Equal Pay Audits
Insight
Cause of Differentials
You now need to look at any gaps which are more than 5% and think about the cause. The 5% rule is recommended by the EHRC and is based on confidence intervals, where when a sample is 100%, 5% represents the margin of error. Gaps under 5% should be noted and monitored.
Gaps which exceed 5% need to be investigated and employers should ask themselves if the gap could be related to the sex, or other protected characteristic, of the comparator. It will probably be necessary to gather more data to investigate the gaps, such as looking at length of service, or retrieving evidence which shows the rationale for the salary at appointment.
In terms of compliance, this is not about “fair pay”, which is paying people the same salary for doing the same job. It may seem “unfair” that people doing the same job sometimes get paid different salaries. The “unfairness” is completely distinct from the fact there is nothing unlawful about paying people differently provided that the reason for the pay differential is not based on sex or other protected characteristic. However if you can’t show a genuine or material reason for the pay differential then it could be implied that the differential is related to sex, as in the recent Ahmed v. BBC equal pay case.
The burden for the employer is to demonstrate that the explanation for the variation in pay is not tainted with sex. The employer must show a genuine or material factor that:
Is not related to sex
Is the real reason for the pay differential
Caused the difference in pay
Is material: that is, relevant and significant, and
Is objectively justified if it puts women at a particular disadvantage compared to men.
Common causes of pay variations include:
Pay Protection
Pay protection happens when employers protect the pay of employees whose jobs are downgraded. This may have happened as a result of a pay review, or the implementation of a new job evaluation scheme. It is commonly referred to as “red circling”, where salaries are frozen for a period of time to assist long term adaptation, with the aim that the salary of others will eventually catch up with the red circled salaries.
Pay protection can be a valid reason to justify gaps but it can be risky when the group that predominantly benefits is male and the protection period is length or indefinite as this could be seen as perpetuation of discrimination. Courts will examine very closely any pay arrangement in place by an employer, regardless of good intentions, that has the effect of continuing past discrimination in pay, even on a short-term basis.
Length of service
Following the case of Cadman v Health and Safety Executive [2004], it is generally accepted that paying someone more due to length of service is objectively justifiable provided that there is no evidence of serious doubts as to the appropriateness of rewarding experience based on length of service.
Market Forces
Gaps can be justified by market forces, where an employer can show that it was necessary to pay a premium for a role which could be related to skills shortages or it may be the case that someone is relocating from a higher paid job and/or area and expects to be compensated based on and existing package. These gaps can only by justified where there is solid evidence of what the market rate actually is for the higher paid job. It is not enough for an employer to say “We really wanted him and he negotiated hard”. It will not be adequate to say “Good business analysts are hard to get so we paid more”. You have to be able to provided evidence of the external market, and the supplement should be added on to the base salary and reviewed regularly to demonstrate that the market force argument remains valid.
Managerial Discretion
New appointments are often advertised with a salary bracket and managers have discretion in deciding where the successful candidate will be placed within the range. There may be very good reasons which justify where the salary is pitched, but caution must be taken as the greater the degree of discretion, the greater the risk of discrepancies. Managerial discretion can also perpetuate discrimination. To reduce risk, consider implementing a policy about starting salaries, and ensuring that there are control mechanisms over the use of discretion.