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Enhancing Public Accountability: Key Elements of the Public Office (Accountability) Bill 2025
Kirsty Cook
After five years of consultation, last year the government confirmed there are no plans to make ethnicity pay gap reporting mandatory for employers. The ethnicity pay gap being the difference between the average earnings of white employees and those of other ethnic groups.
The decision comes notwithstanding the recommendation of Baroness McGregor-Smith in her 2017 report and the government’s commitment in March 2022 to tackling “unfair racial disparities” in Britain.
As things stand, there is a disparity between the treatment of gender and ethnicity-based pay inequalities. Whilst companies with at least 250 employers have had to publish their gender pay gap since 2017, reporting their ethnicity pay gap remains voluntary.
Yet, we know an ethnicity pay gap persists. For example, in 2022 UK-born Black, African Caribbean or Black British employees earned 5.6% less than UK-born White employees, according to the ONS. This gap hasn’t changed since 2012.
Shining a light on pay disparities is a helpful first step to addressing inequalities in the workplace.
Why hasn’t the government made ethnicity pay gap reporting mandatory?
The government says it is concerned that it would be an “undue burden” on business, citing three issues:
1. Data collection
Many employers do not have adequate data on staff ethnicity. Around 35% of those surveyed by PwC in 2020 did not collect this data at all. Concerns around compliance with the General Data Protection Regulation (GDPR) was cited as one barrier. Another reported obstacle was low staff response rates.
2. Binary reporting
There is a risk that employers will combine the data of different ethnic minority groups together to compensate for low employee declaration rates. However, this approach obscures the disparities in labour market outcomes between these groups.
3. Skewed results from small groups
Calculating pay gaps at a granular level can also skew results, particularly in relation to ethnic groups with low representation. Pay gaps are determined by averages, and when an average is derived from a limited number of individuals, it becomes susceptible to significant fluctuations with the addition or removal of just a few people.
Whilst calculating an ethnicity pay gap does present challenges for employers, often these stem from a lack of information and resources. According to The Runneymede Trust, the “real burden” for organisations has been the absence of a consistent approach by government and a lack of statutory guidance.
In April 2023, three months before the government confirmed it would not be made mandatory, it published guidance for employers wanting to measure their ethnicity pay gap voluntarily.
What does the government guidance say?
The guidance for employers seeks to address some of the challenges identified in the consultation, including how to:
- collect ethnicity pay data
- consider data issues such as confidentiality, aggregating ethnic groups and the location of employees
- calculate the ethnicity pay gap
- analyse and understand the results
- investigate the root causes of these disparities, from policies in practices in recruitment, retention and progression
- report the findings
- develop an action plan to address identified disparities
Much of the approach will be familiar to those who prepare their organisation’s gender pay gap report.
In many ways, the government is playing catch up. Whilst the consultation continued, several large employers begun voluntarily publishing their ethnicity pay gap. In the absence of statutory guidance, they have relied on guidance from professional bodies such as the CIPD. For some, the debate has shifted from deciding whether to report on their ethnicity to pay gap to determining what to do about it.
Nevertheless, the publication of guidance is a welcome development for many. It is hoped it will increase the uptake of ethnicity pay gap reporting, promoting transparency, accountability and meaningful action. Although the employers who elect to do so are likely to remain in the minority until there is legislative change.
Why might employers consider voluntarily measuring and addressing their ethnicity pay gap?
Whilst the answer partly depends on where organisations are on their Diversity, Equality and Inclusion (DE&I) journey, these are some of the reasons why employers are deciding to do so:
1. Stakeholder interest
Clients, investors, regulators, and future job candidates increasingly assess companies on their Environmental, Social and Governance (ESG) credentials. These may include DE&I policies and practices. Employers may decide that publishing an ethnicity pay gap report and action plan is one way of signifying their values to their stakeholders.
2. Correlation between diversity and prosperity
There is a business case for DE&I. McKinsey found that diversity on executive teams increases the likelihood of financial outperformance. The McGregor-Smith review suggests that ethnically and culturally diverse businesses are up to 36% more profitable and addressing race inequalities in the labour market could boost the UK economy by £24 billion a year.
3. Risk mitigation - legal claims
Employers may wish to get ahead of the curve, scope potential risks and take corrective action before such a pay gap might turn into formal legal claims.
After mandatory gender pay gap reporting was introduced, we noticed an increase in equal pay claims. In recent years, we have seen a rise in race discrimination claims citing salary inequalities. We anticipate that the number of these cases will only increase, particularly if ethnicity pay gap reporting becomes mandatory.
It is important to note that, strictly speaking, equal pay legislation relates only to comparisons between the pay for particular men and women. Unequal pay between men and women doing substantially the same work can be challenged under this regime. There is no equal pay legislation, as such, applicable between different ethnic groups. However, pay disparity between different ethnic groups may be indicative of unlawful race discrimination and may be open to challenge under the Equality Act 2020.
Conducting an internal ethnicity pay gap audit can potentially assist in identifying possible vulnerabilities and areas of exposure. The findings can inform the development of a strategy, with measurable goals and actions. For example, one cause of a pay gap may be a lack of diversity among senior leadership, a matter we have considered in a previous blog.
4. Prospect of mandatory reporting with a change of government
The Labour Party, currently predicted to form the next government, has signalled that it will make ethnicity pay gap reporting mandatory. Following the government’s consultation response, Anneliese Dodds, Shadow Women and Equalities Secretary, announced that reporting would be mandatory for large companies as part of a broader plan to tackle racial inequality through a new Race Equality Act.
With the government guidance now available, and the prospect of mandatory reporting potentially on the horizon, 2024 may be the year that more employers start reporting on their ethnicity pay gap, or at least to take steps to assess whether there might be legal risks they want to address and opportunities for change.
further information
If you have any questions regarding this article, please contact our Employment team.
about the author
Chloe Jacot is a trainee solicitor in our Employment team. She supports the team acting for individuals and businesses on a range of contentious and non-contentious employment matters. These include discrimination, unfair dismissal, grievance investigations and settlement negotiations.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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