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Two steps closer to gender equality? Mandatory gender pay gap reporting and equal pay audits

45 years after the introduction of the Equal Pay Act, there is still a significant gender pay gap in the UK.  Men earn, on average, 16.2% more per hour than women.  This ranks the UK 26th in the world for gender equality, as reported in the World Economic Forum's Global Gender Gap Report 2014.  According to the UN, if the gender pay gap continues to reduce at the current slow rate, the income of female workers across the world will lag behind men for another 70 years.  That's a depressing thought.  So what steps has the UK government taken to address this issue and what does this mean for your organisation?

Gender pay gap reporting

Ever since the Equality Act 2010 came into force, the government has had the ability, under section 78 of that Act, to make regulations requiring employers to publish information about their gender pay gap.  Until recently, the government had chosen not to utilise section 78, instead taking a voluntary approach to gender pay gap reporting.  In 2011, the government introduced the "Think, Act, Report" scheme, encouraging employers to voluntarily publish gender pay information as part of a culture of transparency.  However, this proved not to be particularly successful.  Whilst over 200 companies signed up to the scheme, it was reported in August 2014 that only 4 had published information about their gender pay gap.  

After pressure from the Liberal Democrats, legislation has now been pushed through which brings section 78 of the Equality Act 2010 into effect.  The Small Business, Enterprise and Employment Act 2015 ("SBEEA 2015") came into force on 26 March 2015.  Section 147 of the SBEEA 2015 requires the Secretary of State to make regulations, within 12 months of the Act coming into force, requiring employers to publish information about their gender pay gap.

The government has not issued draft regulations yet so it is not yet known how closely they would follow the format set out in section 78 of the Equality Act 2010. If they were to follow that format, the regulations would require all private sector employers with over 250 employees (which covers about 7,000 businesses in the UK) to publish pay differential information annually or face a fine of up to £5,000 for non-compliance.

Publishing such information could be embarrassing for employers and could impact on their brand and reputation.  It could also lead to an increase in equal pay and discrimination claims from employees.  However, even if the publication of this information identifies a pay gap, a claimant would still have to show an actual comparator of the opposite sex who is paid more than they are for doing like work or work of equal value.  It is unlikely that the new regulations will require employers to disclose this level of detail and employers may still be able to rely on the defence that the difference in pay is justified by a material factor which is not related to sex.

Mandatory equal pay audits

The Equality Act 2010 (Equal Pay Audits) Regulations 2014 came into force on 1 October 2014, requiring employment tribunals to order an employer who loses an equal pay claim to carry out an equal pay audit and publish the results to its employees and on its external website.

There is limited detail in the regulations as to the required content of an equal pay audit.  However, it must include relevant gender pay information for employees identified by the tribunal; details of any differences in pay between men and women and the reasons for those differences; the reasons for any potential equal pay breach identified by the audit; and an action plan for avoiding equal pay breaches occurring or continuing.  The tribunal has discretion when determining the specifics of the audit, including which employees must be included in the audit, the period of time the audit must cover, and the deadline for completing the audit and submitting the results (subject to a minimum period of no less than 3 months from the date the audit is ordered).

The employer must publish the results of the audit on its website within 28 days of submitting it to the tribunal and maintain the publication for 3 years.  It must also inform all employees whose pay data is included in the audit where they can obtain a copy.  The employer must inform the tribunal that it has complied with the publication requirement and provide evidence of having done so.  Employers will obviously need to ensure that they do not breach the Data Protection Act 1998 by publishing information from which the pay of individuals could be identified.

If an employer fails to submit the audit within the deadline set by the tribunal, or fails to comply with the terms of the order, the tribunal will list a hearing to consider the matter.  The tribunal can impose a fine of up to £5,000 where it determines that the employer has unreasonably failed to comply with its obligations.  This fine is paid to the Secretary of State, rather than the claimant in the original proceedings.  Whilst the level of the fine is low, relative to the potential time and cost involved in having to carry out an audit, it is worth noting that a fine can be imposed at each hearing scheduled to determine the employer's non-compliance, and there is no limit on the number of hearings that can be held before the tribunal is satisfied that the employer has complied with its obligations.

The equal pay audit sanction is, however, subject to a number of exceptions.  The regulations only apply to claims brought on or after 1 October 2014.  The tribunal can only order an equal pay audit in respect of the employing company that is the respondent in the proceedings, not any corporate group to which the employer belongs.  An audit must not be ordered where: the employer has carried out an audit containing the relevant information in the last 3 years; it is clear, without an audit, whether any action is required to avoid equal pay breaches from occurring or continuing; the employer's breach gives the tribunal no reason to think there may be other breaches; or the disadvantage of an audit would outweigh its benefits.  Micro-businesses (those with fewer than 10 employees) and new businesses which have been operating for less than 12 months at the point the claim is submitted are exempt.

Faced with the risk of having to carry out an equal pay audit, which will inevitably be time-consuming and costly, employers are likely to be more inclined to settle equal pay claims at an early stage.  In circumstances where claims do get to tribunal and an employer is found to have committed an equal pay breach, it is likely that the parties will make extensive submissions as to whether an audit is or is not required and debates will be had as to the interpretation of the exceptions set out above.  This will probably lead to more lengthy and complex hearings at the remedy stage.  Employers may also seek to appeal an order to carry out an audit or try to negotiate the specifics of the audit, by persuading the tribunal to limit the number of employees included in the audit and the period of time the audit must cover, and extend the deadline for submitting the audit results.

Given that the 12 month timeframe for implementing regulations requiring mandatory gender pay gap reporting has already started to run, and considering the time and cost that would be involved in carrying out an equal pay audit if ordered by a tribunal, it would be prudent for employers to carry out an informal review of their pay practices now and if necessary take action to address any gender pay issues.  The Equality and Human Rights Statutory Code of Practice on Equal Pay sets out good equal pay practice, including a 5-step model for carrying out equal pay audits, which can be found here.

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