Equal pay: follow the US leader

Equal pay is a fast-developing area for both European and US employers. Chris Walter and Jon Geier highlight the lessons that might be learned from the US system in relation to the difficult area of equal pay audits.

More than 30 years after the Equal Pay Act 1970 (EPA) came into force, UK employers are having to reconsider their approach to equal pay issues, following some much-needed clarification by the European and UK courts and an increasingly higher profile for equal pay issues. As the recent success of a claim by a group of 36 dinner ladies against their local authority in St Helens Borough Council v Derbyshire and others shows (see Case of the Month, June issue of Employers’ Law), the financial penalties for employers who fail to address unequal pay practices can be significant.

The issues have been particularly brought into focus for public sector employers and voluntary and private sector organisations that carry out public functions which, since April 2007, must meet the requirements of the new gender equality duty. However, with the number of equal pay claims accepted annually by employment tribunals rising from 590 in 1999 to 17,268 in 2006 (Discrimination Law Review: A framework for fairness: proposals for a single Equality Bill – a consultation paper published by Department for Communities and Local Government on 12 June 2007), private sector employees cannot afford to avoid the issue either. Even the Equal Opportunities Commission (EOC) had to defend itself against claims of gender pay disparities within the organisation.

Who is a proper comparator?

To bring a claim under the EPA, an employee must choose a comparator of the opposite sex who is doing like work or work of equal value for the same employer, but who is paid differently. Unlike sex discrimination claims, a hypothetical comparator may not be used. Selecting the appropriate comparator can be difficult and, to increase the chances of their claim succeeding, employees will often select more than one.

In the recent case of Bainbridge v Redcar & Cleveland Borough Council, the Employment Appeal Tribunal (EAT) confirmed that employees are allowed to bring multiple claims arising out of the same period and circumstances, but relating to different comparators. Each allegation that a comparator is paid more is a distinct cause of action.

This pro-employee decision is a reminder to employers of the potential extent and complexity of equal pay claims. For those employers that decide to undertake equal pay audits, it also highlights the need to conduct a thorough audit that encompasses all roles within the organisation.

The courts have adopted a more employer-friendly approach in relation to the question of whether a claimant can choose a comparator who is not employed by the same employer, and, if so, in what circumstances. The European Court has held that it is not necessary for the comparator to have the same employer, provided that terms and conditions are attributable to a “single source”. In the recent case of Armstrong v Newcastle Upon Tyne NHS Trust, the Court of Appeal demonstrated how this works in practice.

The claimants and comparators in Armstrong had originally been employed by two separate hospital trusts. Following a merger, the two trusts formed a new one which controlled both hospitals and employed the workers at both hospitals. However, as responsibility for determining pay and terms of employment did not rest with the same body, the Court of Appeal held that there was not a “single source of employment” responsible for the differences in pay between the claimants and the comparators. It is therefore not enough for an employee to show that a comparator has the same employer as a claimant: the employer must also be responsible for setting the terms and conditions of both employees.

Equal pay audits

Equal pay audits are not mandatory in the UK, although some have argued that the new gender equality duty has introduced such an audit requirement for those public and private sector employers to whom the duty applies.

Large employers, whose remuneration packages may be vulnerable to equal pay claims, may choose to follow the recommendations of the EOC Code of Practice on Equal Pay and carry out voluntary self-evaluation through equal pay audits.

However, a decision to conduct self-evaluation to reduce the risk of equal pay claims should not be taken lightly. A properly conducted audit can be complex and time consuming, especially as the definition of pay for the purposes of the EPA extends beyond salary to include other contractual benefits, such as bonus, pension and special staff allowances.

Equal pay audits will also be open to disclosure in future litigation. Those with access to the data must be trained and supervised to ensure that data is not used inappropriately.

Where an employer does decide to carry out an equal pay audit, the EOC provides useful guidance in its Equal Pay Review Model. As the EOC highlights, employers must ensure that any audit is conducted in accordance with the principles of the Data Protection Act 1998, and should also consider whether to involve trade union and other employee representatives.

Lessons from the US

UK employers that do conduct equal pay audits can learn from the more sophisticated techniques developed in the US to collate and analyse equal pay data.

The Office of Federal Contract Compliance Programs (OFCCP), which is at the forefront of pay equity legal initiatives in the US, has established a standard methodology to analyse potential systemic compensation discrimination using a “multiple regression analysis”.

This is a statistical technique that generates a set of information to better understand the effect of one variable on another, such as the effect of an employee’s internal company experience on their salary.

The technique enables the OFCCP to consider legitimate factors such as education, work experience with prior employers, time spent in the current job, time in a particular pay grade, performance ratings, productivity, location, and job category, while avoiding the use of potentially “tainted variables,” which may mask gender differences that affect pay.

A regression analysis allows the OFCCP and employers to incorporate these different factors into a model to predict patterns that would be expected when employment decisions, such as compensation, are neutral with respect to gender, race or other protected classes.

Minimise risk

Equal pay cases place a heavy cost and time burden on employers, especially as they are often linked to sex discrimination claims. To minimise the risk of claims, employers should closely review pay policies, monitor starting and promotional pay rates, and train managers on what constitutes legitimate rationales for pay decisions.

The decision to conduct compensation self-evaluation through equal pay audits cannot be made lightly, and an employer should not begin such a process unless it is prepared to deal with the results.

The Single Equality Bill consultation paper launched by the government in early June includes a proposal that employers who carry out equal pay reviews should benefit from a specified period free from legal challenge, within which to rectify discriminatory pay policies and practices. If such an arrangement were to be introduced, it would provide a new incentive for employers to conduct equal pay audits.

Equal pay is a fast-moving area of law, and further clarification is expected from tribunals. If a potential equal pay action is raised by an employee, check with your legal adviser as to whether or not there are relevant pending test cases. The results of current government consultation are also likely to introduce changes to this area of law, with one of the key proposals being to streamline the equal pay and sex discrimination law within the Single Equality Act.

Christopher Walter and Jon Geier are partners at Paul, Hastings Janofsky and Walker. Elaine Ho and Anna Sanford, associates, assisted with this article.

Equal Pay: Action list for employers

  • Start by becoming familiar with the EOC’s Code of Practice on Equal Pay
  • Provide training to HR and line managers on how to take gender-neutral decisions regarding pay
  • Monitor starting and promotional pay rates
  • Consider whether self-evaluation, through an equal pay audit, is appropriate for your organisation
  • Establish or review pay policies
  • Clearly document employee appraisals so employees are aware of their performance
  • Stay abreast of the courts’ approach to equal pay claims and the progress of the government’s consultation process.

Women’s minister Meg Munn rules out mandatory pay audits for private firms

House of Lords rules that St Helens Council victimised dinner ladies over equal pay claims

Equal pay for council workers: whose bill is it anyway?

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