Equal pay: can market forces justify unequal pay?

Adrian Fryer

Can an employer pay two groups differently because it needs to pay more to recruit people into one of the jobs? That question was at the heart of the Employment Appeal Tribunal’s recent decision in the long-running equal pay litigation in Thandi v Next.

A quick reminder: how does equal pay work?

Equal pay law allows an employee to compare their contractual pay and benefits with those of someone of the opposite sex doing equal work.

The jobs do not have to be identical. A claim can also be brought where different jobs are found to be of equal value in terms of factors such as effort, skill and decision making.

If the claimant is paid less, the employer must then either accept the claim or prove to the employment tribunal that the difference in pay was due to a material factor which is not tainted by direct sex discrimination. If an employer does prove that the factor they relied on is not tainted by direct sex discrimination, the employee may still be able to show that it is indirectly discriminatory if it puts women at a particular disadvantage compared to men.

If the employee can do this, the employer will lose the claim, unless it can prove that it had a legitimate aim in applying the factor, and that its actions were appropriate and reasonably necessary to achieve the aim.

What happened at Next?

More than 3,500 predominantly female retail sales consultants compared themselves with warehouse workers, a small majority of whom were male. Their jobs had already been found to be of equal value.

Next argued that it paid warehouse workers higher basic pay because market rates were higher and it needed that pay level to recruit and retain enough staff.

Having found that the pay arrangements placed women at a particular disadvantage (the indirect discrimination test), the employment tribunal held that Next could not objectively justify the difference. It characterised Next’s aim as saving costs, which was not a legitimate aim.

The Employment Appeal Tribunal, allowing the appeal in part, held that the tribunal should have considered Next’s aims as a whole when deciding whether they were legitimate and proportionate. Next’s aims in paying higher basic pay to warehouse operatives included paying the market rate necessary to recruit and retain sufficient warehouse staff, pressures which did not apply to retail recruitment. That was a legitimate aim.

The tribunal had also wrongly asked why Next had not increased retail pay, rather than whether paying warehouse staff more was a proportionate means of meeting its recruitment and retention aim. Its own findings showed that Next paid warehouse workers what was necessary for sound business reasons, and no more. Next’s ability to afford equalised pay did not undermine that justification.

The appeal succeeded on basic pay and certain other pay elements. The tribunal’s decision in favour of the retail sales consultants stood on other elements (including paid breaks, overtime premium, and night-time working premiums).

The HR takeaway

Different market rates can potentially justify different pay for work of equal value. But employers need evidence explaining why the difference exists and why the particular pay arrangements are necessary. “That’s what the market pays” should be the start of that analysis, not the end.

Contact Adrian Fryer, Senior Partner and Head of Employment.