The UK’s inflation rate in August 2026 - as measured by the Consumer Price Index (CPI) - was...
Equal pay and justifying pay differentials
A major retailer did not breach equal pay law when paying its shop floor staff (predominantly women) a lower rate of basic pay than its warehouse staff (in the majority men). The employer could justifiably rely on market forces to distinguish between the pay for the different groups where there was a valid explanation for the pay differences.
Background
Equal pay claims were brought by thousands of Next retail employees who claimed their work was of equal value to that of warehouse employees with a predominantly male population. It was, the claimants argued, therefore discriminatory for Next to pay the male warehouse employees significantly more by way of basic pay, premiums and bonuses, in comparison to the female retail workers.
An initial tribunal hearing established that both groups were doing equal work of equal value. The next tribunal hearing then considered whether Next had any material factors which it could rely on as a defence to justify the disparity in pay.
Next argued that the pay differentials could be explained by a range of material factors including market forces, recruitment and retention difficulties, and the overall performance and productivity of the Next group.
The tribunal held that there was no direct discrimination. But it did hold that the material factors involved indirect discrimination. Sales staff were 77.5% female, and warehouse staff were 52.78% male. Paying sales staff a lower basic pay therefore had a disproportionate effect on women, particularly given that Next benchmarked warehouse pay against the predominantly male market for warehouse staff.
The next step for the tribunal was to consider whether Next’s pay practices could be justified as a proportionate means of achieving a legitimate aim. The tribunal found that Next could have afforded to pay sales staff more but chose instead to cut costs to maximise profitability. Since case law has established that differences in pay cannot be justified by costs alone, the tribunal held that the lower basic pay could not be objectively justified.
The tribunal also rejected Next’s argument that it had to set pay according to market forces. As the tribunal noted, market forces may themselves be based on historic discriminatory views on the value of ‘male’ and ‘female’ work. Allowing market forces to be used as a defence to an equal pay claim could therefore defeat the purpose of the legislation and perpetuate indirectly discriminatory practices.
In relation to basic pay and six other terms, the tribunal therefore found that the material factor defence was not made out. Next did however succeed in establishing the defence in relation to a number of other bonuses and premiums linked to attendance, productivity and operational requirements. Next appealed.
EAT decision
The appeal was allowed in part.
The EAT upheld the tribunal’s finding that the claimants were placed at a disadvantage by the pay disparity compared to the warehouse operatives.
But when it came to whether Next had a legitimate aim, the tribunal got it wrong said the EAT. It had taken an unduly narrow approach and mistakenly required Next to justify paying retail staff less, rather than identifying the aim behind the differential itself. Fairly characterised - as a whole - Next’s aim in setting the warehouse rates was necessary to recruit and retain staff and maintain warehouse operations, and those recruitment and retention pressures did not apply in the same way to retail staff.
As regards proportionality, the tribunal had also got it wrong. The tribunal’s confinement of Next’s legitimate aim to costs undermined the proportionality analysis that followed. It had asked the wrong proportionality question, adopting ‘affordability’ or ‘financial headroom’ as its metric, rather than assessing whether the pay differential was a proportionate response to the genuine business need to recruit and retain warehouse staff in a competitive labour market.
Characterising market forces as a ‘trump card’ misrepresented Next’s case: the higher pay for warehouse workers was not driven by gendered market perceptions but by genuine recruitment/retention needs particular to their role. On the tribunal’s own findings – including that Next could not have reduced the warehouse rate without jeopardising the service – the pay differential was a proportionate means of achieving a legitimate aim.
The EAT therefore allowed Next’s appeal regarding basic pay as well as certain other benefits (where similar errors arose). However, the appeal failed in respect of night-time premiums and paid rest breaks, where the EAT held that the removal of benefits from retail staff was properly characterised as a cost-saving measure.
Comment
This case provides useful guidance on when ‘market forces’ can be used to justify unequal pay. Whilst it remains the case that pay differences based on cost-saving alone will not be justifiable, where an employer is however able to show that they have sound business reasons, such as in this case (the need for effective recruitment and retention of warehouse staff), there is a good chance that this will be treated as a valid justification for unequal pay.
Whilst Next have described the case as a victory for ‘common sense’, this may be short lived as the claimants have indicated that they intend to appeal the decision.