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TUPE: equal pay claims and the genuine material factor defence (TLT LLP)

TUPE: equal pay claims and the genuine material factor defence

In Skills Development Scotland Co Ltd v Buchanan and another, the EAT has dismissed equal pay claims which would otherwise have required an employer to equalise employees’ pay following a TUPE transfer.

The EAT held that a TUPE transfer in 2002 amounted to a genuine material factor defence to the claimants’ equal pay claims six years later. Although the employer could potentially have done more to reduce the pay disparity, by freezing (or "red circling") the comparator's pay rather than including him in "across the board" pay rises, the EAT thought that this was not the point. There was in any case a recognisable risk that a pay freeze may have breached his contract. The TUPE transfer was, and remained, the root cause of the pay disparity, and it had nothing to do with sex. The "mere effluxion of time" did not change that.

Background

After a TUPE transfer, a transferring employee has the right to continue on their existing terms of employment.

Contractual changes (even by consent) will be void if the sole or principal reason for the variation is the transfer itself and may be void if the change is a reason connected with the transfer. This can cause great difficulties for an employer seeking to standardise the terms and conditions of new and existing employees.

Particular difficulties can arise with equal pay issues. Where a woman is paid less than a man performing equal work for the employer, she will be entitled to the higher rate of pay unless the employer shows that the difference in pay is due to a material factor that is not directly or indirectly sex-discriminatory. This was known as the "genuine material factor" or “GMF” defence under the Equal Pay Act 1970 (now the "material factor" defence under the Equality Act 2010).

Facts

Two female workers (the Claimants) were paid £12,000 less than Mr Sweeney despite carrying out similar work to him. The Claimants and Mr Sweeney transferred from different employers to Scottish Enterprise in 2002 and then to Skills Development Scotland Co Ltd (SDS) in 2008.

Prior to the 2002 transfers, Mr Sweeney negotiated contractual guaranteed pay increases which were valid until April 2004. Thereafter Mr Sweeney’s salary would be reviewed “on an annual basis as per normal arrangements”.

In 2004, Scottish Enterprise introduced a Performance Related Pay (PRP) scheme. The PRP scheme provided for employees’ pay to be “red-circled” and no award would be made if employees were deemed to be overpaid. Mr Sweeney however continued to receive annual pay increases and bonuses. The Claimants were told that a planned job evaluation study would address any anomalies in the pay structure however this did not happen.

After the 2008 transfer, SDS undertook a job evaluation to address salary anomalies but awarded “across the board” bonuses and pay increases to employees, including Mr Sweeney, before completing the review.

Tribunal decision

It was agreed that the Claimants’ and Mr Sweeney’s jobs were of equal value. However SDS argued that Mr Sweeney’s contractual rights were protected under TUPE by the 2002 transfer. SDS said that this was the cause of the pay disparity and was a GMF defence not tainted by sex.

The tribunal accepted that Mr Sweeney’s contractual rights under TUPE amounted to a GMF up to April 2004. However, it rejected SDS’s defence for the later period, as it did not believe that the TUPE transfer was a significant or relevant reason for this disparity. The tribunal did not accept that there had been any such legal obligation to award pay rises or bonuses after April 2004 and the chain of causation for the pay disparity had therefore been broken from that date.

EAT decision

SDS was successful on appeal. The EAT decided that SDS had established a GMF defence. The equal pay claims were therefore dismissed.

The EAT made a number of observations about the tribunal's decision:

The tribunal appeared to reason that SDS's explanation was "not good enough" because both it and Scottish Enterprise could have thought about the matter and done more to rectify the pay disparity sooner.
It appeared to be saying that both employers should have asked themselves whether Mr Sweeney's contract required pay rises and bonuses to be made. The tribunal was not satisfied that it did, but did not give reasons for that.
The tribunal made no finding that there was any direct discrimination on grounds of sex, and no findings that would support prima facie indirect discrimination (either based on a "provision, criterion or practice" or on statistics).

The EAT affirmed previous case law which stated that "genuine" means that the employer's explanation should not be "a sham or pretence", and "material" means that it must be "the cause of the disparity... that is, a significant and relevant factor". The explanation must not be directly or indirectly discriminatory. The employer "is under no obligation to prove a 'good' reason for the pay disparity" just a “genuine” reason. Therefore, according to the EAT, "if the employer establishes a subsisting causal link between a non-gender-related explanation and the difference in pay complained of, the defence is made out".

The EAT held that the tribunal's findings were "demonstrative of there having been a genuine explanation for the pay disparity...which was not, in any way, gender related".

The tribunal had seen the employers' failure to address the disparity (by “red-circling” (freezing) Mr Sweeney's pay) and their failure to actively consider the impact of TUPE at each pay review, as having broken the causal link between the TUPE transfer and the pay disparity. However, the EAT considered that Mr Sweeny's contract was "readily capable" of being interpreted as entitling him to pay rises after 2004 in accordance with the employer's "normal arrangements". It was SDS's normal practice to make "across the board" pay rises and bonuses. Whether it could potentially have frozen his salary was irrelevant, since it was not normal practice to do so, and any employer would have realised there was a risk of such a freeze amounting to a breach of Mr Sweeney’s contract.

In those circumstances, the EAT did not think that the employers had broken the causal chain by applying their standard approach to pay rises after April 2004 without specifically considering the effect of TUPE, or the possibility of the pay freeze.

Comment

The tribunal affirmed that an explanation only needs to be “genuine” (or material) and does not necessarily have to be “good”. In this case, the tribunal's finding that the employer could and should have done more to remedy the pay disparity following the TUPE transfer came very close to applying a "good material factor" rather than a "genuine material factor" test.

The key points about this case are that preservation of a comparator's terms under TUPE can provide a GMF defence to an equal pay claim and that there is no general principle that the defence will "extinguish" over time. While this may come as some relief to employers amalgamating two workforces following a transfer, there is still a need for caution. The burden is on the employer to prove that TUPE is the genuine cause of the disparity. Moreover, employers should be careful to ensure that there is no statistical gender bias between the higher and lower paid groups. If so, steps should be taken to address the unequal pay unless it can be objectively justified.

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