The ‘social’ facet of ESG is gaining more prominence with the evolution of gender pay gap rules, consumer trends and employee priorities, writes Doone O’Doherty
The ‘social’ elements of environmental, social and governance (ESG) are rising in prominence, having played a secondary role to the environmental and governance pillars for some time.
This lack of focus is partly because environmental and governance issues are much more clearly defined, and regulations in these areas are better developed – but things are changing.
Local gender pay gap reporting regulations and the EU Pay Transparency Directive are game-changers. These, coupled with changing consumer preferences and employee attitudes, are prompting companies to increase their focus on social issues.
The ‘S’ and tax contributions
The social pillar of ESG looks at an organisation’s contribution to societal fairness. Total tax contributions are key in this regard, as tax is a key indicator of an organisation’s contribution to society.
While the media often focuses on the level of corporation tax earned by the State, it is important to remember that companies are responsible for collecting income taxes via the PAYE system.
In 2022, PAYE income tax and the universal social charge (USC) amounted to €25.46 billion. This equates to 30 percent of total Exchequer receipts.
In addition, by paying employers’ PRSI (11.05%), employers are a significant contributor to the Social Insurance Fund, which funds social welfare benefits and the State pension.
These are important components of an employer’s role in contributing to society via the tax system. This can increase trust in the market and promote an organisation’s overall purpose and values.
The ‘S’ and pay equity
When it comes to ESG and pay, the focus tends to be on linking executive pay to ESG goals.
However, through an employment lens, an ESG strategy isn’t complete unless it addresses issues relating to all employees and supports the growth of a truly diverse workforce that is treated fairly, paid equitably and without bias.
Equal pay
In Ireland, equal pay provisions are contained in the Employment Equality Acts 1998 to 2021. Under this legislation, an employer is prohibited from paying an employee less (either directly or indirectly) in the same employment doing ‘like work’ on nine different grounds of discrimination.
Although an organisation may be fully committed to equal pay, businesses must review their pay systems and consider carrying out an equal pay review to highlight issues they may not be aware of. If there are equal pay gaps, organisations must explain why. If no reasonable explanation can be found, steps must be taken to close the gaps.
Gender pay gap
Even if employers comply with equal pay obligations, they may still have a gender pay gap.
Our analysis of 500 of the country’s largest employers that published gender pay gap reports in December 2022 found a mean gender pay gap of 12.6 percent.
Firms must file new reports in December 2023 based on their situation in June. Progress in closing the gap will require a concerted effort that is enabled by HR, but led by business leaders, to improve the representation of women in their businesses.
Pay transparency
While many organisations already monitor pay equity, the EU Pay Transparency Directive – which must be transposed into national law by 2026 – introduces additional pay transparency measures.
Key features of the Directive include:
- Recruitment: an obligation on employers to provide information concerning pay levels as part of the recruitment process and a prohibition to prevent organisations from asking candidates about their current or historic pay.
- Pay philosophy: a requirement for employers with more than 50 workers to share information on the criteria used to determine pay levels and progression.
- Pay information: a right for workers to request information on the average pay level split by sex for workers doing the same work or work of equal value.
The ‘S’ and worker classification
Spurred by COVID-19, on-demand labour platforms have grown. These offer new job opportunities for workers and convenient, more affordable services for consumers.
The gig economy has become a hot topic in many societal and political debates. The debate primarily focuses on the workers’ working conditions and social security status.
In Ireland, there are many ways to work and operate a business. Specific legislative protections for workers apply to each type of employment.
For employers, it is important to ensure workers are correctly classified in a way that matches the reality of the relationship between the worker and the business. The misclassification of an individual can impact tax, social security and employment law rights and obligations. It can also lead to reputational damage if a company is perceived as treating workers inequitably.
Acting as responsible corporate citizens
With more focus on the social element of ESG, employers must make the following a priority for their organisation:
- Understand what legislation requires and the financial and reputational implications of getting it wrong.
- Ensure that their strategy, processes and systems around the changing regulations that underpin fair pay and workers’ rights are robust and accurate.
- Validate their organisation’s ability to produce the necessary statistical data to ensure compliance with the legislation. And if they cannot, identify the gaps.
Employers should also begin crafting the narrative to explain how they support social progress – treating employees fairly, driving equality and acting as responsible corporate citizens.
Doone O’Doherty is Tax Partner of People & Organisation at PwC
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