What are equal pay audits and how do they work?

The Equality Act 2010 incorporates the clear principle of “equal pay for equal work”. However in practice, equal pay concerns have been increasingly at the forefront of complex employment matters. Recent data from the UK government’s Office for National Statistics shows that, for full time employees in 2021, men were still paid 7.9% more than women and this is up from 7% in 2020. It is clear from these figures that equal pay is an on-going issue within the workplace.

Carrying out an equal pay audit can be a helpful tool for employers to ensure that all employees are afforded equal opportunity and are treated with equal value. Audits can also assist employers to demonstrate their compliance with the Equality Act.

What is an equal pay audit?

An equal pay audit is an examination of an employer’s pay data to determine whether employees are being paid fairly or whether some groups are being treated more favourably than others. Once variables such as length of service/part-time status are taken into account, a comparison is made between the pay packages belonging to employees from different groups. These audits can be undertaken internally or by hiring external consultants.

Should bonuses be included in the audit?

Although a ‘bonus’ payment is an extra in addition to an employee’s basic pay, contractual bonuses are still defined as ‘pay’ under the equal pay provisions of the Equality Act 2010 and in some role make up as significant part of the employee’s remuneration.  So therefore they would need to be included as part of the equal pay audit to ensure transparency.

What should employers do with the audit results?

Once the results are in, employers need to analyse the pay for the male and female employees in each equal work category.  Common ways of calculating average earnings are using median and mean averages.

Unless there is a genuine justification for a difference in pay that has nothing to do with the sex of the jobholder, men and women doing equal work are entitled to equal pay.

If a pay gap is found to be discriminatory, the employer is legally required to fix the problem. It is not sufficient for an employer to simply discover or acknowledge the situation; they will need to put into place an action plan to remedy the pay discrimination.

The Equality & Human Rights Commission (EHRC) recommends that, as a general rule, a pay gap of 5% or more, or any recurring difference of 3% or more will need further exploration and explanation.

If it is found that men and women are being paid differently, the burden of proof falls on the employer to prove that the difference is not linked to discrimination. Some differences in pay will be justifiable (such as job role responsibilities, length of service, geographical reasons or number of hours work), but some differences will not.

It is important for employers to remember that equal pay audits are not simply a data collection exercise, they are a commitment to action if unjustified pay inequalities exist in the organisation.

Are equal pay audits mandatory?

In short, no; equal pay audits are not a legal requirement. However, doing an audit demonstrates your commitment as an employer to remove unfair pay practices and could be a first line of defence to any threatened equal pay claim if the audit shows no real disparity.

Additionally, a tribunal can order an audit if the employer loses a claim for equal pay or sex discrimination in relation to pay. The audit will need to identify any gender-related pay differences and include a plan to address any breaches of equal pay law.

Are there any case studies of tribunals ordering an audit?

Let us take a look at the recent case of Macken v BNP Paribas. In 2019, the claimant was successful in her claims against her former employer, a bank, for equal pay and sex discrimination. The claimant was hired on a salary of £120,000 per annum, whereas a male colleague who was employed in the same role was on a salary of £160,000. Additionally, the claimant received £33,000 in bonuses over a five year period, whereas this male colleague received over £237,000. The claimant raised these concerns to her employer, but they failed to address her complaints.

The tribunal hearing took place in February of this year and the claimant was awarded more than £2m in damages. The tribunal held that the bank’s own equal pay review conducted back in 2019 was insufficient and had scant methodology. Their audit reviewed employee’s base salary only, however it was clear the claimant had suffered discrimination in relation to her bonus as well. So, in addition to paying the claimant compensation, the bank was ordered to undertake an extensive equal pay audit, which the bank will have to publish on their website for three years.

This case was the first time a tribunal has made such an order against an employer. It serves as a timely warning to employers demonstrating the importance of ensuring their equal pay responsibilities and obligations are taken seriously through transparent and compliant equality policies, in order to avoid potential complaints.

Top tips for employers?

•    The decision in Macken v BNP Paribas suggests that tribunals are going to increasingly be on the lookout for opaque pay systems. Employers should ensure they are considering the Equal Pay Statutory Code of Practice and are undertaking meaningful equal pay audits on a regular basis.
•    As mentioned earlier, equal pay audits can be carried out using either an internal resource or using a third party. The advantage of using a third party can help demonstrate impartiality.
•    Equal pay audits are generally not suitable for organisations with less than 50 employees.
•    It is rare to emerge from an equal pay audit without some gender pay differences or some aspects of pay policy requiring change. Remember that this does not necessarily mean sex discrimination has occurred as some differences may be justified. Take one step at a time and if you are in any doubt, do not hesitate to contact us at TS&P for further legal advice.