The Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 (SI 2017/172) (GPG Regulations) come into force on 6 April 2017. They will require large employers to report on the difference between men’s and women’s hourly pay and, separately, bonuses. The way in which bonuses need to be taken into account throws up a number of issues which have not been resolved by the final version of the GPG Regulations, or the draft guidance published by Acas and the Government Equalities Office (GEO).
Employers need to factor bonus payments into the calculation of hourly rates, if bonuses are paid in the pay period (which will usually be the month of April, for monthly paid employees in the private and voluntary sectors). Employers will also need to assess bonus payments made to employees in the 12 months ending on the 5 April “snapshot date” each year (in respect of employees still employed on that date).
One of the issues vexing employers during the consultation on the draft regulations was how to treat awards of shares and share options (which count as bonuses). The GPG Regulations specify that bonuses in the form of securities and options/interests in securities are to be to treated as paid to the relevant employee at the time (and in the amount) giving rise to taxable income or earnings. This will vary depending on the type of award. For instance, unapproved options are subject to income tax on the gain at the point the employee exercises the option and acquires the shares. In relation to options and awards under tax-advantaged share plans, no tax charge arises if statutory conditions are met. It therefore seems that the value of those awards will never need to be included in the reported figures. This could produce misleading bonus data for some organisations. For free awards of unrestricted shares, the employee is subject to income tax on the market value of the shares on the date of the award. Employers will need to check their plans when gathering data for reporting.
Questions remain over incentive schemes in multinational organisations where the scheme is not administered (and shares/options are not awarded) by the UK entity subject to the GPG Regulations. We understand that government representatives have suggested such awards should be included, although this is not clear from the GPG Regulations or the Acas/GEO guidance. It is surely arguable that reporting should be limited to remuneration paid by the reporting entity.
In any event, it is questionable how meaningful bonus reporting will be. For the calculation of the bonus gap, taking into account bonuses paid in the 12 months up to and including the snapshot date, the figures to be used are the bonuses paid to employees in that period (subject to the treatment of shares and options described above). Although this excludes employees who leave before the snapshot date, it takes no account of the likelihood of new joiners during the year only receiving pro-rated bonuses. This may produce misleading figures. More importantly, there is no mechanism for making full-time or full-year equivalent comparisons for employees whose bonuses are pro-rated for part-time working or maternity leave. This will produce artifically large bonus pay gaps in some cases. Employers may want to undertake a full-year/full-time equivalent calculation and perhaps include additional narrative for this data.
The GPG Regulations do, at least, provide for pro-rating of bonuses within the hourly-rate calculation where any employees receive bonuses in the pay period. The hourly rate should include a pro-rated bonus figure which reflects the pay period, where the bonus relates to a longer period than the pay period. This will help to reduce the potential skew in the data where employers happen to pay annual bonuses in April, for example. This had been a concern arising from the draft regulations.
However, it will not always be easy to assess the period to which a bonus payment relates:
- In the case of shares and share options, will employers need to pro-rate according to the period prior to vesting/exercise, or some other period?
- Commission should be straightforward in the case of regular commission payments (for example monthly or quarterly), but what about commission payable only on the conclusion of a particular deal, which is not based on any particular time period? Commission rules will need to be scrutinised to identify the applicable period.
- Sign-on bonus provisions often provide for bonuses to be paid after a minimum period of employment, or subject to a clawback if the employee leaves within a particular period following their start date. These provisions are likely to provide the best guide in determining the bonus period.
- Recruitment bounties paid to employees for introducing a new hire could be treated in a similar way to sign-on bonuses, by considering any minimum period of employment before the introducer receives their bonus.
The requirement to assess bonuses over the 12-month period ending on the snapshot date of 5 April also raises interesting issues in the context of business transfers.
For instance, if employees transfer under TUPE to a transferee in, say, March 2017, they will be treated as relevant employees of the transferee on the 5 April 2017 snapshot date. Accordingly, the transferee would need to include them in its reporting (subject to meeting the 250 employee threshold). If the transferor had operated an annual bonus scheme which paid bonuses to employees in December 2016, should the transferee include those bonuses in its reporting, even though it was not responsible for paying them? The logical answer is that it should, having stepped into the shoes of the transferor, and given that it will need to report on their hourly rates. However, it is not obvious that the relevant information will be available to the transferee who is required to report, particularly in outsourcing/service provision change situations, where the transferee may be reliant on limited employee liability information.
This lack of clarity in the GPG Regulations means that there will be some flexibility for employers if data gathering is difficult. Nonetheless, many businesses will find it unsatisfactory that there are so many areas in which they will need to make their own judgement calls without further guidance from the government.