We explain the ruling and what this means for employers, especially those in the retail sector. We also look briefly at what this means for employers preparing to explain pay differentials as a key aspect of compliance with the EU’s Pay Transparency Directive.
Back in 2024, an Employment Tribunal (ET) ruled that a number of differences in pay between predominantly female retail sales consultants and predominantly male warehouse operatives at Next could not be justified. The most significant part of the ruling was that a difference in basic pay based on market forces was essentially just an argument about cost, and so could not be used to justify unequal pay. As we explained at the time, this attracted considerable interest, particularly for other large retailers facing similar equal pay claims.
As expected, Next appealed this decision. This appeal partly succeeded, and the Employment Appeal Tribunal (EAT) has made some useful comments about market forces and when these can (and cannot) be a valid reason for differences in pay.
A quick reminder of the law… If two jobs done by a man and a woman are of equal value, an employer must pay the same rate for both jobs unless there is a material factor which explains the difference. This factor cannot involve direct sex discrimination, for example deliberately paying less for a job that is stereotypically “women’s work”. If the factor is not direct discrimination but puts one sex at a disadvantage, it is potentially indirect discrimination. The employer must justify this by showing what they have done is a proportionate means of achieving a legitimate aim. Simply saving costs is not a legitimate aim that can be used to justify indirect pay discrimination.
In the initial decision, the ET found that Next had not directly discriminated against the claimants in the case, but they had been indirectly discriminated against through a number of their contractual terms about pay. Next was unable to justify many of these pay differences because its aim was based on cost alone.
What did the EAT decide?
The EAT upheld the ET's finding of indirect discrimination, based on the relevant statistics which showed that paying the retail workers (77.5% women) less than the warehouse workers (53% men) did put women at a particular disadvantage compared with men. This meant that Next needed to be able to justify why there were pay differences. The EAT rejected the cross-appeal from the claimants that this was actually a case of direct discrimination.
The EAT looked at the findings on each of the disputed contractual pay terms. For some of the pay differences, the EAT disagreed with the ET on the critical questions of legitimate aim and proportionality. Most significantly, Next was able to justify a difference in basic pay that was driven by market forces and the need for effective recruitment and retention of warehouse staff. This also applied to some of the other contractual terms that the ET had said were unjustified (unconsolidated awards, Sunday pay premiums and long service awards), partly because these were driven by collective bargaining. However, the EAT agreed that differences in some other payments were purely driven by costs savings and so could not be justified.
Legitimate aim must be looked at as a whole
The ET had found that Next needed to pay the higher market rate of basic pay to warehouse workers because of genuine recruitment and retention pressures. The ET then asked whether Next could justify why it did not pay retail workers more, instead of asking Next to justify the identified aim as legitimate and proportionate. This led them to conclude that Next’s only explanation for not paying the retail workers more was cost - and cost only is not a legitimate aim.
The EAT disagreed with this approach, saying that the ET had asked the wrong question. It was necessary to look at the employer’s aim “fairly characterised as a whole” to decide whether it was legitimate. The aim here was the need to recruit and retain sufficient staff to maintain the warehouse service, and the warehouse workers were genuinely paid more for this reason. This rationale did not apply to the retail workers. It did not matter that Next could, in theory, afford to increase the pay of the retail workers to the same level. The focus should be on the aim of paying one group more, and not on the reasons for paying another group less.
Market forces can be a proportionate justification
The ET had been concerned that allowing market forces to be a “trump card” justification would defeat the object of equal pay legislation, by maintaining lower pay in particular sectors due to discriminatory practices in the past. The ET said there was not a sufficiently “compelling business reason” to make the basic pay difference proportionate.
The EAT disagreed with this approach, as it restricted the ability of employers to rely on market forces too much. Next paid a higher market rate for warehouse work because of recruitment and retention factors. This was not a case of simply paying more for what was perceived by the market as typically men’s work, or simply because such workers tended to be paid more, which would cause discriminatory practices to be embedded. The EAT found that Next was able to demonstrate that it paid the rates to warehouse staff “which it needed to pay for sound business reasons”, and these reasons did not apply to the retail staff. Again, the fact that Next may have been able to afford to equalise the pay of retail workers did not prevent the difference in basic pay from being proportionate.
But some differences in terms were not justified
The EAT agreed with the ET in relation to some of the differences in payments between the two groups of workers:
- Night time premium. This was paid to warehouse workers between 10pm and 6am, but for retail workers only between midnight and 5am (having originally extended to 6am as well). The EAT agreed that the change for retail workers from 6am to 5am was solely to save money, and so not a legitimate aim.
- Overtime premium. This was paid for warehouse workers, but had been removed from retail workers. The EAT found this was not linked to the recruitment and retention factors and so could not be justified (although in practice retail workers did not work overtime, so this will equalise terms rather than leading to a compensation payment).
- Paid rest breaks. Warehouse workers were entitled to paid rest breaks, while the rest breaks for retail workers were unpaid. Paid rest breaks had been removed from retail workers to fund an increase in the national minimum wage, and the EAT agreed that this was a cost saving measure that could not be justified.
It is important to note that the EAT was not saying that these types of pay differences are not capable of being justified. However, on the evidence, the explanations in this case were all about saving money rather than an identifiable legitimate aim.
Where does this leave us?
The first thing to note is that the solicitors for the claimants have already said they will be appealing this decision, so this is not the final word on these issues. It is also important to remember that this case was decided on its own specific facts, meaning that other similar retail claims might not be decided in the same way.
Having said this, the EAT’s discussion of how to assess legitimate aims and the relevance of market factors provides some useful guidance for employers.
- An employer’s legitimate aim in paying one group of workers a higher rate of pay must be looked at as a whole in the context of the relevant business, with a focus on why it is necessary to pay the group this rate of pay, rather than why another group is paid less. It therefore remains important for employers to have a clear, documented business rationale for different rates of pay between different groups.
- The fact an employer could potentially afford to equalise pay between two groups does not prevent an ongoing pay difference from being justified. The ET suggested this made the aim purely about costs and so unjustifiable. The EAT’s decision is clear that this is not the right way to analyse the employer’s aims.
- Market forces can be a valid justification for unequal pay. It was a concern for employers that the ET’s decision suggested this would almost always be discriminatory, because the market rate for a job may be based on historic views of the value of “men’s” and “women’s” work. The EAT has rowed back from this position. A pay difference based on market forces can be a proportionate means of achieving a legitimate aim if this is based on sound business reasons. In this case, it was due to genuine recruitment and retention factors. The ET had actually found that Next could not have paid less than the market rate without jeopardising the warehouse service, which showed the importance of Next’s reasons. Again, this makes it important for employers to have a clear business rationale for different rates of pay that are based on market forces, and documented evidence to support this view.
- But not always! This does not mean that market forces arguments are risk-free. The EAT makes it clear that employers still need to think about why they are paying a market rate. If this is simply because that is the way it has always been (or even a more deliberate attempt to entrench higher pay for “men’s” work), there is still a high risk that this will not be a valid justification.
- The saving of costs alone remains unlikely to be a good justification for unequal pay, especially if the underlying concern is maximising profit, rather than emergency cost-cutting to save a business. This is shown by the EAT’s position on the night time premium, overtime premium and paid rest breaks. Extra pay had been removed from retail workers simply to save money, and so these aspects of the equal pay claims succeeded.
- Evidence based and contemporaneously documented decision making around all aspects of contractual pay is critical to being able to justify differences. An employer facing an equal pay claim needs to have good evidence to confirm what was done and why. In the Next case, the claimants attempted to cross-appeal on the basis that Next had failed to call the most senior decisionmakers to give evidence at the hearing. This did not succeed because the ET had made clear findings based on “compelling” evidence from the knowledgeable witnesses who did give evidence for Next – but this is a good example of the scrutiny that an employer’s evidence and witnesses may be put under in an equal pay case.
- It is also crucial that the reason for maintaining pay differences is regularly reviewed to ensure that the justification continues to be valid and, if not, consideration needs to be given to how that is managed. For example, an annual percentage-based pay rise will continue to increase a pay gap to a point where it may no longer be justified, even if the original rate of pay was validly based on reasons such as market forces.
- Finally, this case is a useful reminder that indirect pay discrimination between two groups does not require each group to be clearly dominated by one sex. The warehouse workers were almost evenly split (only 53% male), but the EAT confirmed that this was enough to show a sex disadvantage when compared to a group that was 77.5% female.
What does this mean for the EU Pay Transparency Directive?
The Pay Transparency Directive aims to surface equal pay breaches and make it easier for workers to successfully challenge them, including by requiring employers to justify gaps between men and women carrying out the same work or work of equal value, using objective gender-neutral criteria.
Although the UK is no longer an EU Member State, our senior case law on material factor defences has historically carried influence, and our close neighbours have certainly been paying attention to the retail equal pay claims. Employers with operations in the EU may therefore breathe a sigh of relief when digesting the headline here: “market forces” lives to fight another day. As we have set out above, that is only part of the picture though, and employers would be well-advised to critically analyse the reasons for any reliance on market rates.
Lewis Silkin has extensive experience of advising clients on large scale equal pay litigation and we can also assist with gender pay gap reporting and compliance with the EU’s Pay Transparency Directive. You can find further information here or please get in touch with your usual Lewis Silkin contact.
(1) Next Retail Limited (2) Next Distribution Limited v Thandi and others – judgment available here.
