Background

Addressing gender inequality in the workplace is at the heart of the government's agenda for 2016, with section 78 of the Equality Act 2010 coming into effect this year. This will make it mandatory for all employers with at least 250 employees to publish information about their gender pay gap, and employers need to be ready for the changes.

The government launched a consultation last year, titled "Closing the Gender Pay Gap". On 12 February, in response to the consultation, the government issued draft regulations that it is proposing will come into effect from October 2016, subject to further consultation with stakeholders. Stakeholders have until 11 March 2016 to respond.

The government proposes that affected businesses are required to publish the following figures annually:

• mean and median gender pay gaps;
• gender bonus gaps (including the proportion of male and female employees who receive a bonus); and
• the number of men and women in each quartile of the company's pay distribution.

The draft regulations envisage that "pay" will include basic pay, paid leave, maternity pay, sick pay, area allowances, shift premium pay, bonus pay, and other variable allowances. "Bonus pay" includes payments received and earned in relation to profit sharing, productivity, performance and other bonus or incentive pay and commission; long term incentive plans or schemes; and the cash equivalent value of shares on the date of payment.

It is thought that the mean will be useful because women are often over-represented at the low earning extreme, and that the median is the best representation of the 'typical' pay difference because it is unaffected by small, extreme outliers. The objective of the quartile data is to help employers identify where women are concentrated in terms of their remuneration and whether there are any bars to their progression.

Potential consequences

Although noticeably absent from the draft regulations, section 78 anticipates that the penalty for an employer that fails to comply with the requirement to publish gender pay information could be a criminal fine of up to £5,000 or civil enforcement measures.

Whilst it is not anticipated that there will be any particular penalties for companies and organisations failing to bridge the gender pay gap, the reputational damage and negative publicity that large employers could face is considerable. There are also likely to be knock-on effects on the business's ability to attract new talent, and on employee engagement and retention. Employers would need to be able to justify any differentials in pay in public.

Employers who are exposed as having a gender pay gap are also at risk of potentially significant employee claims for equal pay, which could be backdated as far as six years.

In October 2012, in the "landmark case" of Birmingham City Council v. Abdullah and others [2012] UKSC 47, the Supreme Court judges held that more than 170 former Birmingham City Council employees could launch pay equality compensation claims in the High Court, on the basis that they had not been eligible to receive bonuses, which male comparators in equal work had been eligible to receive. This essentially extended the time limit for bringing a claim to six years (as opposed to the six-month limit in the Employment Tribunal). The judgment resulted in around 16,000 claims against the council, and it was estimated that the total cost to the council was likely to reach about £1.2 billion.

Preparation for the changes

It is currently expected that the gender pay gap regulations will come into force in October 2016. However, to ensure that employers have sufficient lead-in time, it is proposed that they will have about 18 months after commencement to publish the first set of data, with publishing required on an annual basis thereafter.

Notwithstanding that, large employers may wish to begin taking preparatory steps over the coming months to ensure that they have systems in place to deal with the new administrative burden and have an action plan in readiness for the changes.

We set out below some practical steps that employers can take in preparing for gender pay gap reporting.

Gathering information on pay

Guidance from the Equality and Human Rights Commission recommends that employers should begin gathering information about their pay and grading arrangements, job evaluation scheme, payroll systems, HR information systems and occupational segregation. As is clear from the draft Regulations, it is highly likely that employers will need to include variable elements of pay and other pay enhancements in this exercise. The information should be presented in the format in which it is easiest to perform a comparison exercise.

Job evaluation

The next step will be to determine which groups of employees are doing "equal work". The Equality Act 2010 defines equal work as: "like work", "work rated as equivalent", and "work of equal value". The most comprehensive way of addressing pay inequalities is through a job evaluation scheme or study (JES). A JES is an analytical procedure for grouping jobs into salary bands on a gender-blind basis.
Like work is defined as work that is the same or broadly similar. Equivalent work is where the demands of a job are determined to be equal to those of another job under a job evaluation scheme. Work of equal value is work that is different another job but of equal value in terms of the demands of the role. Recent case law has highlighted that this last category is the most problematic, and employers should give some proper thought when categorising roles as to what may be work of equal value.

Identifying pay gaps

Once an employer has identified which groups carry out equal work, it should determine whether or not there are any gaps in pay, based on the pay information gathered.

Employers should also compare the pay (basic and variable) of part-time and full-time employees, as statistics show that women are more likely to work part time than men. It is not yet clear whether employers will be required to report this level of information but it is nevertheless useful to have carried out this exercise and made any necessary adjustments to avoid claims.

Determining the cause of any pay gaps

Where any gaps are identified, the employer will need to look at the reasons behind the gaps and consider whether it may be possible to justify them.

There are a number of potentially non-discriminatory reasons behind pay gaps, such as pay progression, pay protection, performance pay, competency pay, premiums and allowances. Where these seem to apply, the employer will still need to be comfortable that gender has not played any role in determining pay.

Some differentials in benefits may be indirectly discriminatory but justified as a proportionate means of achieving a legitimate aim (e.g. the aim of retaining and recruiting women in a male-dominated workforce).

Developing an equal pay action plan

In the event that an employer does identify employees who may not have been paid equally for a reason ostensibly connected to gender (and the gaps cannot be justified), it will need to put together a plan to address the gaps in pay.

In preparing for the changes, employers should, however, be aware that, in the event an employee were to bring an equal pay claim (either before or after the new legislative provision comes into effect), the pay data collated and any job evaluation assessment are likely to be disclosable (subject to relevant redactions) unless they can be effectively protected by privilege. This will be the case even if the disclosure of the pay enhancements is not ultimately required as part of the gender pay gap reporting requirements in the final regulations. It will therefore be a commercial decision for employers to make as to the level of preparation they wish to take before the government publishes its final response paper.