The true cost of pay disparity

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Equal pay claims have been on the increase in recent years, highlighting the importance of employers paying men and women equally for undertaking the same work or work that is rated equal value. But what are the unintended consequences of such claims?

There has been much media coverage over the last week about Birmingham City Council (BCC) being effectively declared bankrupt[1] resulting in the Council being forced to apply rigorous spending cuts as a result. Reports suggest that BCC is not alone, with other local authorities also on the brink of following suit. It would be easy to assume that the source of such grave consequences is strictly related to rising inflation or the cost of living. Whilst these no doubt contribute, the reality will resonate starkly for employers and their HR and policy teams alike, with a significant factor being the cost of addressing historical equal pay issues.

BCC was the subject of a landmark equal pay case in 2012, with the court finding hundreds of mostly female employees working in roles such as teaching assistants, cleaners and catering staff missed out on bonuses which were given to staff in traditionally male-dominated roles such as refuse collectors and street cleaners. 

A few months ago, BCC announced that it had already paid £1.1 billion in settlement and is facing future liability in the region of £650m to £760m as a result of the successful equal pay claims. It is reported that BCC’s ongoing liability is accruing at the eyewatering rate of £5m to £14m per month. It is difficult territory for any employer to navigate where on the one hand it is on the hook for previously determined liability while at the same time remaining answerable for a tranche of claims that are still subject to live litigation. Understandably BCC has said that it is no longer in a position to resource the claims and it may be wondering if there is any resolution to the ongoing financial cost. 

It goes without saying that the bigger an organisation’s headcount, the greater the extent of the equal pay liability it may amass if it is found to operate an unjustifiable pay disparity that is tainted by sex. The size of the liability is heightened by the 6-year claim period (5 years in Scotland) that the individual can bring within the scope of the claim.  It is for those reasons, among others, that equal pay claims can become expensive for employers. However, the somewhat good news is that claims do not need to become expensive quickly and reasonably efficient and effective measures can be introduced in an attempt to bring a shutter down on the likelihood of damaging mass litigation. 

Material factor defence 

It may be that an employer can explain a pay differential between the roles that a group of female employees perform when compared to the roles undertaken by their male counterparts. For an employer’s reason to be enough to justify its pay practices, it must be a genuine material factor. Examples of these include the need to protect or ‘freeze’ pay for a group of individuals, that the differential is required to respond to market pressures or different geographical locations are paid differently, to name a few. 

To rely on the defence, the employer will need to overcome the first hurdle of showing that the factor is a material one and secondly that it is not a sham – that it genuinely exists in the way that they say it does. If this can be achieved, then the final requirement is to prove that all of these decisions have not been tainted by sex. By that, it means the material factor itself isn’t directly or indirectly discriminatory to the employees on the basis of their sex. For example, basing pay on an individual’s previous salary level may be tainted by sex as it indirectly discriminates against women who have taken a career break for childcare reasons and therefore haven’t achieved the same level of salary as a male counterpart who has had no time out of work.

Nowadays, fortunately, it is uncommon for jobs to be perceived, in crude terms, ‘women’s work’ and the issues tend to be more nuanced. In relying upon a material factor defence in response to equal pay allegations, the onus on the employer at this stage is to show what the reason for pay disparity is not rather than what it is. For example, it is not unusual for a tribunal to find that there is a sex taint in the absence of clear explanations, typically when policies and procedures are unclear, paperwork is incomplete and decision-making lacks clarity and transparency.  

To alleviate these concerns, it is sensible for employers to take pause for thought and record why they may be adopting a particular pay criterion, policy or practice for a particular employee population, retaining evidence that supports this. They would also be wise not to hang their hat on seeking absolution using a material factor defence and instead focus on whether the pay differential is actually necessary and if it is not, then removing it.  

Closing the pay differential: what can employers do?

If an employer operates a pay differential, then all is not lost; there are measures that employers can take to address a differential, either by closing it or seeking to justify it. A few examples of avenues to explore are to conduct a Job Evaluation Survey (JES), harmonising pay terms or bringing the more beneficial pay terms to an end. 

It would be understating the complexities of equal pay litigation to conclude that there is a failsafe response however factors that should be considered include the size of the employer, whether the employee population(s) are unionised and if they are, the current union dynamic and the overall cost to the business versus the scope for operational disruption.

Each of these measures involve significant planning and communication so if means and resources allow, employers should heed the advice of the old trope that prevention is better than cure, particularly given the amounts potentially at stake. 



[1] Birmingham City Council: How an equal pay claim took down Britain's second-biggest city | CNN Business


This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.


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