A question which has challenged employers for a number of years is to what extent the preservation of terms and conditions under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will be a material factor defence to an equal pay claim.

Frequently, pay differentials between staff of opposite (and indeed the same) sex arise because some staff have been transferred into an organisation following a TUPE transfer. These differentials can often be present for many years after the transfer. Whilst it has been clear for some time that a TUPE transfer can be a genuine non-gender related reason for a pay differential, and thus a defence to a claim of equal pay, what has not been clear is how long such a pay differential can be maintained, with the employer still able to rely upon the TUPE transfer as the reason for the difference. There has been much speculation as to whether a failure to harmonise terms and conditions would, over time, erode the ability to rely upon TUPE as a material factor for the pay differential.

The decision of the Employment Appeal Tribunal (EAT) of Buchanan and another v Skills Development Scotland Co Ltd has provided welcome clarification in relation to these issues.

Background to the case

Two female employees working for Skills Development Scotland Co Ltd (SDS) compared their pay with that of a male comparator (Mr S), who was paid over £12,000 more than they were. The claimants and Mr S had transferred to their original employer, Scottish Enterprise (SE), under TUPE from different employers in 2002 and thereafter transferred to SDS in 2008. In advance of the 2002 transfer Mr S had negotiated contractual pay increases until April 2004 (but not thereafter). The claimants did not have comparable terms in their TUPE transferred terms and conditions.

SE introduced a performance pay scheme in 2004 which enabled SE to “red circle” employees’ pay if they appeared to be overpaid. This was not applied to Mr S and he continued to receive pay increases and bonuses, which compounded the disparity between himself and the claimants. The claimants were led to believe that a job evaluation study would address any anomalies in the pay structure but this did not happen.

Whilst SDS did undertake a job evaluation exercise after the transfer from SE it had awarded bonuses and pay increases to employees including Mr S based on pre-job evaluation salary.

The employment tribunal decision

As a defence to the equal pay claim progressed in the employment tribunal by the Claimants, SDS argued that the TUPE transfer in 2002 was a genuine material factor under the Equal Pay Act 1970 (now it would be a material factor under the Equality Act 2010) which was not on gender grounds and was the root cause of the pay disparity. Therefore SDS submitted that the claimants were not entitled to equal pay with Mr S.

The Employment Tribunal did not accept the defence put forward by SDS. They were not satisfied that SE were obliged to increase Mr S’s salary and award bonuses after April 2004 when it had the contractual power to ring-fence Mr S. It was not satisfied that SE had given “meaningful thought” to whether such awards ought to have been made. The tribunal formed the view that this inactivity meant TUPE was no longer the genuine factor for the pay differential.

The tribunal decision was appealed to the Employment Appeal Tribunal.

The EAT decision

The EAT gave detailed consideration to the causal link between the non gender reason of the TUPE transfer and the difference in pay complained of and decided that the tribunal was wrong. The EAT was satisfied that the findings of fact reached by the tribunal demonstrated that there had been a genuine explanation for the pay disparity complained of which was not, in any way, gender related. The tribunal erred by focusing on the failure of SE/SDS to address the pay disparity sooner as having broken the causal chain.

The EAT found that there was no doubt that the tribunal had found that TUPE operated to impose Mr S’s pre-existing contract of employment of SE and that contract had not been varied. There was no suggestion that Mr S had waived any of his rights under TUPE. The contractual entitlements were clearly the reason why the payments were made to Mr S.

The EAT found that it was not the practice of SE to freeze salaries despite their ability to do so should they have wished to. Their normal practice was to award pay increases as a matter of routine to all staff. The EAT concluded that TUPE was, and remained, the cause of the pay disparity and, therefore, meant there was a valid defence to the claimant’s equal pay claims.

Comment

This case is a helpful reminder that consideration should always be given to the underlying cause of pay differentials and whether this causal chain has in fact been broken. The EAT seemed less concerned about the number of years which had passed since the original TUPE transfer created the pay differential and instead focused on the cause of the pay disparity which was, and remained, the preserved terms and conditions pursuant to TUPE.

Buchanan and another v Skills Development Scotland co Ltd, EAT, 25 May 2011.