Legal

How HR should react to new ‘comply or explain’ rules

4 Jan 2019 By Raoul Parekh

Employers should see compulsory reporting obligations as an opportunity not a burden, says Raoul Parekh

When the gender pay gap reporting rules were announced, the response from employers was muted. The Confederation of British Industry (CBI) only said that the data “could be misleading”. It felt like a fairly anodyne compliance burden for auditors and HR operations teams to worry about, not a boardroom issue. After all, there wasn’t – and isn’t – even any meaningful penalty for failing to comply.

But the consensus was wrong. The data – made publicly available on a government website – was pored over by journalists and politicians. A select committee all but forced the biggest law firms to release more data about their pay than the law required. The trade press in every sector ran stories comparing the gaps between the biggest names. Allegedly, six in 10 women now consider the gender pay gap when choosing a new employer.

All of this is a reflection of a subtle soft power of a long-standing practice of corporate governance law that is now making waves in the HR world: ‘comply or explain’. Listed companies in the UK are well used to having to either comply with principles of good corporate governance (for example, having at least two independent non-executive directors), or explain publicly why they do not. The power of the approach is that regulators and governments can provide a strong incentive towards best practice without setting any rules about what companies can and can’t do or being burdened with enforcement.

This ‘softly softly’ approach has already made an impact on gender pay gap reporting, with employers reeling from hostile coverage on their pay gaps, unwelcome comparisons to competitors and allegations of missing or inaccurate data. 

More obligations on the horizon

Legislators seem to have got a taste for reporting obligations, and a raft of new areas are either already in place, or in sight: modern slavery/human trafficking statements (from 31 March 2016); CEO pay ratio reporting (from 2020); ethnicity pay gap reporting (the government launched a consultation in October last year); and family-friendly leave policies (proposed by Jo Swinson MP in September).

The current tightness of the UK labour market is placing an increasing premium on employer reputation. Companies that might previously have taken a bullish approach to these issues find themselves at a disadvantage for talent. While that continues, these new reporting obligations will continue to cast a long shadow. Employers (especially those with 250+ employees – the threshold for gender, ethnicity and CEO pay gap reporting) should get used to more sunlight on parts of their operations that have been safely in darkness up until now.

This may sound like a frightening prospect, but it doesn’t have to be. What it requires is for HR and senior management to act in a way that they would not be embarrassed to discuss publicly. It requires a willingness to be held to account. But that can be a powerful tool for HR to encourage exactly the sort of behaviours that we are often trying to imbue in senior leaders: clear reasoning; rationale they will stand behind; frankness in communications with employees. 

If leaders meet that challenge, the spotlight of reporting obligations needn’t be something to fear. Gender pay gap reporting has already prompted a flurry of interest in that area; whether broader change will come from the new obligations is yet to be seen. Perhaps, though, it can be an opportunity and not merely a burden.

Raoul Parekh is a partner at GQ|Littler

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