EAT finds tribunal wrongly rejected retailer’s market forces defence in equal pay claims

Background

In Next Retail Ltd and Next Distribution Ltd v Thandi and others, more than 3,500 shop-floor sales consultants brought equal pay claims comparing their basic pay with that of predominantly male warehouse operatives.

An employment tribunal found that the claimants’ work was of equal value to that of the warehouse workers. It then considered whether the respondent could establish a material factor defence by showing that the difference in pay was caused by factors unrelated to sex. As those factors placed women at a particular disadvantage, the respondent also had to show that its reliance on them was a proportionate means of achieving a legitimate aim.

The respondent relied on market forces, including recruitment and retention pressures affecting warehouse staff, as well as business viability. The tribunal accepted that there were particular recruitment pressures in the market for warehouse workers which did not apply to sales workers.

However, it concluded that the respondent's aim was ultimately to minimise costs and maximise profitability. It held that cost saving alone was not a legitimate aim and that market forces should not operate as a “trump card” permitting discriminatory pay differences to continue indefinitely. The tribunal therefore upheld the claims relating to basic pay.

The respondent appealed and the claimants cross appealed the finding that there had been no direct sex discrimination.

EAT decision

The Employment Appeal Tribunal (EAT) allowed the appeal in part and dismissed the cross-appeal.

The EAT upheld the finding that the pay arrangements placed the claimants at a particular disadvantage. The statistical difference between the gender profiles of the two groups, together with evidence about the respondent's benchmarking was sufficient to support that conclusion.

However, the tribunal had wrongly characterised the respondent's aim as cost saving alone. It had focused on why Next did not increase the sales workers’ pay, rather than considering the reason for the difference between the two groups’ pay.

The tribunal had found that the respondent needed to pay a higher market rate for warehouse work because of genuine recruitment and retention pressures which did not apply to the retail workforce. Viewed as a whole, the respondent's aim therefore went beyond saving money.

The EAT also found that the tribunal’s proportionality assessment was flawed. It had focused on whether the respondent could afford to equalise pay, rather than properly assessing why it paid warehouse workers more. A pay difference arising from a genuine need to attract and retain workers in a particular role may be justified, depending on the facts.

On the tribunal’s own findings, the respondent was paying the rates it needed to pay for sound business reasons, and no more. The EAT concluded that the pay differential was a proportionate means of achieving a legitimate aim.

The EAT also rejected the argument that relying on market forces must amount to direct discrimination unless the employer proves that those forces are themselves free from sex-based disadvantage. Whether a pay difference is because of sex remains a question of fact. In this case, the tribunal had found no discriminatory motivation and had rejected the argument that retail pay had been suppressed because of historical sex discrimination.

Learning points for employers

The decision does not mean that employers can rely on “market forces” as a general justification for unequal pay. They must identify the particular recruitment, retention or operational pressures that explain the higher rate and show why those pressures apply to one group but not the other.

Employers should retain evidence supporting market-based pay decisions, such as recruitment difficulties, vacancy rates, applicant numbers, staff turnover and external pay benchmarking. They should also review differentials periodically: a justification based on market conditions may become more difficult to defend if those conditions change.

Pay structures should be monitored for differences between roles predominantly performed by men and women, particularly where the roles may involve equal work. Identifying potential disparities early will allow employers to examine their justification and preserve the evidence supporting their decisions.

For more information or advice, please get in touch with Georgia Blesson in our Employment team.