Equal Pay: EAT upholds Next’s material factor defence 

The Employment Appeal Tribunal (EAT) has overturned significant parts of a landmark equal pay decision involving more than 3,500 predominantly female retail sales consultants employed by Next. The case concerned whether retail staff, whose work had already been found to be of equal value to that of (predominantly male) warehouse operatives, were entitled to equal basic pay and certain benefits, including lump-sum incentive payments, Sunday and night-shift premiums, overtime payments, paid rest breaks and long service awards.

Facts of the case

The claims were brought by 3,540 retail sales consultants working in Next stores across the country. The claimants, who were predominantly women, argued that they were paid less than warehouse operatives, who were predominantly male. A tribunal found their work to be of equal value to warehouse operatives under the equal pay provisions of the Equality Act 2010.

Next relied on the statutory “material factor” defence, arguing that differences in pay arose from factors unrelated to sex. These included market rates, the need to recruit and retain sufficient warehouse labour to support and maintain its 24/7 warehouse operations, incentives for productivity and attendance, and broader business performance considerations.

At first instance, the tribunal found that Next had failed to establish its material factor defence in relation to basic pay and a number of other benefits (see our previous case summary). Although the tribunal accepted that warehouse recruitment and retention presented different challenges from retail recruitment, it concluded that Next had not shown that the pay disparity was justified. The claimants did, however, fail with their direct sex discrimination claim.

Next appealed against the decision. The claimants also appealed against the tribunal’s decision, arguing that it should have upheld their direct sex discrimination claim.

EAT decision

The EAT allowed Next’s appeal and concluded that the tribunal had made a number of legal errors when assessing Next’s material factor defence.

It accepted that the claimants had established a “particular disadvantage” for the purposes of the Equality Act 2010 through statistical evidence comparing the predominantly female retail workforce with the predominantly male warehouse workforce. However, it found that the tribunal had been wrong to conclude that Next was not pursuing a legitimate aim when paying its warehouse staff more than retail staff.

According to the EAT, the tribunal should have focused on the reasons why warehouse employees were paid more, rather than on why retail employees were not paid more. Next was able to demonstrate that higher warehouse pay reflected genuine recruitment and retention pressures, as well as labour market conditions that did not apply to its retail workforce. In particular, it faced greater difficulty recruiting and retaining warehouse operatives than retail sales consultants, creating a commercial need to offer enhanced rates of pay. The EAT held that these factors formed part of a legitimate business aim and that the tribunal had erred in its analysis of the issue.

The EAT also held that the tribunal had approached the proportionality exercise incorrectly. Rather than focusing on whether Next could have afforded to increase retail employees’ pay to match warehouse rates, the relevant question was whether there were legitimate and proportionate reasons for paying warehouse operatives more. The EAT concluded that the recruitment, retention and labour market pressures affecting warehouse roles provided this justification and should have been the primary focus of the tribunal’s analysis.

Importantly, the EAT reaffirmed that employers may rely on recruitment and retention challenges as part of a material factor defence, provided there is evidence that those factors genuinely influenced pay-setting decisions and did not involve less favourable treatment because of sex.

The EAT also dismissed the claimants’ cross-appeal, finding that the tribunal had been entitled to conclude that there was no direct sex discrimination arising from Next’s pay structure. It rejected the claimants’ argument that an employer’s reliance on recruitment, retention and job market considerations automatically amounts to direct discrimination simply because those considerations may reflect historical gender-based disparities.

The Birketts view

This is a significant decision for employers facing equal pay claims, particularly those operating across certain sectors or functions with distinct labour market pressures.

The EAT’s judgment provides welcome confirmation that, where supported by evidence, employers are not required to equalise pay simply because they can afford to do so. Instead, the focus remains on whether there are legitimate business reasons for the higher rate of pay enjoyed by the comparator group.

However, this decision should not be viewed as a licence to rely on broad assertions about recruitment and retention challenges. Employers should continue to carefully review their pay structures, ensure that the reasons underpinning pay differentials are properly documented, and keep those decisions under regular review as the labour market evolves. Maintaining a clear audit trail of the commercial, operational and job market considerations that inform pay-setting decisions will be important evidence should those arrangements be challenged in the future.