Can a pay disparity caused by the TUPE transfer of various employees amount to a genuine material factor (GMF) defence to a subsequent equal pay claim?  Can red circling of an employee’s pay following a TUPE transfer amount to a GMF defence?  In a case which involves issues of both TUPE and equal pay, the EAT has recently provided very welcome guidance on these issues, as explored further by Anne Palmer.

In this article:

  • The background
  • The facts
  • The Tribunal decision
  • The EAT decision
  • What does this mean for me?

The background

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) a transferring employee transfers across to the new employer on their existing terms and conditions of employment (save for certain exemptions in respect of pensions).  Under equal pay legislation (which was originally contained in the Equal Pay Act 1970 (‘EPA’) but now comes within the Equality Act 2010 (‘EqA’)) men and women in the same employment doing the same work are entitled to receive the same pay.  A disparity in pay can be defended by an employer if it can show that there was a “material factor” (under EqA, or ‘genuine material factor’ (‘GMF') under EPA) i.e. a reason for the difference in pay which is not related to the gender of the employees.

The question to be decided by the Employment Appeal Tribunal in Skills Development Scotland Co Ltd v Buchanan and another was whether the preservation of a comparator’s terms under TUPE could provide a GMF defence, even where the contractual guarantee of pay increases ceased in 2004. 

The facts

Two female employees made equal pay claims on the basis that they were paid approximately £10,000 less than a male comparator (‘Mr S’).  Both the Claimants and Mr S had transferred to the Skills Development Scotland Co Ltd (‘SDS’) via separate TUPE transfers many years previously and, at the time of the claim, worked at the same grade doing work which was accepted as ‘equal value’.  Before his TUPE transfer from his previous employer, Mr S had been given a contractual guarantee of specific pay increases up until April 2004.

In 2004 SDS introduced a Performance Related Pay scheme which, if necessary, permitted the ‘red circling’ of employee’s pay should it be found they were being overpaid.  Rather than utilise this provision SDS continued to award Mr S, along with all other staff including the Claimants, regular pay increases and bonuses.  These increases were being made ‘across the board’ and SDS chose not to freeze any salaries, to remain consistent.

The Tribunal decision

At the Tribunal hearing SDS put forward a defence that the pay difference after 2004 was as a result of the TUPE transfer.  The Tribunal rejected this argument and held that, after 2004, the pay rises and bonuses awarded to Mr S were made without SDS giving any consideration to whether such payments were in fact necessary under TUPE. In addition the Tribunal criticised SDS for failing to consider whether Mr S was being overpaid and, in turn, failing to red circle his pay. They therefore held that the chain of causation for the pay disparity had been broken as a result of these factors.

The EAT decision

The EAT held that the Tribunal had incorrectly applied the law and allowed the appeal.  They held that:

  • SDS had established that the TUPE transfer was a GMF defence;
  • Having established a GMF, SDS were under no obligation to take further action (i.e. red circle pay);
  • Red circling Mr S’s pay would have been against the normal practice of SDS and, in turn, could have created a risk of breaching his contract; 
  • The chain of causation had not been broken by SDS; and
  • There is no legal rule to support the idea that the “mere effluxion of time” causes a gender-neutral defence to disappear.

The EAT held that there was no evidence to support that SDS had directly or indirectly discriminated against the Claimants with regard to their pay and the pay disparity was supported by a GMF.

The judgment therefore suggests that an employer who “inherits” terms and conditions on a TUPE transfer would not be penalised for failing to take steps to equalise these in a timely manner.

What does this mean for me?

Transferee employers can often face great difficulties in trying to integrate their new workforce with the existing workforce, especially as more often than not there are differences in their terms and conditions which are difficult to change without falling foul of TUPE.

Although this is a welcome decision for employers, a degree of caution must be retained; the burden of proof is on the employer to show that TUPE was, and is, the genuine reason for a pay disparity.

This decision concerned the Equal Pay Act 1970, which has now been superseded by the Equality Act 2010, however the provisions in the new Act are substantially the same as the old legislation and so this judgement will apply to all claims brought under the new Act.

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