How do salary sacrifice arrangements affect gender pay gap reporting?

salary sacrifice arrangements

Need to know:

  • Deductions for salary sacrifice arrangements are excluded from an employee’s base pay for the purposes of gender pay gap reporting.
  • This could influence an organisation’s final gender pay gap data depending on how many women compared to men have taken up benefit via a salary sacrifice arrangement, by creating an artificially lower rate of pay for those who opt to use salary sacrifice compared to those who do not.
  • Employers should use measures such as a descriptive supporting statement or additional pay calculations in order to explain if salary sacrifice deductions have impacted their gender pay gap results.

In December 2016, the government published its final draft regulations for the introduction of statutory gender pay gap reporting for organisations with 250 or more employees in the UK. Effective from April 2017, the regulations require UK employers to publish their gender pay gap and bonus data within the 12 months following the designated snapshot date of 5 April each year for private sector organisations and charities, and from 31 March for public sector organisations.

According to the government’s online gender pay gap viewing service, as at 5 December 2017, 302 employers have reported and published their gender pay gap data so far, ahead of the April 2018 deadline. However, grappling with the prescribed pay calculations is no easy feat and it has been suggested that excluding salary sacrifice deductions from an employee’s basic pay for the purposes of gender pay gap reporting could artificially skew an organisation’s final gender pay gap statistics.

What do employers need to report?
To meet the gender pay gap reporting requirements, the figures eligible employers need to publish are: the difference between both the mean and median hourly rate of pay for male and female full-time employees; the difference between both the mean bonus pay and median bonus pay for male and female employees; the proportions of male and female employees who were awarded bonus pay; and the proportions of male and female full-time employees in the lower, lower middle, upper middle and upper quartile pay bands.

But what facets of pay should be included in an employee’s overall rate of pay? According to the regulations, this should include an employee’s base salary, any bonus payment made during the relevant pay period covering the snapshot date, and any shift premiums or piecemeal rates that have been paid, says Tamsin Sridhara, director in the talent and reward practice at Willis Towers Watson. Employers will also need to include any allowances that have a fixed monetary value in their employees’ hourly rate of pay, for example, car allowances, pay for leave allowances and London living allowances.

However not all types of pay need to be reported on. Overtime wages, redundancy pay, pay in lieu of leave, expenses and season ticket loan amounts, for example, are all excluded from the final pay calculations. But where does this leave deductions made for salary sacrifice arrangements? Esther Langdon, associate at law firm Vedder Price, says: “No non-monetary benefit should be included. For [the purpose of gender pay gap reporting], salary sacrifice arrangements are regarded in that bracket of non-monetary benefits and that’s why they’re not included.”

Difficulties around pay calculations
Both the government and the Advisory, Conciliation and Arbitration Service (Acas) have updated their websites in 2017 with in-depth guidance on how employers should broach pay calculations for gender pay gap reporting. However, any information regarding how to tackle salary sacrifice deductions is rather thin on the ground, says Vaneeta Khurana, partner, head of employment tax, at accountancy firm Mazars. “There’s a report that was done by Acas and the government’s equal opportunities forum and that’s a 38-page document that has a couple of sentences on [salary sacrifice],” she says. “There isn’t really much [guidance] provided to date.”

Furthermore, the regulations themselves have not helped to clarify employers’ questions. “The actual regulations aren’t very clear,” adds Langdon.

The crux of the matter for some employers is that if more female than male employees take up salary sacrifice arrangements, most notably for childcare vouchers, this could create artificially lower rates of pay for women compared to men, effectively skewing an organisation’s pay data and final gender pay gap statistics. According to the Employee Benefits/Staffcare Benefits research 2017, published in May 2017, 95% of employers offer childcare vouchers via salary sacrifice, making this one of the top three benefits offered in this way. “I think it is firmly established that more women use the childcare voucher salary sacrifice arrangement than men do, so if [a] small employer [had] a large proportion of the women using that benefit, then [employers] could end up in a position where the pay gap looked larger then in a sense it really was,” says Langdon.

Mitigating the risks
Employers can help to pinpoint whether the deductions from salary sacrifice arrangements have impacted gender pay gap data by calculating two sets of figures; one using pre-salary sacrifice pay and one using post-salary sacrifice pay. Rita Trehan, president at the eponymous consultancy and chief people officer at Australian energy company AGL, says: “While the legislation is quite clear on what it wants, equally it’s not restricting employers to go beyond that and provide more detail, either in their narrative or further analysis or reports that they can include if they choose to. I’d encourage [employers] to be really looking at [gender pay gap reporting] in its broadest sense and perhaps go beyond what’s been asked.”

Employers should also be sure to fully use their supporting narrative statement to act as an explanatory tool about what data sets have or have not been included in their final pay calculations. This can prove effective because employers have complete freedom in how they present their data. “It’s a blank canvas,” says Vedder Price’s Langdon. “How the employer presents [the prescribed information], there is quite a lot of freedom as to how to do it.”

However, there is a danger of the supporting statement being overlooked when sat next to a stark gender pay gap statistic, especially as a narrative of this style could appear more defensive than anything else. “It’s summarising so much information in one figure, and I think any narrative is going to look a little bit defensive and on the back foot,” says Langdon.

Mazars’ Khurana adds: “Data is black and white so actually how much emphasis are readers going to [place] on the narrative?”

Furthermore, employers can encourage both men and women across their organisation to participate in available salary sacrifice schemes to ensure that everyone across the organisation is aware of the advantages of using salary sacrifice and that all feel encouraged to take it up. Sridhara says: “The way [employers] might mitigate it is then just making sure it’s as easy as possible for people to participate in the salary sacrifice scheme.”

This would suggest that if both men and women are taking up salary sacrifice arrangements across an organisation, its gender pay gap data would then be more reflective across the genders with regards to salary sacrifice deductions being excluded from pay calculations.

Factros influencing gender pay gap figures
Despite deductions via salary sacrifice arrangements having the potential to skew an employer’s final gender pay gap figures, there are more prominent drivers influencing organisation’s gender pay gaps, says Willis Towers Watson’s Sridhara. “The key drivers [are] the spread of men and women across the organisation at each level, if there [are] any large pay differentials, and if there [are] any significant differences in the elements of pay that different populations are receiving, and also the proportion of part-time and full-time employees,” she explains.

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Gender pay gap reporting is still very much in its infancy. “As reports come out and we [become] more used to knowing what the figures mean and have it more at our fingertips, I think it [will] be easier to have a view on [whether employers should continue to offer salary sacrifice in light of gender pay gap reporting],” says Langdon.

As Trehan explains, discussions around salary sacrifice deductions will not impact an employer’s decision to offer benefits via this mechanism, however, it will be interesting to see how organisations interpret issues which may involve a lack of clarity around the calculation of gender pay gap figures in the run up to the April 2018 deadline.