Mind the equal pay gap – the material factor defence in the context of company rescue

The recent UK Court of Appeal case of Walker v Co-operative Group has looked in detail at the “material factor” defence in an equal pay claim. At a time when many companies are under financial stress due to the COVID-19 crisis, it is particularly interesting that the Co-operative Group (the Co-op) was able to rely on at least two material factors relating to its rescue plan in 2014, when it was said to be “on the verge of financial collapse”.

Background to an equal pay claim

An equal pay claim under the Equality Act 2010 relies on the claimant demonstrating that they are engaged in equal work to a comparator of the opposite sex. They can do this by showing they are engaged in:

• like work;
• work rated as equivalent to the comparator under a Job Evaluation Scheme (JES); or
• work which is equal to the comparator’s in terms of the demands made on the claimant.

Where a woman is engaged in equal work to a male comparator, a “sex equality clause” is implied into her employment contract, so that the terms of her employment are modified to be equally as favourable as the male comparator’s terms (and vice versa for a male employee with a female comparator).

However, the sex equality clause has no effect where the employer can show that the difference in pay is because of a material factor, which causes a material difference between the claimant’s case and the comparator’s. The material factor must not be discriminatory on the basis of sex, either directly or indirectly.

Walker v Co-operative Group

This was an appeal from the Employment Appeal Tribunal by Ms Walker, the former Group Chief HR Officer (CHRO) of the Co-op. The appeal also discussed issues of sex discrimination, which we do not cover here.

At the start of 2014, the Co-op’s executive team was re-organised as part of the company’s rescue plan. Ms Walker was placed in a salary tier together with her male comparators, the Chief External Affairs Officer and the Group General Counsel (GGC). However, Ms Walker was paid a lower salary than both her comparators.

In February 2015, Ms Walker’s work was rated as equivalent to the work of each of her comparators under a JES. Ms Walker’s claim is based on this JES, rather than being a claim based on her performing “like work” or “work of equal value”.

The Court of Appeal found that there were four material factors which explained the difference in pay in February 2014. It is interesting that at least the first two of these relate directly to the Co-op’s rescue plan:

1. Vital roles – the Co-op considered both comparators to be vital to the immediate survival of the Co-op. They were part of the core team involved in the Co-op’s refinancing and reformed governance plan. Although a strong HR function was considered important, Ms Walker’s work was not considered vital in the same way.
2. Flight risk – it was crucial to maintain stability in the executive team during the rescue, particularly in view of the departure of the CEO.
3. Executive experience – Ms Walker had no prior experience at executive level, unlike her comparators.
4. Market forces – The GGC was paid at the high market rate for general counsel in view of his particular expertise and experience. This exceeded the market rate for CHROs.

The Employment Tribunal found that, as at February 2014, none of these material factors were “tainted by sex”, i.e. discriminatory on the grounds of sex. However, the ET held that there had been a breach of equal pay legislation. It found that, at some stage between February 2014 and the JES in February 2015, the relative importance of the comparators’ roles had declined in comparison to Ms Walker’s role.

The Employment Appeal Tribunal overturned this decision, finding that there had been no new decision about pay since Ms Walker’s salary was set in March 2014, and therefore there was no basis for finding that the material factors listed above had ceased to apply.

In the Court of Appeal, Ms Walker argued that prior to February 2015, the material factors had become “historical explanations” and that the Co-op was required to prove that they remained material. The Co-op argued that, following the leading equal pay case of Glasgow City Council v Marshall, provided the material factor was not tainted by sex, the material factor need only be the cause of the difference in pay, and the employer did not need to justify it as an objectively good reason.

The Court of Appeal’s decision

The Court of Appeal dismissed Ms Walker’s appeal in relation to equal pay.

The Court did not accept Ms Walker’s argument that the Co-op was under a duty, once the rescue plan had started to succeed, to continually review the differences in pay between Ms Walker and her comparators.

The Court also confirmed, following Redcar & Cleveland BC v Bainbridge, that a JES cannot be relied on with retrospective effect to prove equal work.

The Court had regard to Marshall, which outlined the following test for a material factor:

• The reason given for the pay difference is a genuine reason;
• The difference in pay is caused by this reason;
• The reason must not comprise any form of sex discrimination, whether direct or indirect;
• The reason must be a “material”, i.e. “significant and relevant” difference, between the claimant’s case and her comparator’s.

Marshall went on to find that, where there is no sex discrimination involved in the material factor, the employer is under no obligation to provide a “good” reason for the disparity. If the material factor is indirectly discriminatory on the basis of sex, the employer must show the pay gap is objectively justifiable. However, if there is no sex discrimination, the employer does not need to justify the difference in pay, provided it is explained by a material factor which meets the test outlined above.

In Walker v Co-op, Males LJ emphasised that the material factor defence only becomes relevant when the claimant has first proved she is engaged in equal work to her comparator. The ET had therefore erred in considering whether the material factor defence applied prior to February 2015, which was the point at which Ms Walker had proved equal work by reference to the JES.

The Court did not make any finding of fact as to whether the “vital roles” material factor continued to apply in March 2015. However, it held that at least one of the “flight risk”, “executive experience” and “market forces” material factors continued to apply to each of Ms Walker’s comparators in March 2015 after the JES was completed. The ET had confirmed that none of these material factors had been tainted by sex. It was irrelevant that each of these factors were “historical” in March 2015; they remained at that time the cause(s) of the pay disparity.

This decision is helpful in its application of the test laid down in Marshall for the material factor defence, confirming that an employer does not need to prove that a material factor is an objectively good reason for the difference in pay, provided the four tests laid down in Marshall are met.

The decision is also likely to be of particular comfort to companies which currently need to make difficult decisions in relation to remuneration and retention during this period of economic crisis. Where an employee is genuinely vital to the success of the business or there is a genuine flight risk that needs to be addressed, this case demonstrates that those circumstances are capable of being material factors which could defend an equal pay claim. Moreover, this could continue to be the case for some time into the future. The Court of Appeal declined to find any duty on the part of the Co-op to keep pay under continuing review once the rescue had been implemented.