The case of Sodexo Ltd v (1) Gutridge and others (2) North Tees and Hartlepool NHS Foundation Trust considers a transferee’s liability for equal pay claims made by transferred employees following a TUPE transfer. In this case, the Employment Appeal Tribunal (EAT) holds that following a TUPE transfer, claims for equal pay relating to discrimination in pay by the transferor must be made (against the transferee) within 6 months of the transfer. Claims for equal pay arising as a result of discrimination in pay by the transferee can, however, be brought within 6 months from the end of employment with the transferee. Significantly for transferees, where the transferring employees are in receipt of unequal pay at the time of the transfer, as compared to chosen pre-transfer comparators, they will remain entitled to the same pay as the comparator, even if the comparator is not transferred to the transferee.

In practice this means that after a TUPE transfer, transferees are at a continuing risk of significant claims of up to 6 years arrears of pay, even though they are ignorant of the fact that they are paying their employees less than they should because the persons with whom the employees are comparing their pay (the comparators) are not employed by the transferee.

What happened in this case?

The Claimants in the case were employed by North Tees and Hartlepool NHS Trust, mainly as ‘cleaners’ and ‘domestics’ at Hartlepool General Hospital. Their employment transferred to Sodexo Ltd on 1 July 2001 when Sodexo Ltd took up a contract to provide domestic services to the Trust. In 2006, while still in Sodexo Ltd’s employment, the Claimants brought proceedings under the EPA, alleging that they were entitled to the same rate of pay as their chosen comparators, who were maintenance assistants employed by the Trust at the same time as the Claimants, prior to their transfer of the Claimants on 1 July 2001. None of the chosen comparators transferred to Sodexo Ltd under TUPE.

The EPA implies an ‘equality clause’ into the contract of an employee who does work that is similar to, rated as equivalent to or of equal value to the work done by a comparator of the opposite sex employed in the same employment. The equality clause therefore gives a female employee a contractual entitlement to the same terms and conditions of pay as her comparator. This clause has effect whether or not a claim is brought by the female employee. The claimant is entitled to claim up to 6 years’ back pay under the equality clause.

The EPA provides that in standard cases a claim must either be brought during the woman’s employment or within 6 months of the last day that the woman was employed in the employment. As regards the 6 month time limit for bringing a standard equal pay claim in respect of periods of employment before the transfer, the EAT held that this started to run on the date of the transfer. In reaching this conclusion the EAT applied and developed further the reasoning of the House of Lords in Powerhouse Retail Ltd v Burroughs and others [2006] IRLR 381, which found that the time limit for bringing an equal pay claim relating to pension liability ran from the date of the transfer. Accordingly, the Claimants were out of time to recover back pay for a claim based on a comparison with the maintenance assistants.

The EAT then went on to consider the claim for back pay accruing post transfer whilst in the transferee’s employment. The EAT said that where transferring employees who had the benefit of the implied equality clause under the EPA at the date of the transfer, the employee’s rights under that equality clause crystallised at the date of transfer and liability under that clause transferred to the transferee. Hence, if the Claimants (the cleaners and domestics) were paid less than suitable comparators employed in the same employment (the maintenance assistants), the effect of the EPA would be to imply into the Claimant’s contracts an equality clause which entitled them to the same pay as the maintenance assistants. Liability under this clause would transfer to the transferee on the TUPE transfer and would continue indefinitely post transfer. This was so even though the maintenance assistants with whom the Claimants compared their rate of pay remained with the transferor so that the transferee was unaware that it was paying the Claimants at a lower and discriminatory rate. The transferee would therefore be liable for unequal pay since the transfer.

What does this decision mean for employers?

Although liability for the transferor’s discriminatory pay practices is transferred to the transferee on a TUPE transfer, this case makes it clear that the time limit for making claims against the transferee expires 6 months after the transfer. After that date, the transferee is in the clear as regards the claims in respect of unequal pay pre-transfer. This principle will place transferred employees in a worse position than if the transfer had not taken place thus going against the spirit and intention of EU Law covering the safeguarding of employees’ accrued rights on transfer of undertakings. It remains to be seen if this aspect of the decision will be appealed.

As regards unequal pay post transfer, however, the case makes the transferee’s position far more unclear than previously understood. The transferee is, of course, still liable for its own breaches of the EPA but this case seems to establish that the transferee may be liable for unequal pay which is determined at the date of the transfer by reference to comparators who did not transfer to the transferee’s employment at that time. This is significant because a transferee may not know he is discriminating against female employees when the chosen comparators are not employed by the transferee.

It would be open to the transferee or the transferor to agree which of them, as between themselves, assumes the risk for these liabilities by means of suitable warranties and indemnities in the relevant sale or transfer agreement. However, claims could be made several years after the transfer takes place and there could be significant problems for the transferee in gathering the evidence necessary to justify the difference in pay between its employees and that of the comparator whom it does not employ. The transferee would need to obtain the evidence from the transferor (which might, at the relevant time, no longer exist). Furthermore at the time of the transfer itself, neither the transferor nor the transferee may have any knowledge of the transferor’s discriminatory practice. Hence, if the transferor is asked to give an indemnity in respect of such liability it will have to consider very carefully whether any such claim potentially exists, as liability could be substantial and (subject to the terms agreed with the transferee) long-term.