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08/10/2020 Briefing

The principal issue for the CoA in Walker v Co-operative Group Limited and Richard Pennycook A2/2019/3016 was when and how a ‘material factor’ may cease to be a defence. For the purposes of the English Equality Act 2010, the ‘material factor’ defence is a means by which an employer can justify pay differentials between employees of different genders, and defeat a claim for equal pay.

In Ireland, the equal pay provisions are contained in the Employment Equality Acts 1998 – 2015 (“Employment Equality Acts”) and prohibit an employer from paying an employee lower pay than a person of the opposite sex in the same employment for the same (or an associated) employer doing ‘like work’. While the concept of ‘material factor’ does not exist in the Irish law protections on equal pay, the equivalent defence for an Irish employer is to demonstrate that there is an objective justification for a pay differential, unrelated to any of the nine protected characteristics under the Employment Equality Acts.

Background

Ms W, formerly the Co-op’s HR Director, compared her work to that of two other directors, Mr A and Mr F. All three were on an Executive Committee in 2014 tasked with first rescuing, and then restoring, the Co-op which was then in serious financial difficulties. Mr A and Mr F were already on the Executive, and their pay was increased from £450,000 to £550,000. Ms W was newly promoted onto the Executive and her salary was increased from £215,000 to £425,000. Ms W’s employment was subsequently terminated by the Co-op as a result of changes to the HR function.

Employment Tribunal (“ET”)

The ET accepted the Co-op’s case that in 2014 there were four material factors which distinguished Ms W from her comparators and which were unrelated to sex. These were:

  1. Vital roles – the Co-op saw Mr A and Mr F as vital to the immediate survival of the Co-op. They were part of the core team who, with the CEO, refinanced the business and reformed governance to restore its reputation. Ms W’s HR function was important but not regarded as vital in the same way.
  2. Executive experience – the Remuneration Committee considered that Ms W was newly promoted to the Executive and unproven at that level, unlike including Mr A and Mr F and so a rise from £215,000 to £500,000 as originally proposed was deemed to be excessive.
  3. Flight risk – it was crucial ‘in the eye of the storm’ to maintain stability in the top team of people and to support the interim CEO. The previous CEO had recruited Mr F and Mr A, but he then left abruptly. Their following him was regarded as a serious risk which could damage the Co-op’s recovery.
  4. Market forces (this applied to Mr A only) – he had been a partner in one of the top  law firms, and therefore market forces applied to retain him at that salary.

However, the ET went on to find that, after the recovery period (in or around October 2014), Ms W’s job had increased in importance and the comparators’ jobs had decreased in importance. Mr F was given notice in January 2015.  An independent third party carried out a job evaluation study (the “JES”) which was accepted by the Co-op in February 2015. The JES showed that Ms W’s job was scored higher than either that of Mr A or Mr F.  The ET therefore found that “the historical explanations for the pay differential given at the time the pay was set were no longer material at the time of the [JES] and that [the] value of the Claimant’s work was equal to that of her comparators.” As a result, Ms W was able to claim the difference in pay since some time (to be determined at the ET Remedies Hearing) between October 2014 and February 2015, together with bonuses of up to 100% of base salary and LTIP options.

Employment Appeal Tribunal (“EAT”)

The Co-op appealed to the EAT on the material factor issue.  Finding in favour of the Co-op,  the EAT held that where an employer has established a material factor defence, this will continue to operate until a further decision or omission to decide pay could be identified.  Secondly, in the alternative, there was inadequate evidence to support the decisions that the material factors had ceased to apply.

Court of Appeal (“CoA”)

The principal issue in Ms W’s appeal was when and how a material factor may cease to be a defence.  Ms W argued that once the financial situation of the Co-op began to change at the end of 2014, it was under a continuing duty to review the differences in pay between Ms. W and her comparators.

The Co-op accepted that the materiality must be judged at the time of the hearing and not at the initial decision, but claimed that at least one, if not more, material factor(s) still applied for each comparator in February 2015. In 2015, both Mr A and Mr F were still more experienced than Ms W and were necessary to the recovery phase as well as the rescue phase.  Market forces still applied to Mr A.

Ms W argued that in the case of Mr F, the material factors no longer applied to him and had evaporated.  The fact that he had been given notice in January 2015 showed that his retention was no longer relevant, his experience was no longer valued, and his presence was no longer regarded as necessary during the recovery process.  Ms. W sought to draw an analogy between her case and Benveniste v University of Southampton [1987] ICR 617. In that case, the claimant was appointed as a lecturer, but was told that she would be paid less than her male comparators because the department was in financial difficulties.  By the start of the next academic year, those financial constraints no longer applied, but her pay was not equalised to that of her male comparators. The material difference between the applicant and the male comparators “evaporated when the financial constraints were removed.” In Ms W’s case, once her role assumed more importance than Mr. F’s, and he was regarded as disposable, the material factors had also ‘evaporated’.  Nothing in previous case law required a fresh decision to be made before the material factors defence would fail. If an employee had to ask for equality, or a fresh decision had to be made, arrears could never be claimed for the period prior to that request or decision.

Decision and Assessment

The CoA considered the material factors advanced by the Co-op.  While it was accepted that there was an argument that in 2015, Mr. F’s role was no longer vital (factor #1), it did not accept that Mr. F’s experience (factor #2) had evaporated as a material factor.  Mr A had been paid the high market rate for top general counsel and there was nothing to suggest this had changed in February 2015.

The decision of the EAT was upheld and the Co-op was entitled to rely on the material factors defence.

This case demonstrates the importance for employers of regularly reviewing the reasons why there are pay differentials between employees of different genders and if they are to be maintained, ensuring that these reasons amount to an objective justification. For example, when carrying out salary reviews, employers should carefully consider whether an objective justification that may have previously explained a difference in pay (i.e. a reason unrelated to gender) continues to apply.