On 6 September 2023, Birmingham City Council became the seventh council in the last three years to declare itself in a state of “effective bankruptcy”. The Council issued a s114 notice which confirmed that it does not have enough resources to meet its financial liability relating to equal pay claims.
In 2012, 174 city employees sued the Council under the Equality Act 2010, claiming unequal pay in the public sector. The Supreme Court found that the Council had subjected the claimants to years of unequal pay and extended the time limit on claiming back pay from six months to six years. This has resulted in the Council already having paid approximately £1.1bn in equal pay claim compensation, with a further £650-£760m due to be paid out with an ongoing monthly liability.
Although this is likely to be on the extreme side of equal pay cases, it does highlight the importance of ensuring equality in the way staff are paid. To help employers mitigate the risk of falling foul of costly equal pay claims, we have compiled a list of suggestions to help organisations reduce risky pay practices that could lead to unequal pay.
First, a reminder of the legal position: under the Equality Act 2010, men and women must receive equal pay for equal work, unless there’s a material factor for the difference in pay that is not related to sex. Going one step further, EU law allows for a woman to have equal pay with a man who shares neither the same employer nor location of work, but where the difference in pay is from a single source (ie a head office) with the ability to correct the difference. The UK Government has recently confirmed its commitment to introduce secondary legislation to ensure that the protections provided in EU law remain enshrined in the UK law.
Although in reality, equal pay claims are generally brought by women, either gender, provided the individual is employed, can bring a claim.
For an equal pay claim to be successful, the claimant must be able to compare their contractual terms with that of a comparator. The comparator must: (1) be of the opposite sex, (2) be a current or previous employee, (3) be / have been working in the same employment, and (4) be actual, not hypothetical. Notably, these attributes allow for a claimant to use a predecessor to prove an equal pay claim.
In addition to identifying a comparator, the claimant must also show that equal work is being done and there is a pay discrepancy. Equal work can be “like work”, “work rated as equivalent” or “work of equal value”. The actual work undertaken, rather than just the terms of the contract, will need to be looked at closely to identify the equal work.
Employer respondents will be able to escape liability in an equal pay claim if they are able to establish a “material factor defence”. This will always depend on the facts of the case, but it is an opportunity for the employer to show that the real reason for the difference in pay is not related to sex.
To learn more about the intricacies of an equal pay claim, see our earlier blog with some fundamental Q&As on the subject.
Tips on reducing risk
An obvious lesson from Birmingham City Council is that the bill for equal pay claims can be very high indeed. Although no compensation for injury to feelings can be awarded in an equal pay claim, the Tribunal can require payment of back pay or damages. In addition to financial risk, equal pay claims pose a risk of reputational damage. We have compiled some tips below to help employers mitigate the risk of equal pay claims.
- Answering equal pay questions – as of July 2022, Acas published guidance on how employees can submit questions to their employer to help them determine whether they have a claim. While employers are not under a legal obligation to answer questions, Acas advises them to take any such requests “seriously and reply as soon as possible”.
- Limit having multiple pay and grading scales in one organisation to avoid inconsistency and too much discretion.
- Be transparent about pay and grading systems to stay accountable to the business and its people and to avoid discrepancies that could lead to equal pay claims.
- Have up to date job descriptions that accurately describe the work that staff do with consistent job titles so that in suspected instances of inequalities across pay, job descriptions can be used as a factual and objective metric.
- Be wary of managerial discretion over starting salaries as this could lead to an equal pay risk where starting salaries result in further divergence in pay across comparators.
- Ensure proper supervision over market-based pay systems and any market supplements, when pay systems are linked to the external labour market. Market-based pay can be lawful as long as the differences in pay can be attributed factors like skill shortages or competitive pressures in a sector, not sex.
- Have periodic equal pay audits with adequate analyses undertaken by independent evaluators to identify possible issues and take appropriate action to rectify them. However, keep in mind that pay reviews will be disclosable in any potential equal pay claim, so if inequalities are identified it might make it easier for a claimant to establish their claim.
- Have clearly defined, achievable, and fair criteria for performance related pay – performance needs to be linked to a quantifiable, objective target.
- During times of organisation restructure, avoid indefinite or lengthy pay protection periods, as this runs the risk of preserving an unjustifiable difference in pay between a man and a woman doing equal work for longer than is necessary.
- Ensure equality in competence pay, where employees are compensated based on their knowledge, skills and abilities, rather than their job title or position. All employees should have equal access to opportunities to develop competence and improve their abilities to achieve the pay rate they desire.
- Undertake equality impact assessments to ensure policies, practices, and decision-making processes are fair and do not disadvantage or hinder one gender or another from participation.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2023