Thank you, Next! Equal pay ruling overturned in favour of Next

Background to the Appeal

In a 2024 first instance ET decision, thousands of female retail sales consultants (the “Claimants”) succeeded in their equal pay claims against Next. The Claimants alleged that, as a predominantly female workforce, they were paid less than warehouse operatives, a predominantly male workforce, despite performing work of equal value.

The ET made this decision based on the following considerations:

• The Claimants were carrying out work of equal value to the warehouse staff.
• The pay difference was not directly discriminatory – all warehouse staff received the same pay regardless of their sex, as did all sales staff.
• However, the higher rates of pay afforded to warehouse workers amounted to indirect discrimination as paying warehouse staff more than sales staff had a disproportionate effect on women. The ET relied on statistical evidence and the fact that Next benchmarked pay against the market and the warehouse labour market had a significant imbalance favouring men.
• Next failed to establish the material factor defence. This defence allows an employer to demonstrate circumstances that justify the pay differences which are unrelated to any discriminatory reason. The ET concluded that cost reduction could not constitute a legitimate aim in the circumstances and that the business need relied upon by Next was insufficient to justify the discriminatory effect of the pay disparity.

Next appealed this decision and the Claimants cross appealed aspects of the ET’s reasoning.

EAT Decision

The EAT recently overturned the ET’s ruling, finding that it erred in rejecting Next’s material factor defence.

Discrimination

Next challenged the ET’s findings that the difference in pay disadvantaged women. The EAT rejected this challenge and upheld the finding of indirect discrimination, holding that whilst the statistical evidence was not overwhelming, combined with the ET’s other findings, it was sufficient to satisfy the disadvantage test in s.69(2) of the Equality Act  2010. Despite the Claimant’s cross appeal, it was also upheld that there was no direct discrimination, confirming the difference in pay was not directly attributable to sex.

Material factor defence

The appeal ultimately turned on the application of the material factor defence. The EAT found that the ET had erred in applying the defence by separating the identification of the material factor from the legitimate aim pursued by it. Instead, it held that this should be considered as a whole.

The EAT found that, viewing Next’s legitimate aim as a whole, the warehouse rates of pay encompassed the need to recruit and retain sufficient staff to maintain the warehouse service. Next needed to pay its warehouse staff the higher market rate for this work to remain competitive. Importantly, that market-driven rationale was unrelated to gender and did not apply in the same way to the retail workforce.

The EAT also criticised the suggestion by the ET that Next relied on market forces as a “trump card”, finding that this was not a fair characterisation of the case. Rather, warehouse workers were paid more because the market required higher rates of pay for that type of work. The fact that this market dynamic may have operated within a sector dominated by men did not, of itself, undermine the legitimacy of Next’s explanation of the difference in pay.

Further, by focusing on “financial headroom” the ET were considering the affordability of Next equalising pay across its workforce rather than assessing the reason for the difference in pay.

The EAT did however reject Next’s challenge to the ET’s findings that it had failed to justify the following:

• Lower rates of night-time pay and overtime pay
• The failure to provide paid rest breaks to store workers
• Lower Sunday premium payments to store workers

Concluding thoughts

Had Next not been successful in this appeal, it may have been liable to pay compensation of over £30 million to its retail workforce. The EAT’s decision marks a significant development and clarifies that market-driven recruitment and retention considerations can, in principle, provide a lawful justification for pay disparities.

The Claimants intend to appeal the EAT’s decision so this may not be the end of this particular case.