UK equal pay: A significant EAT decision

Why should I read this?

The Employment Appeal Tribunal's decision in Thandi and Others v NEXT Retail Ltd is a significant development in the law of equal pay.

NEXT's successful appeal on the key issue of basic pay overturns the Employment Tribunal's finding that the retailer breached equal pay requirements by paying its shop-floor sales staff a lower rate of basic pay than its warehouse operatives carrying out roles assessed as being work of equal value. The EAT found that it was justifiable for NEXT to rely on market forces to distinguish between the pay for the different groups of employees where there was a valid rationale for the pay differences.

Equal pay remains a cornerstone of workplace equality, helping to ensure that individuals receive fair remuneration for equal work regardless of sex. The material factor defence plays an important role in balancing that principle with the reality that pay differences may arise for legitimate, non-discriminatory reasons. It enables employers to justify a pay disparity where it is genuinely attributable to a material factor that is not the difference in sex.

As equal pay claims continue to attract significant legal, financial and reputational attention, understanding the scope and limits of the material factor defence is critical for employers seeking to maintain fair, transparent and legally compliant pay practices. The EAT's decision provides useful guidance in this respect, and in particular on the circumstances in which market-related factors and recruitment and retention pressures may constitute a legitimate and proportionate justification for pay differentials.

Background

The equal pay claims were brought by over 3,500 retail sales employees working in NEXT’s stores, who claimed that their work was of equal value to warehouse operatives with a proportionately higher male population (an average of approximately 52.8% male warehouse operatives compared with 77.5% female retail staff). The retail employees claimed that they had been paid less than the warehouse operatives, referring to 20 different contractual terms giving effect to the difference in pay, including basic pay, paid rest breaks, and certain bonuses and premiums.

At a first hearing, the Employment Tribunal found that the claimants' work was of equal value to that of the warehouse operatives, on the basis that the roles made comparable demands in terms of effort, skill and decision-making.

At a further hearing, the Tribunal considered whether the difference in pay was attributable to material factors that were not the difference of sex for each of the 20 terms. NEXT highlighted market forces, the need to recruit and retain sufficient warehouse labour, incentivising high productivity and attendance during peak periods, and business viability, resilience and performance.

The Tribunal accepted that pay was generally set by reference to prevailing rates in the two separate markets and that warehouse recruitment pressures were materially greater. It also found that the overall warehouse remuneration package was needed to maintain the warehouse service, while those pressures did not apply in the same way to retail employees. 

The Tribunal found that there was no direct sex discrimination, stating that “gender did not enter into the equation” in relation to the difference in pay. NEXT had not decided to pay men more than women and the factors relied upon to explain the pay differences were not themselves based on sex. However, the Tribunal concluded that the material factors placed women at a particular disadvantage because the retail workforce was predominantly female, while the warehouse workforce was disproportionately male, and the factors operated to produce differences in pay between those groups.

Where a factor places women at a particular disadvantage compared with men, reliance on the material factor defence requires the employer to also show that the factor is a proportionate means of achieving a legitimate aim. The Tribunal found that the business viability, resilience and market-related considerations were “all about cost” and that these reasons could not, without more, provide objective justification for the pay differential. In relation to basic pay and six other terms, it therefore found that the material factor defence was not made out. NEXT however succeeded in establishing that defence in relation to a number of other bonuses and premiums linked to attendance, productivity and operational requirements.

The EAT's decision

The essence of NEXT’s appeal was that the Tribunal had incorrectly determined that NEXT should have paid the retail employees the same basic pay as the warehouse operatives to whom a different rationale for paying more applied. It was submitted that there were errors of law in relation to the application of the particular disadvantage requirement and the findings in relation to the legitimate aim and proportionality relating to that basic pay element. Further, that some of the same or similar errors were also made in relation to other pay elements.

Considering first the "particular disadvantage", the EAT upheld the Tribunal’s finding that the retail workers were placed at a disadvantage by the pay disparity compared to the warehouse operatives. It held that the Tribunal’s statistical analysis of the gender composition of the groups was valid, albeit that the statistics were “not of the overwhelming kind”. It highlighted that the Tribunal did not in any event rely on the statistics alone, with its conclusions supported by the factual matrix of the specific circumstances.

Moving to consider the issue of legitimate aim, the EAT held that the Tribunal had incorrectly characterised NEXT’s objective as being purely about cost saving. Drawing on previous authorities, the EAT found that the Tribunal had failed to make a fair characterisation of NEXT’s aim “taken as a whole”. While equalising pay would undoubtedly have increased costs, that was “not the whole story”. The higher basic pay for warehouse operatives was necessary to recruit and retain staff and maintain warehouse operations, and those recruitment and retention pressures did not apply in the same way to retail staff. It was legitimate for an employer not to extend payments to employees where the rationale for those payments did not apply to them.

The EAT further upheld NEXT’s appeal on proportionality. It found that the Tribunal's confinement of NEXT’s legitimate aim to costs undermined the proportionality analysis that followed. The Tribunal asked the wrong proportionality question, adopting "affordability" or "financial headroom" as its metric, rather than assessing whether the pay differential was a proportionate response to the genuine business need to recruit and retain warehouse staff in a competitive labour market.

The EAT emphasised that the proportionality exercise demands a "critical evaluation" of working practices and business considerations. The Tribunal's findings that NEXT faced specific market pressures for warehouse staff, paid no more than the prevailing market rate, could not have paid less without jeopardising the service, and that “this was not a case where warehouse workers were paid more simply because warehouse workers tend to be paid more” supported a conclusion that the differential was proportionate.

The appeal also looked at several different elements of pay beyond basic pay. The appeal succeeded for items such as certain one-off payments, premiums and long service bonuses. The appeal was dismissed on night-time pay, overtime, and paid rest breaks.

The claimants also cross-appealed the Tribunal’s finding that the material factors did not involve direct sex discrimination. The EAT dismissed the claimants’ cross-appeal. It confirmed that the material factor defence requires a factual finding that the unequal treatment was because of sex; NEXT was not required to disprove discriminatory motivation in every employer whose rates informed the market. On the facts, the Tribunal was entitled to find no conscious or subconscious sex influence in NEXT’s decisions.

How we can help

Increasing regulatory and stakeholder focus on equal pay, pay transparency and wider workforce fairness means employers are facing greater scrutiny of how pay decisions are made, documented and justified. Effective equal pay compliance requires a strategic approach to workforce governance, reward design and risk management

Drawing on our extensive experience in equal pay matters, we help employers to identify and assess potential equal pay risks, test the robustness of existing pay practices, develop defensible remuneration strategies and support the resolution of disputes where they arise. Our multidisciplinary team combines litigation, advisory, reward and data expertise to provide practical, commercially- focused support across the full spectrum of equal pay compliance..

The depth of experience we have developed through our established UK equal pay practice also enables us to support clients navigating emerging pay transparency obligations internationally. This includes helping organisations prepare for compliance with the EU Pay Transparency Directive. You can track the latest developments on our Navigating Global Pay interactive site, as well as access to essential FAQs, timelines, a summary of the Directive, a glossary and briefings. Request access to our site here.