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Blog: Top 10 pitfalls in Market Rate equal pay justifications

I’m sure you will be aware of the ‘market rate’ factor which can justify a pay differential between those of the opposite sex whose roles are (or are claimed to be) comparable under equal pay legislation.

It’s usually the obvious defence that employers reach for very often and one that they can develop a very strong attachment to. It can, where applicable and where it justifies the whole of the pay gap, be a very effective defence against an equal pay claim.

Easy one to reach for

However, I feel that some employers reach instinctively for the market rate defence without even knowing whether it is in fact true in the particular comparison under discussion, just because they hate the upheaval and threat to their pay policy that equal pay comparisons can throw up.

It can sometimes feel like an employer is simply willing the market rate defence to apply even before they have assessed the evidence. And if you’ve ever read about unconscious bias, I’m sure you will be familiar with the unhelpful effect of ‘confirmation bias’, whereby we focus on evidence that justifies the outcome that we want to prove, and we tend to ignore or downplay in our own mind any evidence to the contrary.

While the market rate factor can, where proved, provide a complete defence against an equal pay claim, it is nowhere near as easy to prove in an Employment Tribunal as many employers may think – or indeed hope.

Market rate defence: top 10 pitfalls

Having come across quite a lot of wishful thinking from employers recently on this subject, I thought it worthwhile putting together a list of my top 10 pitfalls to be aware of and hopefully avoid…

  1. Inability to justify the whole of the pay gap between the comparators. Explaining 70% or 80% of the gap is not enough. You must justify the whole of the pay gap.
  2. Taking a generalised approach – e.g. seeking to show the market rates by department or area of responsibility. Justification has to be done on a role-by-role basis.
  3. Insufficient solid evidence of what the market rate for the higher-paid job actually is. Gut instinct, anecdotal evidence, a couple of candidates turning down a job offer, one email from a friendly recruitment agency – none of these are acceptable proof nowadays of what the market rate is for a particular role. You need to have obtained a proper amount of evidence, such as would persuade an Employment judge, so we’re talking multiple items of evidence from different sources. A professionally produced salary benchmarking exercise would usually be sufficient (but see tip 4).
  4. If you are indeed seeking to rely on professional advice (e.g. a commercial provider of salary benchmarking), have the provider’s systems and their staff been ‘equality proofed’, such as through training on equality and gender bias? You will be questioned about this in any Tribunal hearing.
  5. Lack of evidence to cover 6 years of back-pay claims. Remember that an equal pay claim can cover up to 6 years of back-pay. If you don’t keep sufficient evidence to justify the market rate for each year, it can be impossible to find it a few years later when you receive the complaint.
  6. Linked to the above point, lack of a regular review (at least annually) to check that the market rate still definitely applies and explains the whole of the pay gap. Market rates tend to rise and fall, and so what may have been a valid market rate defence in 2015 could evaporate as a defence by 2018. So I recommend, if you can possibly manage it, to pay reviewable market rate premiums/supplements rather than consolidating the extra amount into basic pay. It may require a slightly painful cultural change but you then retain the contractual power to alter the market rate premium. It doesn’t make good business sense to be stuck with paying more for a particular role if it’s no longer justified. You might be able to save as much – or more! – by giving yourself this flexibility than you might ‘lose’ through the cost of any increases in female pay that you need to make.
  7. He negotiated, she didn’t“ is not a valid defence. The fact that a female candidate may meekly accept the pay you offer for a role but that a male candidate insists on negotiating a higher salary for a comparable role upwards is not going to provide you with a defence, on its own. If you are fixed on hiring a candidate who demands more pay than his/her peers, even if it may then create an equal pay risk for you, then you need to look for ‘permitted’ reasons for the pay differential with comparable staff. Sometimes s/he will have more relevant experience or additional qualifications that can justify the higher pay. Sometimes you may be able to collect a decent amount of proof that the market rate for his/her particular role or skills is higher than the market rate for her role or the skills of others. There needs to be some clear, cogent reason that you can articulate as providing a reasonable case for the pay gap within the list of permitted justifications. Being a better negotiator is not on that list.
  8. It is rarely a good defence to justify the pay for the lower-paid role on the basis of market forces (e.g. “I paid her less because she was willing to work for less“) if the roles are comparable for equal pay purposes – even if it’s tempting because it saves you money. This is why I strongly recommend that employers stop asking job candidates what their current package is. It’s already illegal in many parts of the USA. It’s a very effective way of reducing your overall gender pay gap as well as avoiding equal pay risks.
  9. If the particular labour market for the type of role(s) you are looking at is itself tainted with sex discrimination then your market rate defence will not succeed. In other words, if the market rate differs between whether a man or woman is doing the (same) work. For example, if you are looking to hire a certain kind of executive (Finance, Sales, etc.) and you find that the male candidates tend to be on (or demand), say, £15k per annum more than the equivalent female candidates (without the males being able to offer you any more in the way of skills or experience than the females), you have a problem on your hands. It’s not a defence to say “but that’s what a male Director of X is worth“ or that “the men usually ask for more than the women for this sort of role so we can defend if as ‘market forces’.”
  10. If you use a Job Evaluation scheme but you don’t follow the salary it recommends for a particular role – perhaps because your view is that market rates dictate that a certain role needs to be paid more – you are on thin ice and need to act defensively to ensure that you have some solid and permissible reasons for the extra pay. It’s akin to trying to explain to an Employment Tribunal in an unfair dismissal claim why you didn’t follow your own disciplinary procedure: an uphill struggle with a significant risk of failure. This situation is (if I may be so brazen) definitely a situation where you should call in your friendly employment lawyer.

Market rate defences are going to be more and more talked about as the large number of additional equal pay claims come through the Employment Tribunals and into the appeal courts. I suspect that it’s an area where we will see certain changes and also greater clarity and definition. In the meantime, tread carefully.

If you’re keen to learn more about improving Pay Equality in your organisation and protecting yourself from legal risks, come to our seminar in October – ‘Pay Equality: a brave new world. Claims, risks strategies and solutions’.

Luke Menzies

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