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The equal pay phenomenon and TUPE

September 2006



This article appeared in the Birmingham Post in September 2006 and was written by Neil Black, Employment Lawyer in the Construction Sector Group at Pinsent Masons


In recent years, Employment Tribunals have been inundated with claims brought under the Equal Pay Act 1970 by local authority employees.  In this article, we consider how the equal pay phenomenon affects private sector contractors bidding for contracts from local authorities.


Local authorities have a large number of employees in low-paid roles which are, for the most part, held by women.  The catalyst behind the claims is the allegation that local authorities have failed to pay these employees as much as certain other employees who hold jobs of equal "value" and who are, for the most part, men. The claims affect local authorities the length and breadth of the country.  The potential cost for the authorities is huge.  For example, it is reported that Glasgow City Council has had to find nearly £60 million to settle the claims brought against it.  Inevitably, such costs lead to budget cuts, wage freezes and potentially redundancies. 


The equal pay phenomenon also affects employers in the private sector.  It is common practice for local authorities to "contract out" certain functions.  This often involves local authority employees transferring to the contractor under the Transfer of Undertaking (Protection of Employment) Regulations 2006 ("TUPE").  Frequently, those transfers involve manual staff in low paid jobs, one of the areas that have seen the most equal pay claims. One example of such transfers happening on a regular basis is when local authorities enter into PFI projects with private sector sub-contractors for the construction and maintenance of schools.  These projects often involve a TUPE transfer of the local authority employees who are responsible for the maintenance and cleaning of these schools. 


Under the provisions of the TUPE regulations, the employees transfer to the contractor without a break in their continuous employment and on the terms and conditions they enjoyed immediately before transfer.  In addition, any liabilities owed by the local authority to those employees transfer with the employees. These liabilities include any liability under the Equal Pay Act 1970.  Consequently, private sector contractors are at risk from equal pay claims from their employees who transferred from a local authority.


If such a claim succeeded, the remedy is two fold.  Firstly the claimant is entitled to a payment of "back pay", equivalent to the difference in pay between the claimant and their chosen comparable employee of the opposite sex for a period of up to 5 or 6 years.  (The maximum time period depends on whether the claim has been brought in Scotland or England).  Secondly, the Tribunal orders an immediate increase in the claimant's pay so that the unequal pay no longer exists. 


Given that, once the pay of one employee at a particular grade has been increased, it will be necessary to increase that of all of her colleagues, these remedies are potentially very expensive for the private sector employer.  In the PFI schools example above, the contractor will have been involved in a competitive bid process and will have priced their bid according to what they believed, at the time of bidding, their employment costs would be going forwards.  Any subsequent, unpredicted increase to those costs will therefore affect the profit, if any, that might be made by the contractor. 


It is therefore important that the contractor ensure that they are fully protected against any equal pay claims in the contract with the local authority.  This can be done by including a mechanism in that contract which allows the contractor to recover from the local authority any additional costs arising out of equal pay claims.


It is standard practice for the local authority to provide an indemnity to the contractor whereby the local authority reimburses the contractor for the cost of any claims where the cause of action arose before the date on which the employee transferred.  However, the risk for the contractor goes further than this.  The contractor will generally keep in place the pay scales that were used by the local authority before the employees transferred.  If one employee brings a successful equal pay claim based on what they received under those pay scales before or after their transfer, that will probably mean that a number of other employees are also in a position to bring such claims.  The contractor may therefore have to change its pay scales as a whole.  This may mean it has to give pay increases to large numbers of employees, not just those who have brought claims.   Therefore, it is important for the contractor to ensure that the contract allows such additional costs to be recovered from the local authority as well. 


In any event, it is important that contractors appreciate the increased legal risk that the local authority equal pay phenomenon poses.  Where possible, contractors need to take the necessary steps outlined above to protect their position.  The figures involved in the equal pay disputes are so large that failing to do so may reduce or wipe out their profit on the contract.


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