The issue of pay has dominated the headlines over the summer, largely in relation to the remuneration of City employees. While restrictions on bankers’ bonuses and the obligation to provide greater transparency of pay arrangements to regulators is an immediate concern for large financial organisations, the issue of transparency in pay arrangements will soon become a concern for all large private employers if the proposals in the Equality Bill (the Bill) come into law.
The Bill, due to be put before theHouse of Lords this autumn, comes nearly 40 years after the Equal Pay Act (EPA) 1970 and seeks to address the continuing disparity in pay between the genders. According to a Women and Work Commission report published in July 2009, women are being paid 22.6% less per hour than men, a gap that has increased from 21.9% in 2007. The Equality and Human Rights Commission (EHRC) reports that in the financial services industry the pay gap is even higher, with women working full-time earning 55% less annual gross salary than men. When looking at performance-related pay, the gap is an astonishing 80% (as found by the EHRC in its official inquiry into finance sector pay published on 7 September 2009). Fewer than half of the companies questioned by the EHRC as part of the inquiry were making any efforts to address the pay gap and fewer than one-quarter had undertaken an equal pay audit. With the EHRC accepting that despite the passage of 40 years, the EPA 1970 has not solved the issue of pay disparity, it is now championing other ways to close the gap. The Bill is at the forefront of this initiative and all companies employing over 250 people need to consider how it will impact their businesses and start taking steps to prepare for its implementation.
SUMMARY OF The Bill
The Bill brings together all the existing discrimination laws into one piece of ‘super legislation’. Many of the provisions of the various discrimination acts will stay the same, but there are some nuanced changes to numerous aspects of the existing laws. In relation to pay issues, it will become unlawful to prevent employees discussing their pay with each other in certain circumstances. The Bill also reserves the power to make regulations requiring private sector employers with more than 250 employees to provide mandatory reports about their gender pay gap. At the same time, it will introduce changes to the ways in which an employee who believes they are not receiving equality of pay can bring proceedings to challenge their remuneration. The proposals are discussed in greater detail below.
An end to secrecy about pay
At present, an employer can require an employee to keep details of their pay confidential and can use contractual provisions to expressly prohibit the discussion of personal remuneration with colleagues. Under the Bill, such prohibitions are rendered unlawful where the employees are engaged in a relevant pay discussion (RPD). An RPD is a discussion with a colleague about pay that relates to whether, or to what extent, in relation to the work in question, there is a connection between pay and having (or not having) a ‘particular protected characteristic’. A ‘particular protected characteristic’ is a characteristic relating to age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex or sexual orientation. In short, it is a characteristic protected by anti-discrimination legislation. As a result, it is not just a gender gap that could be highlighted by an RPD. Any pay gap that can be linked to characteristics protected by anti-discrimination legislation could form the basis of litigation. For example, where a disabled employee is paid less than their non-disabled colleagues, this could amount to direct disability discrimination.
Employees will be entitled to ask colleagues and ex-colleagues about their pay and disclose such information themselves. While the definition of a relevant pay discussion arguably narrows the scope of what employees are permitted to discuss, it will be a bold employer that seeks to challenge any such disclosure on the basis that the exchange was unrelated to a recognised form of discrimination. The other problem for employers is that once the employee is aware of a pay disparity, arguing about whether or not the knowledge was properly obtained will not answer the question of why the disparity exists. Being involved, whether as the giver or receiver of information, in an RPD will also be treated as a protected act for the purposes of the victimisation provisions of the various discrimination acts. As a result, disciplining, dismissing or otherwise treating an employee less favourably because they have taken part in an RPD will be regarded as an act of victimisation and could lead to compensation being paid to employees, regardless of whether the discussion demonstrated an illegal pay gap.
Gender Pay Gap Information
Specifically addressing the gender pay gap, the Bill allows the government to require employers in the private sector with at least 250 employees to publish information about any differences in pay between male and female employees. Publication would have to be made on an annual basis, so as to track changes in the pay gap, and, presumably, progress towards closing the pay gap. The EHRC will be responsible for determining what type of information must be disclosed as part of a gender pay report and will be responsible for monitoring progress in annual reports. It published a consultation paper to that end in August 2009 to seek the views of private employers on how pay disparity should be monitored and to obtain examples of existing good practice in measuring the gender pay gap. The consultation remains open until 28 October 2009 and the results will shape the way in which the EHRC will expect employers to publish information on gender pay gaps. Employers will be encouraged to publish gender pay gap information on a voluntary basis prior to legislation being enacted. Only if employers do not start to make voluntary disclosure of their gender pay gap will the government look at making disclosure in a proscribed form mandatory. To give employers a chance to undertake pay audits and start to publish their pay on a gender basis, the government has committed to not implement any mandatory disclosure obligations untilApril 2013. However, the scale of the issue for certain employers will mean that they will need to start to consider the ramifications of compulsory disclosure now to be able to address issues before publication becomes a legal requirement. As expected, employers in the public sector will be subject to even closer scrutiny. It is proposed that the government will require public bodies with over 150 employees to publish their ethnic minority employment rate and disability employment rate alongside information on the gender pay gap from 2011 onwards. The EHRC propose that pay disparity will be shown by comparing the percentage difference between median hourly payfor men and women. Issues such as part-time working and overtime will not be taken into account.
The proposals in relation to public sector employers create two issues. The framework that applies to public sector workers is likely to inform the provisions that will ultimately apply to private employers. For companies contracting with public sector employers, it is likely that, as part of any tender process, private companies will be required to provide the same information on equality matters as public sector employers.
Altering the regime for bringing claims relating to pay disparities
Although the EPA 1970 is notoriously complex, employees who wish to complain about contractual terms that give rise to pay disparities must use this piece of legislation rather than the Sex Discrimination Act (SDA) 1975. The problem with the EPA 1970 is that it requires a claimant to provide one or more real comparators to demonstrate a pay disparity, ie ‘Joe Blogs earns more than me for equal work or work of equal value’. Identifying a comparator can prove a significant challenge to claimants and has often meant that EPA 1970 claims are costly and torturous in their progress. The SDA 1975, on the other hand, allows employees to demonstrate less favourable treatment by reference to a hypothetical comparator, which significantly eases the difficulty for an employee to pursue a claim. The Bill will not remove the requirement for a real comparator in EPA claims. However the Bill proposes to enable employees who are unable to identify a real comparator to bring a claim in relation to contractual pay as a form of direct sex discrimination. The explanatory notes use the example of an employer who tells a female employee that ‘I would pay you more if you were a man’ in circumstances where there is no male comparator available. This provision broadens the scope for pay-related discrimination claims and this, combined with the transparency measures set out above, will make it easier for employees to pursue claims in the future.
Implementation timetable
The majority of the Bill is expected to come into force in autumn 2010, although this timeline is subject to alteration.
What should employers be doing now?
While it is not yet certain whether the Bill, in its current form, will become law, it seems inevitable that the general shift towards greater transparency in terms and conditions of work will continue. For employers seeking to put their houses in order, preparation will therefore be key. In many businesses, levels and grades of pay have developed organically over years, and market conditions have always significantly affected levels of remuneration. The economic difficulties of the last twelve months have already forced many employers to look again at how employees are incentivised and, in particular, whether bonus structures promote long-term stability in the work force and are good for business. The starting point for dealing with the potential impact of the changes is to audit pay arrangements and assess whether a pay discrepancy exists and, to the extent it does, whether it reveals underlying unlawful discrimination. The most basic of questions need to be answered through measureable and accurate data first:
- What are people paid?
- How is pay calculated?
- How are people remunerated in terms of salary, bonus, stock, long-term incentive schemes and commission?
- What do contracts of employment and offer letters say about entitlements to remuneration?
- How do bonus/commission schemes operate in reality? Are they genuinely discretionary, as contracts may suggest, or have they become so formulaic over time that there is a risk of a claim in contract?
- Do contracts contain pay secrecy clauses that may need to be amended or removed?
- When and how are pay scales reviewed, both with individuals as part of an appraisal process, for example, and also across businesses?
- What is the pay differential between employees with different levels of experience and in different roles?
- Can these pay differentials be justified on an objective basis?
- How does length of service affect remuneration and can this be objectively justified under age discrimination provisions?
Conclusion
While the stringent pay scales often found in the public sector may be inappropriate in business, where levels of remuneration are treated as highly commercially sensitive, private companies will undoubtedly be in a stronger position to face claims of discrimination if they are able to justify why one employee earns more than another by reference to objective criteria.
By Joanna Blackburn, partner, andBeth Leng, associate, Mishcon de Reya.
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- Private employers with 250 or more employees. It is estimated that there are around 6,000 organisations with 250 or more employees, employing about 10 million workers.
- Public bodies with more than150 employees.
- Possibly any employer who tenders for certain public contracts.
The duty to report will initially be voluntary and the precise metrics to be used for the reporting are still undecided. However, there are several issues employers should consider in preparation for the reporting duty. These include putting in place systems to:
- collect and collate records on pay across the organisation, including bonuses and commission;
- collate separate data on male and female pay;
- identify full-time and part-time positions;
- identify average pay for different job grades or types of work; and
- provide narratives to help put pay results in context, for example – nature and size of business.