Home | News & events | Legal updates | Equal pay claims could cost employers dearly on a TUPE transfer

Equal pay claims could cost employers dearly on a TUPE transfer

19 August 2008

A recent Employment Appeal Tribunal (EAT) judgement in the case of Sodexo v Gutridge examined the effect of TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006) on transferring employees’ claims for equal pay.

Whilst this is not the first time that this legal ‘intersection’ has been considered by the Courts, the case deals with a novel point, and has very important ramifications where there is a TUPE transfer, for example, a business sale or service provision change.

Summary

In this case, the EAT held that even where no equal pay claim has actually been brought against an employer, the failure to pay equal pay creates a contractual liability. Where an employee transfers under TUPE, her pay level protected by TUPE is not what she is actually paid, but what she should have been paid had the equality clause in her contract been enforced against the transferor. Where a transferee is in ignorance of this and pays the employee at the lower rate rather than the higher “equality rate” there is an ongoing breach of contract.

Background

Section 1 of the Equal Pay Act 1970 (EPA) implies an equality clause into every woman’s contract of employment. Where a woman’s work is of equal value to a man’s, the terms of her contract are modified by that equality clause, if necessary, so as to be not less favourable than those enjoyed by the man.

The EPA governs the time limit for bringing an equal pay claim. In a standard case, a claim must be brought within six months of the last day 'on which the woman was employed in that employment’.

Where TUPE applies to transfer the employment of a woman, the EAT confirmed in the earlier case of Unison v Allen that the six month’s time limit would run from the end of the employment with the transferor (i.e. the date of transfer) notwithstanding that the transferor’s liability for the pre-transfer breach would transfer to the transferee.

In a standard case, the EPA provides that the maximum amount of arrears that may be recovered is limited to those accruing in the six years before the proceedings were instituted.

The facts

In Sodexo v Gutridge, the employees were cleaners and domestics employed at Hartlepool General Hospital. They transferred to Sodexo from the NHS trust as part of a TUPE transfer in July 2001. Five years later, in December 2006, they brought an equal pay claim for back pay based on a comparator who was a maintenance man at the hospital but who had not transferred to Sodexo. They claimed against both the transferor and transferee.

The claimants did not try to argue that they were entitled to continue to compare themselves to employees who remained with the transferor. It was accepted that the equality clause could not continue to operate in relation to the employees of the transferor once the claimants became employed by the transferee (exceptionally, this is possible but only where both employers have a common source of funding). The claimants agreed that post-transfer they could not continue to benefit from any improvements to the terms and conditions of their original comparator.

Instead, they argued that the effect of the equality clause in their employment contract with the transferor was to confer upon them enhanced contractual rights to the higher remuneration of their comparator. Initially the transferor was obliged to honour this term. They then transferred to the transferee on these enhanced contractual terms (notwithstanding that they had never actually brought an equal pay claim against the transferor and the transferor had never actually paid them the enhanced rate of pay they claimed to be entitled to). Because the transferee did not honour those terms, it too was in breach of the equality clause.

In the employment tribunal it was held that:

• The effect of the equality clause was to substitute the more favourable terms and conditions of the comparator into the claimants’ contract pre-transfer.
• The effect of TUPE was to automatically transfer those more favourable terms and conditions to the transferee.
• This was the case regardless of whether a legal ruling had been obtained against the transferor. The right to the benefit of the equality clause bites immediately: there is no need for successful proceedings to have been taken to establish the right.
• The tribunal held that ‘employment’ for the purposes of section 2ZA of the EPA was the employment with Sodexo, so that the six month time limit for bringing a claim in relation to the equality clause ran from the date of termination of employment with Sodexo. Since the claimants were still employed by Sodexo, the claims were in time.

Sodexo appealed, arguing that the contractual rights against the transferee were not part of the equality clause with the transferee, but derived from the operation of the equality clause with the transferor so that time for the claim should start to run on the transfer. Alternatively, Sodexho argued that the right to equal pay applied only while the women were in the same employment as their comparator, it therefore ceased to apply on the transfer and the women reverted to the pay earned prior to the equality clause taking effect.

The EAT decision

The EAT partially reversed the tribunal’s decision, it held:

• It agreed with the tribunal that the equality clause does not simply hover over the contract; it bites once the conditions for its application are met.
• After the transfer the claimant was enforcing a contractual right derived from the operation of the equality clause with the transferor. As a result of TUPE she can enforce against the transferee the rights she could enforce against the transferor.
• It is not strictly accurate to say that the equality clause transfers but, the contractual liability derived from it does transfer and the employee should be allowed to enforce that right as if it had arisen under an equality clause with the transferee.
• The time limit for bringing an equal pay claim which derives from the equality clause with the transferor is six months from the ending of the employment with the transferor, i.e. the date of transfer. Although the transferee stands in the shoes of the transferor, this does not change the time limits applicable to those claims. The women were therefore out of time to enforce against the transferor in respect of pre-transfer liability. 
• Where the obligation to respect the equality clause transferred to the transferee but was not honoured by it, the time limit with respect to that continuing liability is six months from the termination of employment with the transferee. 
• In respect of the continuing liability to honour the contractual terms in place at the point of transfer this is a personal obligation on the transferee and the women were in time to enforce that element of their claim.
• The fact that the comparator did not transfer does not affect the continuing application of the equality clause, it merely prevents any ongoing comparison with the employee of the transferor.

Comment

This case leaves many unanswered questions about how such claims will work in practice. It appears that the claimants will have to show that there was in fact unequal pay during their employment with the hospital for their claim against Sodexo to succeed. Given the passage of time this may be difficult evidentially. Sodexo will be in the unenviable position of having to defend a claim in respect of a period of employment with which they were not involved and with no guarantee that the hospital will co-operate with them in running that defence.

Another important issue is what type of claim the claimants bring against Sodexo. It is difficult to see how an equal pay claim will work given the comparator relied upon is not employed by Sodexo and the employment tribunal does not have jurisdiction to hear a breach of contract claim while the claimants are still employed. It has been suggested that the correct claim may therefore be an unlawful deduction from wages claim.

More generally transferees will find themselves in a difficult position following this case because, if the transferor is genuinely not aware of potential equal pay claims at the time of the transfer (because employees have not raised the issue), then the sorts of standard warranties generally given will not bite: most transferors are likely to be unwilling to warrant that there are no pay inequalities whatsoever in their workforce.

The usual indemnity for pre-transfer liabilities given by a transferor will only protect in respect of any claims which are made in the first six months after the transfer in respect of breach of the equality clause by the transferor. However, after this it appears that such claims will be out of time.

The problem with any indemnity taken which protects the transferee against claims for on-going breach of contract based on a higher (but unknown) salary is that it could be many years before the breach comes to light. A transferee will want comfort that the entity giving the indemnity will still be around.

---

Are any of the issues in this article giving you a headache? If so, we want to know

Name *
Email *
Telephone
Comments*
I agree to Shoosmiths holding information about me in accordance with its privacy policy.* To subscribe to our news updates click here.

 

Email this page

Search the site

Enter the keywords below to search:

Related links

• TUPE advice

Get in touch

Rebecca McGuirk

Partner
T: 08700 86 4103
I: +44 (0)121 625 4103
E: rebecca.mcguirk@shoosmiths.co.uk