UK Employment Law Coffee Break: Equal pay, our HR pensions spotlight for September and the latest news on incentives

Employment Tribunal scrutinises use of 'market forces' and the 'costs plus' defence in £30m equal pay claim

In a recent case, an Employment Tribunal has looked at whether an employer had established a "material factor defence" to explain the difference in basic pay (and a number of other allowances) between shop floor staff, who were predominantly female and warehouse staff, the majority of whom were male. Under the Equality Act 2010, an employee has a legal right to equal pay with a colleague of the opposite sex who is in the same employment and where they are employed on equal work, that is, like work or work rated as equivalent. A previous Employment Tribunal had found that the claimant sales staff in this case were carrying out work of equal value to the warehouse staff.

An employer can defend an equal pay claim where it can demonstrate that the difference in pay is attributable to a "material factor" that is "not the difference in sex": the material factor must not be either directly or indirectly discriminatory. Consequently, where a material factor is found on its face to be indirectly discriminatory, an employer would need to objectively justify the difference (namely, were the measures adopted a proportionate means of achieving a legitimate aim). Case law has established that cost can be a legitimate aim, provided it is not the only legitimate aim – this is referred to as the "costs plus" approach.

Here, the Employment Tribunal held that the material factor defence could not be established in relation to basic pay (and a number of other pay terms); although it did succeed in respect of some other allowances.

Were the material factors relied on directly or indirectly discriminatory?

While the Employment Tribunal found that the material factors that the retailer relied on as having influenced its decision to set the basic pay of warehouse staff at more than sales staff were not directly discriminatory, it did find that on the face of it there was indirect discrimination.

Statistics suggested that paying warehouse staff more than sales staff had a disproportionate effect on women (during the relevant period sales staff were 77.5% female compared to 52.78% men). The employer also benchmarked pay against the market, which had a significant imbalance favouring men; the higher pay for warehouse staff therefore reflected this predominantly male market.

Could the differential in basic pay be objectively justified?

The Employment Tribunal rejected the employer's stated legitimate aim of "the viability, resilience and performance" of the retailer's group and subsidiaries. It accepted that paying warehouse staff more basic pay than sales staff was one way (but not the only way) of the retailer achieving its stated aims. However, here the employer could have afforded to pay a higher basic rate of pay to the sales floor staff, but had instead preferred to keep labour costs to a minimum and maximise profitability. The whole drive of the pleaded case was cost-cutting which could not on its own be a legitimate aim under the costs-plus requirement.

Even if the employer's aim had been found to be legitimate, the Employment Tribunal went onto determine that the payment of different sums to the warehouse and retail staff – despite both reflecting the market rate for those roles – would not be a proportionate means of achieving it. The business need was not sufficiently great as to overcome the discriminatory effect of lower basic pay for the sales staff; "for market forces to be a trump card in this way would defeat the objective of the legislation; lower pay in particular sectors due to indirectly discriminatory practices could then be lawfully sustained in perpetuity. There must usually be a more compelling business reason for such arrangements to be justifiable, such as with the incentivised productivity bonuses… "

What does this mean for employers?

This is only an Employment Tribunal decision, reflecting the particular facts of the case, and is therefore not binding on other tribunals. However, it emphasises the potentially indirectly discriminatory impact in relying on market rates as the reason for pay levels and that arguments centred around controlling costs alone are unlikely to meet the objective justification requirements.

Here, the Employment Tribunal considered that the employer had prioritised its own profitability over bringing the basic pay of sales staff in line with that of warehouse staff. It noted that there was "no real scope for any costs plus ingredient, when the whole drive was about cost saving, a consistent theme of the relevant witnesses. We recognise in the broadest sense that business decisions in this industry were not just about making profits. High street shopping has been on the wane leading to the closure of stores and the loss of retail jobs over a sustained period… but the first respondent has survived where many other retailers have gone to the wall. This was achieved by careful management, particularly in the field of budget planning… The fact that the first respondent has made sustainable profits throughout the period, save for the year after lockdown, and could absorb the cost of the same basic pay for work of equal value is a judgment the Tribunal can pass with the merciless wisdom of hindsight. All that said, we are satisfied that with respect to basic pay the legitimate aim of viability, resilience and successful business performance, fairly characterised, falls on the wrong side of the demarcation line, of costs only, with no element of costs plus."

It has been reported that the claimants in this case could receive compensation in excess of £30m, and employers should anticipate that this is an area where their reasons for setting pay at particular rates or providing for specific allowances in relation to cover particular circumstances could face increasing scrutiny, particularly given the government's proposal to introduce the draft Equality (Race and Disability) Bill and the information and reporting measures set out in the EU's Pay Transparency Directive which EU Member States must implement by 2026 (the UK does not need to implement the directive).

We will be following any appeal in this case closely and please do contact your usual Osborne Clarke contact if you would like to discuss the impact of this decision on your business further.

HR pensions spotlight for September: Mind your Ts and Cs

Last week's Coffee Break included a report of a recent Supreme Court decision on "fire and rehire" (also known as "dismiss and re-engage"). It also flagged the new code of practice on dismissal and re-engagement and the government's plans to reform the law in this area. All of these developments are relevant to pensions.

If an employer wants to withdraw a pension scheme or make significant changes to it, then it must check whether the contracts of employment of the members who will be affected contain anything which would be a barrier to the proposal. The employer should also check whether any commitments have been made or expectations created in any other context. For example, if changes have been made to the scheme in the past, or pensions have been considered as part of any other negotiation, what were members told at the time?

When it comes to new contracts of employment, many employers now avoid including any wording that would commit them to providing benefits through a particular scheme and make it clear that any pension scheme the employee joins is subject to its rules, and to variation and withdrawal.

However, there will be cases in which the contracts of employment of some or all of the members affected by a proposal include specific commitments around pension provision. In this situation, it may be necessary to think about whether it is possible to agree changes to terms with those employees. 

If agreement is thought to be unlikely, employers should also consider whether dismissal and re-engagement on new terms is available as a last resort, or whether the existing terms preclude that approach. Such cases are rare and there may be other options in a pensions context. Specialist legal advice will help the employer to consider all available options, related consultation requirements and (if necessary) what else needs to be done to comply with the letter and spirit of the new code of practice.

If you would like to discuss any of these points, please contact your usual Osborne Clarke contact or Claire Rankin, Pensions partner.

Our latest Employee Incentives Update

Please find the latest update from our Incentives team, which looks ahead to the UK Autumn Budget on 30 October 2024 and the possible CGT and employer national insurance changes ahead.

If you have any questions on the articles, please contact Michael Carter, Anika Chandra or your usual Osborne Clarke contact.