9. Market forces and pay

Equal pay in practice checklist 9

What do we mean by 'market forces'?

In most organisations market forces play a part in setting rates of pay. An organisation has to set its pay structure(s) at competitive levels at which it can recruit and retain employees to its main areas of activity.

An employer may need to pay one group of workers more than another, even though their work is of equal value, because the 'going rate' for the job is higher. Other examples of market forces include: geographical distinctions, such as London weighting; a skills shortage in one job as compared to another.

While in some circumstances market forces can provide a defence to an equal pay claim, but the scope for using market forces as a basis for explaining the difference in pay between, for example, a man and a woman doing equal work is limited. An employer cannot rely on the fact that the market rate suggests that certain jobs usually done by women are paid at less than jobs usually done by men, because that market rate may itself be based on discriminatory assumptions. What an employer has to show is not that ‘that's what everybody else pays’ but rather ‘that's what I had to pay to get the person I needed to fill the vacancy I had’.

Moreover, to provide a complete defence against an equal pay claim, market forces must account for all the difference in pay, and not just a part of it. If not, the courts will determine what proportion of the difference is accounted for by market factors.

How do you find out if there is a problem?

As with any aspect of your pay system, you need to look at the impact of market forces on employees who are doing equal work in the protected groups. If you find that there appears to be a differential impact, then you need to examine the reasons for the difference and ensure you have an objective justification unrelated to factors like sex, ethnicity, disability, and contractual status.

You will need to be able to identify the market forces that you use in setting rates of pay. For a market factor to act as defence to an equal pay claim you must be able to show that the factor was genuinely taken into account when setting the rates of pay and that you are not simply putting it forward as a post hoc justification for a difference in pay. Any market factor must be genuine (do you still have difficulty in recruiting to a particular job, or is this no longer the case?) and material (does the job for which you pay a premium for specialist skills really require those skills?).

Some examples

  • In Enderby v Frenchay Health Authority and the Secretary of State for Health 1993 IRLR 591 ECJ, the European Court of Justice accepted that part of the difference in pay between speech therapists and pharmacists working in the health service was attributable to market pressures which had led the Department to agree a higher pay increase for pharmacists than for other professional groups.
  • In North Yorkshire County Council v Ratcliffe and others 1995 ICR 833, the tribunal accepted that the market rate for school meals staff, who were almost exclusively female, had been influenced by preconceptions about the value of traditional women’s work.

What lies behind the differences?

The answers to the following questions can help you find out what lies behind any differences in pay:

  • Are differences in pay attributable to past market pressures?
  • Do the market factors remain, that is, do there continue to be difficulties in recruiting to the jobs in question at the grade rate? And can you evidence the fact that you are having difficulties in recruiting?
  • Are you able to distinguish between the pay attributable to the value of the job and that attributable to market pressures?
  • Are the market pressures related to the gender or other characteristics of the job holders such as disability or ethnicity?

Action - what you can do to put things right

If you are satisfied that you need to pay more to recruit to a particular role, the additional payment will be most easily defended if:

  • You pay the additional amount as a separate market supplement, rather than consolidating it into basic pay.
  • You record the evidence that led you to pay the market supplement.
  • You review the evidence and the payment regularly to check whether payment is still justified.
  • If it is no longer justified, you do not pay the market supplement to new recruits to the role.

Make sure that decisions on pay are properly documented.

It makes good business sense for employees to understand why they are paid as they are. It is also good risk management, because if you should ever be challenged in employment tribunal documentation will be essential. Properly documented decisions will enable you to explain your reasons. Where market forces are concerned this means you will need not only records of the payments but also of the market pressures (e.g. failure to recruit) that led you to set the particular rate of pay.

Transparency is a key feature of tackling equal pay problems.

A transparent pay system is one where employees understand not only their rate of pay but also the components of their individual pay packets. The similarity between two jobs may not always be apparent to an employer. A transparent pay system avoids uncertainty and perceptions of unfairness and reduces the possibility of individual claims.

About the Equal pay in practice checklists.

Whilst every effort has been made to ensure that the advice given in this note is accurate, only the courts or tribunals can give authoritative interpretations of the law.

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