Service-Related Pay and Benefits
Length of service is used by many employers as a criterion for increased benefits, such as additional holiday or paid sick leave entitlements. To a lesser extent, service-related pay scales are still operated by a number of employers. The lawful use of these traditional practices has recently been jeopardised in certain circumstances by both legislation and European case law.
Potential indirect age discrimination
During the Government’s consultation on the new age discrimination legislation some respondents argued that the use of service-related pay or benefits may amount to indirect age discrimination because some age groups are less likely to have the necessary length of service than others. Normally, employers would be required to objectively justify the use of such criteria on each occasion if challenged by an employee. However, because service-related criteria are such a common feature of employment relationships, the Government aimed to ensure their continuation by providing certain exemptions.
The DTI argued that the continued use of service-related benefits is justified by the legitimate aim of employment planning, in the sense of being able to attract, retain and reward experienced staff. Such benefits help maintain workforce stability by rewarding loyalty as distinct from performance and by responding to employees’ reasonable expectation that their salary should not remain static.
The Age Regulations do not therefore prohibit employers from continuing to award benefits to employees using the criterion of length of service. The Age Regulations contain a blanket exemption for service-related criteria of five years or less. However, if the length of service criteria exceed five years, it must reasonably appear to the employer that the use of length of service fulfils a business need of the undertaking (for example, by encouraging the loyalty or motivation, or rewarding the experience, of some or all of the workers). ACAS have stated that in order to take advantage of this provision, employers need some evidence on which to base their conclusions, for example, information gathered from monitoring, staff attitude surveys or focus groups. Although what, exactly, may be required to satisfy a Tribunal in this regard remains to be seen.
The exemption for service-related benefits contained in the Age Regulations was strongly criticized by the Equal Opportunities Commission (EOC) who regarded the burden of proof required to validate the indirect age discrimination caused by service-related benefits as being too low in comparison to the normal requirements of discrimination law for full objective justification. The EOC were also concerned that, even if service-related criteria may not amount to indirect age discrimination they may still amount to indirect sex discrimination and be challenged under the equal pay legislation.
Service-related benefits have already been considered by the European Court of Justice (ECJ) in the context of sex discrimination and equal pay. This is significant because of the possibility that Tribunals may endeavour to interpret the Age Regulations in a similar manner to that established by case law from these other strands of discrimination.
Potential indirect sex discrimination
In 1989 the ECJ considered an equal pay case, Danfoss, in which an employer was alleged to have indirectly discriminated against women by awarding pay based (in part) on length of service. The ECJ ruled that because length of service goes hand in hand with experience and since experience generally enables the employee to perform his duties better, the employer does not have to provide special justification for recourse to the criterion of length of service.
This principle was subsequently followed by the Employment Appeal Tribunal (EAT) in 2002 in another equal pay case, Health & Safety Executive –v- Cadman. Mrs Cadman was a female HSE Principal Inspector who claimed equal pay with four male comparators, who were also Principal Inspectors. It was accepted that the pay differentials that existed between them came about from a previous pay system, in which the male comparators had moved further up the pay band because of their longer service; and that using the criterion of length of service in this way had a disproportionate impact on women. The issue was whether the HSE had to objectively justify the use of length of service in these circumstances.
The EAT, overruling the original Tribunal decision, said no. By virtue of Danfoss, the HSE was entitled to reward seniority without needing to show its actual importance for the performance of the specific duties entrusted to the employee. Mrs Cadman has appealed the EAT decision to the Court of Appeal.
In 2004, the Court of Appeal referred the Cadman equal pay case to the ECJ for a definitive ruling on whether an employer is required to objectively justify the use of service-related pay. In October 2006, the ECJ Judgment on the Cadman case was issued. Briefly, the ECJ reaffirmed that the Danfoss principle remained good law but clarified certain limits on its application.
Rewarding experience which enables a worker to perform his duties better is a legitimate objective of pay policy. As a general rule, use of a length of service criterion is appropriate to attain that objective. Length of service goes hand in hand with experience, and experience generally enables the worker to perform his duties better. The employer is therefore free to reward length of service without having to establish the importance it has in the performance of specific tasks entrusted to the employee.
However, the ECJ also noted that the Danfoss case did not exclude the possibility that there may be some situations in which use of the criterion of length of service must be objectively justified by the employer in detail. Namely, where the worker provides evidence capable of giving rise to serious doubts as to whether use of the criterion of length of service is, in the circumstances, appropriate to attain the abovementioned objective.
In summary, the ECJ ruled that where the criterion of length of service as a determinant of pay leads to disparities in pay, in respect of equal work or work of equal value, between the men and women, the employer does not have to establish specifically that recourse to that criterion is justified as regards a particular job, unless the worker provides evidence capable of raising serious doubts in that regard.
Mrs Cadman’s case has now been returned to the Court of Appeal for a decision as to whether she has produced sufficient evidence to establish serious doubts that it was appropriate to reward length of service in the case of her particular job.
What should employers do if they operate service-related pay/benefits?
The EOC’s view:
Commenting on the Cadman ruling, the EOC have stated that “long pay scales in jobs which can be effectively mastered within a few months/years of starting, such as unskilled and semi-skilled work, will be open to challenge and will have to be justified in detail. Also, employees will now be able to challenge the use of very long pay scales in more complex jobs where the scale goes beyond the point where the tasks are effectively mastered.” The EOC are advising employers to err on the side of caution and ensure that length of service is only used where it can be objectively justified.
Peninsula comment
While employers should be relieved that the ECJ has confirmed that the initial burden of providing some evidence in service-related equal pay cases rests with the employee, following the Cadman judgment the continued use of service-related pay and conditions should be periodically reviewed on a case-by-case basis.
The length of service exemption contained in the Age Regulations has yet to be tested at Tribunal in respect of potential indirect age discrimination and, until the Cadman equal pay case returns to the Court of Appeal, it is uncertain what evidence an employee will need to produce to establish serious doubts as to the appropriateness of service-related pay for equal pay purposes (and it may not become clear even then).
Given the current uncertainty, employers who provide pay/benefits based on length of service, whether of more or less than 5 years, are normally best advised to keep these terms under review for the time being pending case law clarification of Cadman by the Court of Appeal or a specific challenge from an employee, rather than rushing into potentially expensive negotiation for new terms with their staff as a result of either the ECJ decision in Cadman or the Age Regulations.
There would seem to be little point in amending service related pay/benefits now to bring them within the 5 year blanket exemption contained in the Age Regulations only to find that they may still be subject to a ‘Cadman’ challenge under equal pay/sex discrimination legislation. Equally, employers who are confident that they can show that any service-related terms exceeding 5 years fulfil a business need of the undertaking for the purposes of the Age Regulations, will not necessarily be safe from equal pay claims.
What is clear is that the use of service-related pay/benefits must now be considered both in the light of potential challenge under the Age Regulations and under the equal pay legislation. In light of this, it goes without saying that employers should normally be advised against starting to offer new service-related terms or expanding on any such existing terms.
Unfortunately, it does not appear likely that there will be any form of ‘standard’ answer to queries on existing service related pay/benefits. Each employer’s terms, circumstances and job roles will need to be considered on an individual basis.
In summary, the use of service-related pay and benefits now appears to pose a potential risk. However, the current case law position is too uncertain to generally justify advising the expense of a change in terms at this stage. In addition, it should be noted that equal pay claims are comparatively rare. Usually, it will be more appropriate to keep such terms under review pending further case law developments, although in some cases it may be worth considering setting some money aside as a contingency fund.
Naturally, we will keep clients informed of any developments in this regard via future issues of The Bottom Line.