Update: employment

Employment lawyers benefited from a veritable avalanche of important decisions at the end of the legal term in July. Discrimination law issues took centre stage, with equal pay cases, age discrimination and religious discrimination all receiving a fair amount of judicial scrutiny.

Taking an overview of these developments, it is easy to see that for a long time to come, we are going to be seeing these issues take the lion's share of judicial attention. In particular, the numbers of equal pay claims in the public sector, which now account for over a third of all claims in the employment tribunals, seem set to grow and to continue to throw up difficult issues partly caused by employers trying to cope with the financial implications of backdating pay awards for up to six years, and judges being asked to rule on what can legitimately be done to manage the problem and what mechanisms are themselves unlawful.

Pay protection arrangements deemed unlawful

In the combined cases against Redcar & Cleveland and Middlesborough councils ([2008] EWCA Civ 885), the Court of Appeal upheld decisions by two employment tribunals that pay protection arrangements, which had been introduced to alleviate the impact of a job regrading exercise on a predominantly male group of employees, were unlawful.

The background to these cases is the 'single status' agreement between local authorities and trades unions to try to eradicate past pay inequalities between men and women in local government employment by undertaking a large job evaluation scheme and merging terms and conditions for all such employees (the Green Book). Previously, pay and conditions for manual workers '“ predominantly male '“ had been regulated separately from those for administrative, professional, technical and clerical staff '“ predominantly female. They were known as the Purple and White Book arrangements respectively. Following the evaluation of roles, inevitably many people being paid differently from each other were found to be doing work of equal value. Therefore potentially they were entitled to full pay equality (including six years' back pay). This meant that thousands of women had the basis for significant equal pay claims '“ including the back pay and interest. Since councils could not afford simply to equalise pay upwards, including the back pay element, they embarked on negotiations to enable them effectively to cut the pay of some staff, as a means of equalising. 'Pay protection' was the mechanism negotiated between these councils and their trades unions to permit cushioning of the effect of the agreed pay cuts, over periods of up to three years.

In both the lead cases the employment tribunals had decided that the pay protection arrangements were unlawful because they did not extend to the women who wanted to receive the higher pay straight away, that is to be the beneficiaries of the pay protection. Those decisions now have to be applied by the councils, who will have to go back to the drawing board to decide how to square the circle between legal rights and lack of resources. One of the last acts of the Equal Opportunities Commission before it merged into the Equality and Human Rights Commission last year was to ask the government urgently to consider some alternative means of both funding and determining the complex and multi-headed equality issues raised by single status. That call looks even more pertinent after the decision of the Court of Appeal last month.

Pay liability under TUPE

Another twist in the equal pay saga was created by the EAT decision in Sodexo v Gutridge [2008] UKEAT 0024_08_3107 31 July 2008. The factual nexus of the case is similar to hundreds of situations around the UK: transfer of staff in non-core functions from the public sector into private sector employment. In this case, it was catering staff who had worked for the NHS trust until they were transferred into the employment of Sodexo under TUPE 1981 in 2001 when the hospital privatised its catering facilities. In 2006 the employees brought equal pay claims, seeking recovery of back pay for up to six years, and citing as comparators men who had worked for the Trust in 2001 and who had not transferred into employment with Sodexo. They succeeded in establishing a right to equal pay. The question now was whether the transferee, Sodexo, could be liable for five years' worth of back pay, given that '“ clearly '“ it had no idea of such potential liabilities at the time of the transfer. Following the earlier decision of the House of Lords in Preston v Wolverhampton Healthcare NHS Trust [1998] ICR 227 (HL), previously Powerhouse Retail Limited v Burroughs [2006] UKHL 13, (the pension litigation), it was established that the right in respect of the period of employment by the transferor did not transfer under TUPE, and therefore any claims would have to be brought within six months of the transfer date, as that effectively terminated the employment. That was based on the fact that the pension rights were not preserved under TUPE and therefore the illegality ended on the transfer. The six months is the strict time limit imposed by the Equal Pay Act.

The Sodexo decision raises a much scarier prospect for contractors taking on activities from public sector employers, including at third and fourth remove. In this case, the EAT held that by failing to implement the equality clause and eliminate the pay illegality of which it was unaware, Sodexo had perpetuated the illegality which had been present at the time of transfer. Therefore the employees could complain about the period of employment by Sodexo. They could compare themselves successfully with people who had previously been in employment with them at the trust because the equality clause should have been in place before they transferred, and they could therefore recover for the five years of employment with their new employer. They were however out of time for claiming against the NHS Trust, because that right ran out six months from the date of transfer. Contractors and their solicitors have been absorbing the impact of this decision and considering what sorts of enquiries should be raised in the future as part of due diligence and what types of indemnities and warranties would be apt for the commercial contracts, at least where the arrangements are bi-partite and there is a direct relationship between the outgoing and incoming employer. The questions raised are large, and there must be a hope that Sodexo will appeal.

Legitimate aims of schemes 'not enough'

Two important age discrimination decisions throw a keen spotlight on what is required to be able to justify discriminatory practices under the age discrimination regulations. In MacCulloch v Imperial Chemical Industries [2008] UKEAT 0199_08_2207, the 36-year-old employee complained that ICI's complex redundancy payments scheme, which paid out more to older people, was discriminatory. At the time of her redundancy she received just over 55 per cent of her gross salary by way of redundancy pay, whereas a person in their late fifties with the same length of service would receive 175 per cent of their salary. The ICI scheme did not mirror the statutory scheme, which itself differentiates on age grounds, and so could not be justified on that basis. However the employment tribunal held that it was justified nevertheless, having regard to the aims and objectives of the scheme. The EAT concluded that the ET had not thought sufficiently about the two limbs of the justification test. It had identified a number of legitimate aims such as encouraging volunteers from among older workers and thus freeing up space for younger ones; however it had failed to sufficiently consider the issue of proportionality. The EAT returned the case to the same tribunal to enable it to review and weigh the evidence to determine whether or not the means chosen where in fact proportionate to the stated aims. In effect the ET will have to consider whether the specific differential between the claimant's redundancy payment and that of the older staff is justified: it is not enough that the aim of the scheme is legitimate.

Detailed inquiries are necessary

A very similar result ensued in Loxley v BAE Systems Land Systems (Munitions and Ordnance) Ltd [2008] UKEAT/0156/08/RN. Here the 61-year-old claimant was disadvantaged by the terms of a voluntary redundancy scheme because it applied a taper that ended at 60, so that over this age the employee received no redundancy pay. When the scheme was introduced there was a compulsory retirement age of 60 and although the latter had been lifted to 65, the scheme had not been changed. The EAT allowed the appeal against the ET's judgment that the scheme was justified. Although accepting the principles argued by the employer, and accepted by the ET, the EAT considered that the latter had failed in its duty to expose those arguments, and the many financial illustrations, to critical appraisal. The EAT commented that the ET had apparently had a lot of financial information but had not analysed it. Both these cases indicate that the EAT considers a very searching inquiry to be necessary when considering schemes of employment benefits that discriminate on grounds of age. It is not enough for the aims of the schemes to be legitimate and for there to be some evidence that the specific outcomes reflect those aims, for example via consultation with staff representatives. From these decisions, it would appear that the ET is expected to embark on a detailed inquiry into the business models involved and to consider worked examples of alternative outcomes before deciding for itself whether it accepts the employer's arguments '“ a high level of judicial activism.

Proportionality

The issue of proportionality was at the heart of the High Court decision in R (on the application of Sarika Angel Watkins-Singh) v Aberdare Girls' High School [2008] EWHC 1865 (Admin). The case concerned the clash between the claimant's wish to wear her Sikh bangle (Kara) at all times and the defendant's rule forbidding jewellery at school. In a wide-ranging decision that includes an extensive review of the jurisprudence of the European Court of Human Rights, the judge ultimately came down to weighing the needs of the claimant against the rules of the school, and decided that because of the exceptional importance to her of wearing her Kara, the school's refusal to make an exception for her amounted to unlawful discrimination. Just as with disability discrimination, the focus has recently been on the issue of reasonable adjustments so with other strands of discrimination law, we are forcefully reminded that for discrimination to be justified it is not enough that the discriminating party reasonably considers the means chosen for attaining its aims to be justified: the courts have a duty to go beyond and subject those means to a searching inquiry to be satisfied that they are proportionate.

Contract clauses on failure to take up employment

On a different note employers often wonder if they have any recourse when a highly desirable recruit pulls out after accepting a job and when they have incurred significant recruitment expenses. Usually the answer is that it is not worth litigating. It can be difficult to pinpoint actual loss caused by the default, bearing in mind that the employer is not having to pay the defaulting recruit. Tullett Prebon Group v Ghaleb El Hajjali [2008] EWHC 1924 (QB) is an unusual case that demonstrates a different outcome. The prospective employers claimed damages for breach of contract by the prospective employee '“ a broker who was expected to earn them considerable sums upon joining a specialist department. The contract of employment, to which he had agreed after taking legal advice, provided for the employee to pay as liquidated damages 50 per cent of his net basic salary and 50 per cent of the signing payment if he failed to take up employment.

The employee's argument that this amounted to a penalty and was unenforceable failed. The court considered that the bargain was effectively between two equal parties, both with legal advice and that the stipulated sum was not 'extravagant or unconscionable' when compared with the upper level of loss that the employer could suffer. In addition, the parties had engaged in specific discussion about the need to avoid the clause being regarded as a penalty. There was sufficient consideration to make the clause a legitimate pre-estimate of loss in circumstances where loss was difficult to assess. I would not be surprised to see a spate of such clauses in contracts for senior staff in the coming months.