Equal pay: employer not obliged to close pay gap following TUPE transfer

Skills Development Scotland Co Ltd v Buchanan and others EATS/0042/10

equal pay | genuine material factor | TUPE | red circling

The Employment Appeal Tribunal (EAT) has held that an employer's compliance with the TUPE legislation to preserve existing contractual terms and conditions that results in a disparity in pay can amount to a genuine material factor that may provide a defence to an equal pay claim. 

Implications for employers

  • This decision means that, even where there is a disparity in pay between employees doing work of equal value, the obligation to preserve existing contractual terms on a TUPE transfer can be a sufficient defence to an equal pay claim. 
  • However, the EAT was mindful to point out that, in an individual case, it is not simply a matter of an employer showing that "the reason is not sex", as the facts of the case may show that there was indirect discrimination, for example where the pay criterion adopted adversely affects women but not men, in which case the pay differential would have to be objectively justified. 

In April 2002, the claimants, Miss Buchanan and Ms Holland, were TUPE transferred along with Mr Sweeney to Scottish Enterprise. Subsequently, they were TUPE transferred to Skills Development Scotland Co Ltd (SDS). The claimants and Mr Sweeney worked in customer service manager roles. 

When Mr Sweeney transferred to Scottish Enterprise, his salary was £42,760, while Miss Buchanan's was £33,983 and Ms Holland's was £32,864. Mr Sweeney's contract of employment, which had transferred with him, provided that he was entitled to incremental pay increases on 1 January 2003 and 1 August 2003, after which his salary would be reviewed on an annual basis from April 2004. In April 2003, Miss Buchanan and Ms Holland received a 4% pay increase and, from 1 April 2004, the women and Mr Sweeney received a 1% pay increase. Thereafter, all three employees received routine "across the board" pay increases each year. The pay gap between the women and Mr Sweeney remained between £10,000 and £12,000. In 2004, SDS introduced a performance-related pay scheme that provided that an employee who was overpaid for his or her current position may have their pay "red circled": in other words frozen until it came in line with the grade of his or her current role. However, SDS did not consider red circling Mr Sweeney's salary so as to exclude him from the award of any bonus under the performance-related pay scheme. 

In September 2008, the women brought equal pay claims in the employment tribunal against SDS on the basis that there was a significant pay differential between them and Mr Sweeney, who carried out work of equal value to them. SDS argued that it had a "genuine material factor" defence under s.1(3) of the Equal Pay Act 1970 because the reason for the differential was the operation of TUPE. 

While the tribunal accepted that TUPE was the explanation for the disparity in pay between April 2002 and April 2004, it concluded that the defence did not apply thereafter. The tribunal held that Scottish Enterprise, and subsequently SDS, should have taken action to rectify the pay disparity by red circling Mr Sweeney's pay. The tribunal upheld the equal pay claims from 2004 onwards, concluding that SDS's genuine material factor defence failed. 

SDS appealed the tribunal decision to the EAT. SDS argued that "it was evident that the disparity in pay could be traced directly back to the effect of TUPE and there had been no supervening factor to break that chain of causation" and added "causation is an objective matter, not a subjective one". 

The EAT acknowledged that, if the employer establishes a genuine explanation for the variation in contracts that is not a sham, fraud or pretence and does not involve sex, the employer need go no further. The EAT referred to the case of Strathclyde Regional Council v Wallace and others [1998] IRLR 146 HL, in which the House of Lords held that the purpose of the Equal Pay Act 1970 is to eliminate sex discrimination in pay, not to achieve fair wages. The EAT also noted the case of Glasgow City Council and others v Marshall and others [2000] IRLR 272 HL, which is authority that, where an employer establishes a causal link between a non-gender related explanation and the difference in pay complained of, the defence is made out. 

The EAT upheld SDS's appeal, finding that there was no basis for the payments being made to Mr Sweeney other than his contract of employment, which had transferred with him to SDS. The tribunal was wrong to decide that the absence of any specific consideration by SDS of the effect of TUPE or the question of whether or not Mr Sweeney's pay could be frozen broke the causal chain. The EAT held that the application of the employer's standard approach to pay increases after April 2004 did not break the causal chain that flowed from the gender-neutral fact of the effect of TUPE that began in April 2002. 

Additional resources

Case transcript of Skills Development Scotland Co Ltd v Buchanan and others (on the BAILII website)

For more up-to-the-minute news on key cases, go to XpertHR case law stop press