More than 3,500 current and former store staff have won their six-year legal claim for equal pay against retailer Next. The predominantly female retail staff argued that they were paid lower pay than the predominantly male warehouse workers but that their work was of “equal value”, so they should have been paid the same. 

It was acknowledged by the Employment Tribunal that Next did not intentionally discriminate based on gender (“direct discrimination”) but that it had indirectly discriminated against the store staff in relation to some elements of pay because financial justifications based on “market rates” couldn’t excuse unequal pay - employers cannot rely on “costs alone” to justify the difference in pay, since this would undermine the purpose of equal pay legislation. 

The ruling could see Next paying over £30million in compensation by way of back payments. Exact compensation due will now be assessed by the Tribunal but Next does plan to appeal the ruling. 

There are a number of helpful lessons for other private sector employers which we have set out below.

Summary of the key points in the case

A previous hearing had already determined that Next’s store staff were carrying out work of equal value to its warehouse staff. Independent experts appointed by the Tribunal made this determination, taking account of the demands of the roles in terms of factors such as effort, skill and decision-making. 

The purpose of this hearing was to determine whether there was a genuine material factor which caused the difference in pay, which was not discriminatory. Next argued that “market forces”, recruitment and retention, and business viability and productivity justified the differences in pay. 

The female claimants argued that the “market forces” argument was direct discrimination, as differences in pay “because of the market” actually reflected that the store roles were seen as women’s work and the warehouse roles were seen as men’s work. The Claimants argued that Next knew of this perception and the impact it had regarding market differentials and took advantage of that.

The Tribunal heard evidence from three experts appointed to provide their opinion including on:

• The market price for sales consultants and warehouse operatives;
• To what extent sex or the sex composition of a job group, or collective bargaining, or worker productivity, or part-time status impacts market rates; and
• Perceptions of retail as “women’s work”.   

The Tribunal looked at 17 different terms relating to pay, productivity bonuses and overtime.

To succeed, Next needed to show that the factors it relied on to justify the differences in pay were not tainted by reasons relating to sex (i.e., either direct or indirect sex discrimination). In the event that there was any evidence of indirect sex discrimination, the employer must show that the discrimination was objectively justifiable, i.e., a proportionate/reasonably necessary means of achieving a legitimate aim.

The Tribunal found that:

• the factors relied on by Next did not amount to direct discrimination, as the reasons related to cost and profitability, rather than being influenced by sex;
• while there was a substantial imbalance in the store staff (on average in the claim period, 77.5% were female), the difference was less significant amongst the warehouse staff, with only 52.78% being male. When combined with the fact that pay benchmarking was done against a wider warehouse market with a largely male workforce (rather than e-commerce fulfilment centres (like Next’s warehouses) where the gender distribution was more finely balanced) the Tribunal held that this was sufficient to make a prima facie case of indirect sex discrimination;
• Next then needed to show that the material factor explaining the difference in pay for each pay element was objectively justified (i.e., there was a legitimate aim which was applied proportionately);
• In respect of the differences in basic pay, while an employer’s need to reduce expenditure to balance its books could be a legitimate aim where there was an element of compulsion, in Next’s case the aim was purely financial – Next could have afforded a higher rate for retail staff (as some competitors did) but gave paramountcy to keeping costs in the labour budget to a minimum. There needed to be “something more” than just costs alone for this to amount to a legitimate aim and to provide an objective justification; and 
• Even if the Tribunal was wrong on this latter point and this was a permissible aim, the payment of different sums of basic pay was not “reasonably necessary” to meet that aim – the business need was not sufficiently great to overcome the discriminatory effect of the aim and therefore it could not be objectively justified. For “market forces” to be a trump card in this way defeats the objective of the legislation. There must be a more compelling business reason for such aims to be justifiable, as with some of the other types of payment in the case, such as the productivity bonuses, which were found to be objectively justifiable.

What are the impacts of the Employment Tribunal’s decision?  

• Anticipate more claims – this landmark ruling is the first private sector equal pay claim to reach the final legal stage and secure a win against a national retailer. There are similar ongoing equal pay claims being made against other UK retailers. Employers in the retail sector and beyond can now expect a significant increase in awareness of these issues and therefore the potential for more claims with regards to equal pay.
• Can we still rely on market forces? – the ruling sets a precedent and makes it clear that relying on market rates is risky and cost alone is not a valid defence. Reliance on market rates is risky because this may be swayed by traditional views of the value of “men’s” and “women’s” work and may therefore perpetuate pay discrimination particularly where market forces are being used to justify broad differences in pay. Where companies have been applying benchmarking and paying the ‘going rate’ for certain roles by comparison to competitors, they will need to be careful to ensure that the benchmarking is appropriate. However, it is still possible to rely on market forces in the sense of paying the current rate in the market to hire a particular individual at that time because of current market demands, provided you have appropriate evidence.
• Equality of value between roles – it is important for companies to look across their job families and consider the risks of claims based on “equal value” arguments, particularly where there is gender segregation which might lead to a prima facie finding of indirect sex discrimination which then needs to be objectively justified.
• Size doesn’t matter – it isn’t solely large businesses that should fear the repercussions of the ruling especially where smaller businesses have followed in their footsteps as to ‘market rates’ of pay and tracking rates paid by competitors.
• You can still rely on the need to recruit and retain staff (for example) – while retailers fight against the decrease of physical footfall in shops and increased reliance on online trading, it has been made clear that a desire for retention and recruitment of staff in ”hot” labour markets such as e-commerce fulfilment will be accepted as legitimate aim, so long as the factor is applied in a proportionate way – in this case, the measures implemented to assist retention of warehouse staff were for a legitimate business reason and were proportionate because they were for a limited period of time.
• Influence of “non-wage amenity benefits” – the ruling also makes clear that while “non-wage amenity benefits” such as staff discount and working wardrobe allowances may ameliorate pay disadvantages to a degree, the focus needs to be on equalising core basic pay. The Tribunal will take a “term by term” approach, rather than looking at fairness across the whole suite of pay and benefits.
• Importance of fair pay practices – the need for businesses to ensure they are working to avoid perpetuating gender-based discrepancies has been bolstered.

Practical steps to take now

Although Next was found not to have directly discriminated against the female store staff, the Tribunal found that Next’s approach to issues of pay disparities was not satisfactory. In particular, it highlighted that:

• Decision-makers about pay had no training on equal pay laws;
• Next had not undertaken an equal pay audit; and
• Gender pay gap reports from 2017 onwards had not been used as a base from which to examine whether structurally discriminatory pay might have become embedded.

These are all useful lessons for other employers, along with the need to look across their job families and consider the risks of claims based on “equal value” arguments, particularly where there is gender segregation which might lead to a prima facie finding of indirect sex discrimination which then needs to be objectively justified.

Broader context 

Given that the National Living Wage is likely to increase in April (with the new Government promising to keep the minimum wage in line with the cost of living), employers will be taking a cautious approach. The Tribunal noted that the pay differential had reduced significantly over the years, because store staff’s pay had increased in line with the minimum wage.

The ruling has also been delivered against the backdrop of the introduction of the EU Pay Transparency Directive across EU Member States, which will require employers across the EU to publish gender pay gap reports for the first time from 2027. 

Although the Directive is no longer directly applicable in relation to UK workers, the new Government has indicated that it intends to introduce similar pay transparency laws in the UK and has already vowed to extend UK gender pay gap reporting to cover ethnicity and disability, as well as officially extending equal pay laws to cover these two protected characteristics.

Given the length of time these cases are typically taking to come to a full Employment Tribunal hearing (often in excess of six years), the government has also promised to introduce an equal pay enforcement body to take more pre-emptive steps to ensure equal pay, although the exact scope and powers of this body remain to be seen. 

A requirement for more transparency may uncover gender differences in pay more easily and therefore, UK employers with operations in the EU should be starting preparations to align with the Directive and any future UK legislation now.

How can we help? 

At Deloitte we have a team of experienced pay equity and transparency professionals to help you respond to the ruling and navigate the changing equal pay regulatory landscape. Our specialists can assist with:

• Conducting gender pay gap analysis to identify pay discrepancies and develop strategies to address them. 
• Advising on approaches and roadmaps towards greater pay transparency. 
• Conducting full equal pay/pay equity audits under legal privilege and advising on remediation.
• Conducting training sessions for HR professionals and line managers to ensure they are fully equipped to comply with the impact of the ruling. 

Your contacts 

Kathryn Dooks, Partner – Employment Law, Deloitte Legal 
Deepinder Lamba, Partner – Reward, Deloitte LLP
Amy Douthwaite, Director – Employment Law, Deloitte Legal
Gary Fereday, Director – Reward, Deloitte LLP
Natalie Bell, Associate – Employment Law, Deloitte Legal

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