Outsourcing the problem: equal pay and local authority trading companies

Doug Mullen looks at the complex issues around equal pay that arise with local authority trading companies.

Twenty-five years after an agreement between local authorities and trade unions to tackle equal pay, and fifteen years after the deadline agreed upon for local authorities to review and address pay inequalities through pay and grading evaluations, equal pay is well and truly back in the news.

The most high-profile story has been Birmingham City Council’s issuing of a section 114 notice over an equal pay liability estimated at £760m but this is far from an isolated incident:

• A recent Employment Tribunal decision has found that Fife Council’s job evaluation scheme was flawed;
• Councils in Cumbria, Dundee, Sheffield and Coventry are facing fresh claims;
• The GMB union says that they are collecting evidence in 20 more local authorities with claims likely to be launched in at least six more this year; and
• 1,000 cases have been launched against Sunderland Care & Support, a wholly owned local authority trading company of Sunderland City Council.

The complaint against Sunderland Care & Support is that as well as paying £5,000 a year less than men in equivalent roles, workers are not given access to the Tyne & Wear Pension Fund, which is part of the Local Government Pension Scheme, and only receive the minimum contributions required by auto-enrolment laws.

The situation in Sunderland highlights an important principle in equal pay law which doesn’t get much attention, namely that workers in one employer can often compare themselves to workers in an ’associated employer’. This means that a female worker at one associated employer can compare themselves with a male worker at another associated employer – and vice versa.

Associated employers are defined under the Equality Act 2010 as those where there are two employers and ‘(a) one is a company of which the other (directly or indirectly) has control, or (b) both are companies of which a third person (directly or indirectly) has control’. It’s worth noting that ’company’ has been interpreted broadly in the past with one employment tribunal decision ruling in a case involving Glasgow City Council that ’company’ also covered limited liability partnerships.

Local authorities have increasingly considered local authority trading companies (LATC) as an option when looking at changing their service delivery models. Where outsourcing has fallen out of favour, a local authority may well consider that an LATC addresses some of the key issues with outsourcing, offering increased control and the opportunity for any profit to come back into the local authority.

When outsourcing to an LATC, or bringing an outsourced service into an LATC, local authorities will need to carefully consider the equal pay implications of doing so, as the need to comply with equal pay obligations may well have an impact on the business case.

Our experience is that local authorities, and sometimes their advisers, assume that they will always be able to adopt a different set of terms in the LATC to the terms that apply to the local authority. Indeed, this can sometimes be one of the drivers for using the LATC. Whilst it may sometimes be permissible to have different terms in the LATC and the local authority, this will need careful consideration and justification.

Some local authorities may find themselves in a situation where they already have different pay and conditions in the LATC and the local authority. As the situation with Birmingham demonstrates, grasping the nettle quickly and dealing with any equal pay issues effectively is likely to be less painful and costly than simply adopting the ostrich position and hoping that the issue goes away.

It’s also worth noting that where there has been a difference in terms between the LATC and local authority, but the service has now been outsourced to the private sector, local authorities shouldn’t assume that they are now off the hook. The effect of equal pay laws is to imply an equality clause into all contracts of employment so that if there has been a breach of equal pay laws, the lower-paid staff member’s contract will be uprated to match the corresponding level of pay/benefits in the comparator’s contract. This is a permanent change and will be the case even if neither the employer nor the employee has realised it. This is a term that transfers under TUPE, so it may be that the private sector contractor is responsible for higher pay – and may be entitled to claim the cost of this under indemnities negotiated with the local authority in the outsourcing contract.

Doug Mullen is a Partner at Anthony Collins.