This spring, the UK government released its first official guidance on ethnicity pay gap reporting. The guidance is designed to allow employers to take "meaningful action while remaining proportionate and without adding undue burdens on business." However, the complexity of the calculations suggested should be "checked with analysts," according to the Introduction in the 20+ page report.

While ethnicity pay reporting is not currently mandatory, there is a likelihood that this will become law in the future. So while ethnicity reporting is a very necessary undertaking, there’s an argument for HR and People departments to get into the habit now in order to glean learnings before the pressure of legal obligation arrives.

Why ethnicity pay gap reporting matters

Unlike the gender pay gap, there's currently no legal obligation for UK businesses to publish their workforce pay gaps in relation to ethnicity (or sexuality or disability, and only businesses with 250+ employees are required to publish their gender pay gap). You can't address the pay gap without addressing structural racism. If your business is not paying attention to gender and ethnicity pay gaps, it’s sending a loud and clear message that it doesn't care about them.

Remember, a pay gap is not the same as unequal pay. A pay gap is the difference between the median (or mean) hourly pay of employees in category A and the median (or mean) hourly pay of employees in category B. Unequal pay, on the other hand, is when employees performing equal work, or work of equal value, are not receiving equal pay. Discrimination based on race, including ethnicity, is unlawful. So, even if an employer has a fair pay and reward policy, and even if it has equal pay, it could still have a pay gap.

How to begin collecting data

Unlike gender pay gap reporting, ethnicity reporting is clouded by multiple issues of parentage, heritage, and self-identification. The guidance cautions strongly against simply dividing the workforce up into White people and others, as this will obscure particular disparities. The guidance recommends initially seeking responses in the categories used in the 2021 Census, making sure to include a "prefer not to say" option. The answers given will count as special category data under GDPR and must be kept secure. For comparison purposes, individual ethnicity information should be distilled into five aggregated groups - Asian, Black, mixed, White, and "other."

The guidance recommends that employers report the percentage of each ethnic group in each hourly pay quarter, the mean and median ethnicity pay gap, the percentages of employees in different ethnic groups, and the percentage of employees whose ethnicity is not known. If bonuses make up a large proportion of employee pay, employers should also report the mean and median ethnicity bonus pay gap and the percentage of each ethnic group receiving bonus pay.

Ultimately, a business’s 10-step plan would look something like this:

  1. Define the ethnic categories: Ensuring that they align with the ethnic categories used in the 2021 Census.
  2. Collect the data: Define an internal process to follow to effectively collect data from across the entire business, including every single person on the payroll.
  3. Calculate the pay gaps: Using both mean and median hourly pay figures.
  4. Calculate bonus gaps: If bonuses make up a significant portion of employee pay, businesses should also calculate the ethnicity bonus pay gaps, using both mean and median bonus pay figures.
  5. Calculate workforce composition: Businesses should calculate the proportion of employees in each ethnic group in different roles or pay bands, broken down by gender.
  6. Identify causes of any identified gaps: Including both internal factors (such as recruitment and promotion processes) and external factors (such as industry-wide trends).
  7. Develop an action plan: Set targets to close any identified gaps. Sharing the plans with employees would provide an open and honest channel of communication, and allow staff to contribute to the discussion.
  8. Regularly report on progress: Businesses should report regularly on their progress towards closing ethnicity pay gaps and share updates with their employees.
  9. Publish the report: While not required, businesses are encouraged to publish their ethnicity pay gap report, action plan, and any early progress made to close any identified pay gaps.
  10. Keep monitoring, reviewing, and progressing: As headcounts and business models change, reviewing categories and data collection is crucial to ensuring the reports remain relevant and accurate.

Once the data is visible

Employers should then prepare an action plan to remedy pay gaps, and essentially to address the issues that have been identified as causing the ethnicity pay gaps in the first place. It’s important to internally outline the actions a business intends to take to reduce any disparities, and how success will be measured.

While employers are not required to publish their ethnicity pay gap calculations or their action plan, the guidance encourages them to do so to identify how disparities change over time. As employees and investors are becoming increasingly impassioned about giving their talent and opening their wallets for companies who rightly prioritise diversity and inclusion, publishing the reporting and the resulting actions that the business has committed to, can be a huge boon to the business’s future.