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City bonus culture: equal pay obligations: sex-bias claims

No employment tribunal should be seen to condone a City bonus culture involving secrecy and lack of transparency as giving employers a reason for avoiding equal pay obligations.

The Employment Appeal Tribunal so stated in allowing the appeal, and remitting sex discrimination and unequal pay complaints, of Louise Barton against the decision of a London Central employment tribunal promulgated on September 30, 2002, which had found:

(i) the employer had established the material factor defence over variation in salary and long-term incentive plans between the applicant and a male comparator;

(ii) the difference in treatment as to grant of share options was due to a material factor which was not the difference in sex under the Equal Pay Act 1970, or, if the options were not regulated by the contract of employment, did not amount to less favourable treatment on the ground of sex;

(iii) the employer did not treat the applicant less favourably on the ground of sex in awarding bonuses.

The applicant, who was employed in the financial sector in the City, became aware of apparent discrepancies in salary and discretionary bonuses between herself and certain male employees in the same institution, including an apparent discrepancy, in the bonuses awarded in one year, of £700,000 between her own case and that of a male colleague.

Section 1 of the 1970 Act provides: “(3) An equality clause shall not operate in relation to a variation between the woman’s contract and the man’s contract if the employer proves that the variation is genuinely due to a material factor which is not the difference of sex …”

Section 63A of the Sex Discrimination Act 1975, as inserted by the Sex Discrimination (Indirect Discrimination and Burden of Proof) Regulations (SI 2001 No 2660) provides:

“(1) This section applies to any complaint presented under section 63 to an employment tribunal.

“(2) Where, on the hearing of the complaint, the complainant proves facts from which the tribunal could, apart from this section, conclude in the absence of an adequate explanation that the respondent – (a) has committed an act of discrimination against the complainant which … the tribunal shall uphold the complaint unless the respondent proves that he did not commit or, as the case may be, is not to be treated as having committed, that act.”

Section 56A of the 1975 Act, as inserted by section 79(4) of the Race Relations Act 1976 provides for the Equal Opportunities Commission to issue codes of practice for certain purposes including the elimination of discrimination in the field of employment and the promotion of equality of opportunity in that field between men and women.

Subsection (10) provides: “A failure on the part of any person to observe any provision of a code of practice shall not of itself render him liable to any proceedings; but in any proceedings under this Act [or the 1970 Act] before an [employment tribunal] any code of practice issued under this section shall be admissible in evidence, and if any provision of such a code appears to the tribunal to be relevant to any question arising in the proceedings it shall be taken into account in determining that question”.

The Equal Opportunities Commission Code of Practice on Equal Pay, issued and brought into force on March 26, 1997, by SI 1997 No 131 and to be found at page S.1501 ff of Harvey on Industrial Relations and Employment Law (Issue 160) states under the heading “Transparency”:

“(19) It is important that the pay system is clear and easy to understand; this has become known as transparency. A transparent pay system is one where employees understand not only their rate of pay but also the components of their individual pay packets and how each component contributes to total earnings in any pay period. Transparency is an advantage to the employer as it will avoid uncertainty and perceptions of unfairness and reduce the possibility of individual claims.

“(20) The European Court of Justice has held that where the organisation concerned applies a system of pay which is wholly lacking in transparency and which appears to operate to the substantial disadvantage of one sex, then the onus is on the employer to show that the pay differential is not in fact discriminatory. An employer should therefore ensure that any elements of a pay system which could contribute to pay differences between employees are readily understood and free of sex bias.”

The grounds of appeal included:

(i) section 63A of the 1975 Act required the issues of burden of proof and sex discrimination to be revisited;

(ii) the tribunal had not adopted the proper approach to a failure by the employer to comply with the questionnaire procedure under section 74 of the 1975 Act and/or the relevant code of practice;

(iii) the tribunal should not have condoned an opaque procedure for bonus setting, involving lack of transparency and objectivity.

Mr Robin Allen, QC and Mr David Reade for Ms Barton; Mr Roy Lemon for the employer.

JUDGE ANSELL, giving the reserved judgment of the court, said that, as to the sex discrimination claim, the court had reviewed in detail the relevant domestic and community law, including Council Directive 97/80/EC of December 15, 1997 (OJ 1998 Ll4/6), the burden of proof Directive, which led to the introduction of section 63A of the 1975 Act, and concluded that fresh guidelines were required, going beyond those in King v Great Britain China Centre ([1992] ICR 516), approved in Glasgow City Council v Zafar ([1998] ICR 120), particularly in light of the words “could …. Conclude in the absence of an adequate explanation” in section 63A.

1. Pursuant to section 63A of the 1975 Act it was for the applicant who complained of sex discrimination to prove on the balance of probabilities facts from which the tribunal could conclude, in the absence of an adequate explanation, that the respondent had committed an act of discrimination against the applicant which was unlawful by virtue of Part 2, or which by virtue of section 41 or 42 of the 1975 Act was to be treated as having been committed against the applicant. These were referred to below as “such facts”.

2. If the applicant did not prove such facts he would fail.

3. It was important to bear in mind in deciding whether the applicant had proved such facts that it was unusual to find direct evidence of sex discrimination. Few employers would be prepared to admit such discrimination, even to themselves. In some case the discrimination would not be an intention but merely based on the assumption that he or she would not have fitted in.

4. In deciding whether the applicant had proved such facts, it was important to remember that the outcome at that stage of the analysis by the tribunal would therefore usually depend on what inferences it was proper to draw from the primary facts found by the tribunal.

5. It was important to note that the word used was “could”. At that stage, the tribunal did not have to reach a definitive determination that such facts would lead it to the conclusion that there was an act of unlawful discrimination. At that stage a tribunal was looking at the primary facts proved by the applicant to see what inferences of secondary fact could be drawn from them.

6. Those inferences could include, in appropriate cases, any inferences that it just and equitable to draw in accordance with section 74(2)(b) of the 1975 Act from an evasive or equivocal reply to a questionnaire or any other questions that fell within section 74(2) of that Act.

7. Likewise, the tribunal had to decide whether any provision of any relevant code of practice was relevant and, if so, take it into account in determining such facts pursuant to section 56A(10) of the 1975 Act. That meant that inferences might also drawn from any failure to comply with any relevant code of practice.

8. Where the applicant had proved facts from which inferences could be drawn that the respondent had treated the applicant less favourably on the ground of sex, then the burden of proof moved to the respondent.

9. It was then for the respondent to prove that he did not commit or, as the case might be, was not to be treated as having committed that act.

10. To discharge that burden it was necessary for the respondent to prove, on the balance of probabilities, that the treatment was in no sense whatsoever on the ground of sex, since a finding of no discrimination was compatible with the burden of proof Directive.

11. That required a tribunal to assess not merely whether the respondent had proved an explanation for the facts from which such inferences could be drawn, but, further, that it was adequate to discharge the burden of proof on the balance of probabilities that sex was not any part of the reasons for the treatment in question.

12. Since the facts necessary to prove an explanation would normally be in the possession of the respondent, a tribunal would normally expect cogent evidence to discharge that burden of proof. In particular, the tribunal would need to examine carefully explanations for failure to deal with the questionnaire procedure and/or code of practice.

The tribunal in the instant case had not dealt with the matter in the required two-stage manner, so that the sex discrimination claim had to be remitted.

Turning to the equal pay claim: there was a requirement of objective justification to establish the material factor defence.

The approach was contained with Brunnhofe v Bank der Osterreichischem Postparkasse AG (Case No. 381/99) ([2001] ECR 4961) and Bilka-Kaufhause GmbH v Webers von Hartz (Case No 170/84) ([1986] ECR 1607: [1987] ICR 110).

The employer needed to establish seven points, including necessity and proportionality.

Further, in looking to whether it was appropriate to draw adverse inferences under section 74(2) it could not be said that where section 74 of the 1975 Act referred to “this Act” that should be taken way of incorporation to include the 1970 Act, amended and re-enacted, and set out in one of the schedules to the 1975 Act, but nevertheless it was right that under normal common law rules of evidence inferences against the employer, which could be drawn under section 74, could also be used against the employer in 1970 Act proceedings, particularly if the employer failed to deal with questions in relation to aspects of contractual pay.

The equal pay claim was to be remitted since the tribunal, in looking to the section 1(3) defence, had not adequately dealt with the seven points, in particular the employer’s failure to deal with the questionnaire procedure, and the lack of transparency.

Finally, in looking more generally at transparency and bonuses, it was noted that the tribunal, in reliance upon its industrial knowledge, had found, apparently condoning the fact, that the City bonus culture was one of secrecy and lack of transparency; but it was to be made clear now that no tribunal should be seem to condone a City bonus culture involving secrecy and/or lack of transparency because of the potentially large amounts involved, as a reason for avoiding equal pay obligations.

“The Times” April 2003