In April 2023, the UK government published new guidance for employers on how to measure, report on and address ethnicity pay differences within their organizations. Here we consider how to collect, track, and analyze ethnicity data for companies which voluntarily publish ethnicity pay gap reports. 

What is the purpose of collecting ethnicity data?

Ethnicity pay gap reporting aligns with the UK’s "Inclusive Britain" strategy which aims to help employers build trust and transparency in the workplace. The UK was one of the first countries to introduce gender pay gap reporting for companies with over 250 employees. The latest guidance is a direct response to action 16 from Inclusive Britain, which committed the government to 74 actions to "level up unjust ethnic disparities."

Comprehensive guidelines on voluntary ethnicity pay gap reporting cover the following sections:

  • Collecting ethnicity data 
  • Gathering required payroll data for calculations 
  • Making ethnicity pay calculations 
  • Analyzing pay disparities and understanding the results 
  • Developing an action plan to address workplace disparities

Four key elements of collecting ethnicity data

Ethnicity pay gap reporting is a more sensitive and complex matter than reporting on the gender pay gap as it involves more groups of people. UK government guidance recommends:

  • Data is gathered by asking employees to self-report, with the option to opt-out 
  • Employers use the Government Statistical Service harmonized standards when collecting ethnicity data to ensure best practice
  • The guidance provides five categories to group the data into, for instance, Asian, black mixed, white, and other
  • The inclusion of a "prefer not to say" or "opt-out" category

Under GDPR rules, employee ethnicity is regarded as "special category data". Employers must provide context, explaining who will use the data and how it will be safely and securely stored. Employers must ensure individuals cannot be identified from any published data. 

Analyzing pay disparities

If a pay gap exists, employers are encouraged to evaluate whether the causes arise from the following: 

  • Are members of ethnic groups more likely to be hired in lower paid roles?  
  • Does an imbalance exist in individuals from different ethnicities applying for and achieving promotions?
  • Are people from certain ethnic groups "stuck" at certain levels? 
  • Are some ethnic groups more likely to work in specific roles than other ethnic groups, and is this reflected in pay?
  • Are ethnic groups more likely to work in locations that affect their pay?
  • Are employees from different ethnic groups leaving at higher or lower rates compared to the rest of the workforce? 
  • Do starting salaries and bonuses differ by ethnicity?

In addressing workplace disparities, the guidance also recommends investigating the impact of the following categories on any pay gaps:

  • Job role 
  • Locations, sites or divisions 
  • Permanent or temporary staff
  • Full time or part time staff
  • Pay bands 
  • Length of service 

A minimum of 50 employees is recommended in each group. Once the analysis is complete, employer action plans should set out clear achievable objectives, a deliverable timescale and an explanation of how success will be measured. 

The argument for mandatory ethnicity pay gap reporting

The UK is struggling to make meaningful progress on closing the gender pay gap. PwC found that, while the past year saw the biggest annual fall (0.7%), the overall gender pay gap has only fallen by 1.2% since 2017. Seven sectors have seen an increase in the mean average gender pay gap in the past 12 months. 

While ethnicity pay gap reporting remains voluntary, it will be difficult to gain an accurate picture of pay gaps or increase the rate of progress. In 2022, BITC (Business in the Community) research noted it could take until 2051 for employers to know what their pay gap is, unless ethnicity pay gap reporting was made mandatory.  The CIPD previously found that only 13 FTSE companies reported on their ethnicity pay gap. Additional research also revealed that the number of UK employers voluntarily reporting on ethnicity pay gaps fell by half from 2020 to 2021 (from 129 to 64). 

With a UK General Election due no later than January 2025, employers should be prepared for change. The UK’s Labour Party proposes increased reporting, with ethnicity and disability pay gap reporting being made mandatory.  If successful, the Labour Party may also align the UK with the requirements of the EU’s Pay Transparency Directive

Benefits of voluntary pay gap reporting

Ethnicity pay gap reporting is a vital step towards achieving pay equity which offers numerous benefits for employers, including: 

It supports ESG strategy and transparency in the workplace. The "S" in ESG relates to the social aspect of sustainable investment, and how an organization treats its employees, customers, and suppliers. ESG initiatives are essential to successful financial performance, brand reputation and attracting investment. 

Attracting more talent to your organization: According to Mercer’s Global Talent Trends 2022/23, 96% of employees expect their employer to adopt a sustainability agenda but only 28% of HR leaders prioritize sustainability and ESG. KPMG research also found that one in three Gen Z workers have rejected a job offer if an employer’s ESG values did not align with their own. 

Enhanced organizational trust. Employee perception of pay equity is based on organizational trust, but only around one-third of employees believe their pay is equitable, and less than one-third believe they are fairly compensated for their work. Further, in the UK, only one quarter of employees trust their leadership. Voluntary ethnicity pay gap reporting can help to build trust. 

Class pay gaps, the next step in UK pay gap reporting?

As the UK explores further ways to promote diversity and inclusion in the workplace, reporting on the class pay gap may be a future consideration. Research found that people in the UK with working class origins face an average pay gap of £6,718 (13.05%), effectively working one day in every seven for free. At present, only three companies report on the class pay gap, accountants PwC and KPMG, and law firm Clifford Chance. PwC revealed a 12.1% class pay gap across its UK workforce. Class pay reporting is published in addition to its gender and ethnicity pay gap reporting. 

Reporting on the ethnicity pay gap

Getting started with a pay equity audit: The first step to collecting ethnicity data is a pay equity audit, to accurately identify pay disparities. One way to do this is by using software like PayParity which conducts a pay equity audit at the intersection of factors such as gender, race/ethnicity, age, and disability. A comprehensive pay audit identifies risk areas for remediation and pay gaps within every employee group and at every level in your organization.

Identify the root causes of pay inequity: UK government guidance noted above highlights the issues which may affect your organization’s pay equity, such as, certain groups of employees may typically be employed in lower paying roles. An audit can identify how those issues affect your company. 

Develop an action plan: Explain how your organization will take steps towards closing the ethnicity pay gap. A pay equity software solution like Salary Range Finder® can determine competitive and fair salary ranges by overlaying internal pay equity audit data with that of external labor market data. 

Staying GDPR compliant: Trusaic is GDPR compliant and can assist any organization in the UK in meeting its obligations regarding gender pay gap reporting and ethnicity pay gap reporting.