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TUPE transfer is no ongoing defence to equal pay claim

04 August 2010

An employment tribunal ruling suggests contractors should be wary about equal pay claims when they inherit staff on an outsourcing.

Background

Where services are outsourced to a contractor the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will usually apply so that employees’ terms and conditions of employment are protected and can only be changed in very limited circumstances after the transfer.

This is clearly problematic for a contractor with an existing workforce which has different terms and conditions as staff working alongside each other after a TUPE transfer could be paid different rates for doing the same or similar work.

The Equal Pay Act 1970 (the EPA) is intended to ensure that men and women in the same employment receive the same pay for the same work.

Potentially, therefore, where different rates of pay are inherited through TUPE, there could be an equal pay issue if an employee is able to compare themselves with someone of the opposite sex who is on a higher rate of pay.

An employer will have a defence to any claim under the EPA if it can demonstrate a Genuine Material Factor (GMF) which is not due to gender to explain any difference in pay.

Facts

In Buchanan and anor v Skills Development Scotland Co Ltd two female claimants compared themselves to a male employee comparator who was paid over £12,000-a-year more. All three worked as senior managers in the Scottish careers service.

The claimants and their comparator had initially transferred from various employers under TUPE in 2002. The comparator had negotiated a contract with his old employer which guaranteed pay rises until April 2004. The new employer operated a performance related pay bonus scheme from 2004 and all three were awarded bonuses under this scheme.

At no time did the employer consider whether the comparator was overpaid for his role and whether his pay should therefore be frozen. The comparator also continued to receive annual pay increases as a matter of course like any other employee.

On 1 April 2008 they all TUPE transferred again to Skills Development Scotland Co Limited and following an internal reorganisation the claimants and their male comparator ceased to do the same work.

Tribunal decision

The employment tribunal did not accept the employer’s defence that the difference in pay after April 2004 was due to TUPE; it held that from then the salary increases and bonuses were paid to the male comparator as a matter of course without the employer applying its mind to whether it really had to pay them because of TUPE.

The tribunal criticised the employer’s lack of evidence to prove that TUPE was the reason why they continued awarding the comparator annual pay increases and bonuses.

From April 2004 the tribunal considered that TUPE was not the reason for the less favourable treatment of the claimants.

Conclusion

Buchanan is a decision from a Scottish employment tribunal (and so is not binding on other tribunals) but it illustrates some important legal issues for contractors involved in outsourcing to consider and suggests some precautions they could take against equal pay claims.
Due diligence should be carefully conducted to ensure a proper understanding of the potential problems and liabilities. In-coming contractors need to be fully aware of any equal pay issues which will have to be resolved from the date of the transfer. Transferees will not enjoy any grace period while they conduct a job evaluation so they could incur liability from day one.
Although TUPE can be a GMF at the time of a transfer this protection will not last indefinitely and employers should not just ignore pay inequalities. Some action is better than none: even if the employer proposes to reduce inequalities very slowly.
It will be legitimate to freeze the pay of higher paid employees to ensure parity with lower paid employees over time (so-called ‘red circling’) unless there is a contractual entitlement to annual pay rises.
An employer will need to first understand exactly what their contractual obligations are if they are to rely on TUPE as a GMF. An employer will not be bound to continue any non-contractual practices. Note that a commitment to review pay every year is not the same thing as increasing pay every year.
Where a contractor wants to award a non-contractual pay rise or bonus to a higher paid employee then they need to be able to demonstrate that they had a GMF at the time the award was made. The genuine reason for this is unlikely to be TUPE itself but could be for example because of outstanding performance by the employee following the transfer or for employee relations reasons in the context of the TUPE transfer. Meaningful consideration should be given and recorded.
In a second generation outsourcing scenario the new contractor should not rely on the original TUPE transfer as a GMF. If the first generation contractor has failed to deal with a pay inequality then the employees will transfer on the modified, more favourable terms.
Given the potential for very large liabilities for contractors legal advice should be sought at the earliest possible opportunity to enable time for commercial negotiation.

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TUPE transfer is no ongoing defence to equal pay claim

04 August 2010

An employment tribunal ruling suggests contractors should be wary about equal pay claims when they inherit staff on an outsourcing.

Background

Facts

Tribunal decision

Conclusion

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Helena Derbyshire

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