Court of Appeal considers the applicability of the material factor defence where numerous factors have been identified

Court of Appeal considers the applicability of the material factor defence where numerous factors have been identified

The recent Court of Appeal decision in Walker v Co-Operative Group considered the application of the “material factor defence” in equal pay claims. The Court clarified that, where a material factor defence is applicable, an employer does not have an ongoing duty to monitor the continuity of the material factors prior to a further identifiable decision (or omission to decide) about pay. The Court also clarified that a material factor needs to explain, but not justify, the pay disparity in question.

Walker v Co-Operative Group Ltd and another [2020] EWCA Civ 1075

What is the material factor defence and when is it used?

The Equality Act 2010 (EqA 2010) requires that an employee is entitled to contractual terms, such as those related to pay, which are as favourable as those of a comparator of the opposite sex in the same employment if they are employed to do equal work. In the absence of such express terms, a “sex equality clause” is automatically implied into the contract of employment. Essentially, this clause imports into the employee’s contract the more favourable terms of their comparator.

However, an employer can rebut the inclusion of a sex equality clause where they can show that the difference in terms is because of a material factor that is not based, directly or indirectly, on sex. To achieve this, the employer must show that:

  1. The reason was genuine and not a sham or pretence.
  2. The less favourable treatment was due to that reason and that it was a “material reason”, i.e., a significant and relevant factor.
  3. The reason was not because of sex.
  4. The factor relied on is a material difference, that is, a significant and relevant difference.

However, a material factor need only be the cause of the difference, rather than providing for a good reason for the difference. Once shown, it will continue to explain a difference unless and until it is shown that (i) a new decision has been taken which is tainted by sex discrimination and has the effect of displacing the prior legitimate decision, and (ii) those factors have ceased to apply and therefore, the defence is no longer applicable.

What are the facts of Walker v Co-Operative Group?

The Claimant was promoted to the role of Group Chief HR in February 2014, during a time when the Co-Op was facing financial difficulties. Employees were placed into tiers, each of which had a salary band. The Claimant was placed into a tier with two men and one other woman, with a salary band of between £350,000 and £550,000.

The Claimant’s salary was lower than the two men in the tier, who worked different roles within the executive committee. Following a period of consolidation, the Co-Op decided that the Claimant’s role should be downsized and her salary reduced. In February 2015, following an external Job Evaluation Review (JER), involving a pay grade review to introduce consistent grades across the Co-Op group, the Claimant’s role was rated equivalent to, or higher than, the two men in her tier.

The Claimant was subsequently dismissed on notice in April 2017. She commenced proceedings against Co-Op, including a claim for equal pay. The Co-Op invoked the material factor defence, relying on the following multiple material factors to justify that the differences in pay were not because of sex:

  1. Each individual in the tier had a different role. The men’s roles were vital to the immediate survival of the company, whereas the Claimant’s role was important, but not vital.
  2. The men were more experienced at executive level.
  3. It was crucial to maintain stability and the top team of people to support the CEO.
  4. The men’s pay reflected particular market forces, which put pressure on their roles and pay.

What was held by the Employment Tribunal (ET) and the Employment Appeal Tribunal (EAT)?

The ET accepted that, in February 2014, the pay difference was genuine for the reasons put forward by the Co-Op. However, by the time of the external JER, the ET held that these material factors had ceased to apply. As such, at some point between February 2014 and February 2015, when the material factors ceased to apply, an unlawful pay disparity had arisen.

Co-Op appealed the decision to the EAT on the basis that it was not open to the ET to decide that any material factors had ceased in the intervening period, without a basis for doing so. There had been no new decision made by the employer in relation to pay and conditions prior to the JER. The EAT agreed. Until a further identifiable decision (or omission to decide) about pay, at which point the Co-Op would have been required to defend any pay differential, the material factors continued to apply. The Claimant subsequently appealed to the Court of Appeal.

What was held by the Court of Appeal?

The Court of Appeal held that, where a claimant’s job is rated as equivalent with a comparator following a job evaluation scheme, the statutory language looks to the present and the future, but not to the past. As such, the ET was not permitted to look at the period before the JER review took place, to identify when the material factors had ceased.

In addition, it was held that the JER did not mean that all of the multiple factors proposed by the Co-Op then ceased to apply. In this instance, this was not the case and there was at least one material factor which remained causative of the difference in pay.

Further, it was not for the ET to consider whether the material factors justified the difference, but merely whether they caused the difference. It is likely that a JER would focus more on justification. It was not the case that the JER could be relied upon as definitive evidence that no material factors applied.

What can employers take from this?

For a material factor to apply, an employer must ensure that the reason is genuine. However, it need only be what caused the difference in pay. As such, it is not for a Tribunal to take a view on whether a material factor is a good reason for a difference in pay.

Once established, an employer is not under a continuing duty to review the differences in pay. Material factors that applied at the time of a decision will continue to apply unless and until a new pay decision is taken (or an equivalent omission to decide). Therefore, employers should consider the position at pay review meetings in the usual way, unless reasonably requested to do so at an earlier date. However, it is important to note that, where there is only one identifiable material factor, it may well be the case that more is expected from employers when it comes to monitoring material factors between pay decisions.

This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact Rachael Lloyd or Siobhan Murphy to discuss any issues you are facing.