understanding where issues may lie and taking steps to address pay disparity:

  • job role;

  • locations, sites or divisions;

  • permanent or temporary;

  • full time or part time;

  • pay bands; and

  • length of service.

A supporting narrative can enable employers to explain the figures, what might drive any pay disparities, and the steps taken to understand and address any pay disparities.

The guidance also recommends that employers prepare actions plans to address pay gaps. Using clear measurable targets with reference to specified time frames can help address any issues that EPG reporting identifies.

The guidance highlights that ethnicity pay gap reporting is a more complex process than comparing pay by reference to gender.

Employers should perform detailed analysis to understand their ethnicity pay gap data in a systematic way to identify inequalities within its workforce and enable them to take meaningful action to address inequalities arising from pay.

So, what are your next steps?

To the extent an employer doesn’t already have high ethnicity data disclosure rates or does not calculate its ethnicity pay gap, starting to actively collect data and interpreting what it is saying can send a positive message to employees.

It says, ‘We’ve heard you – to help us make progress we need you to help us collect the right data’.

That matters if an employer wants to demonstrate a commitment to the ‘S’ of ESG and demonstrate a commitment to IDSE and fair pay.

We recommend that employers are authentic in their communications on this. That means understanding the full picture by taking a deeper dive into the ethnicity pay gap results and undertaking additional analysis to understand the drivers for any gaps. That will ensure employers have data to develop and support any action plans.

If you have any questions or wish to discuss the Government’s new guidance and its implications for your business, please contact Donna Sharp, Partner, Solicitor and Head of KPMG Law- Employment or your usual KPMG contact.