The Court of Appeal has held in Graysons Restaurants Ltd v Jones and Secretary of State for Business, Energy and Industrial Strategy that potential compensation awards arising from equal pay claims can constitute “arrears of pay” under the law. As such, they form debts to be paid from the National Insurance Fund in the event of an insolvency, whether or not the claims still have to be determined.

Basic facts

In 2007, a group of female school cooks and kitchen assistants commenced equal pay claims against Liverpool City Council.  Their employment was subsequently outsourced to Duchy Catering which went into administration in 2009 and Graysons took over the women’s contracts under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) 2006.

It was accepted by all the parties that the claimants were carrying out work of equal value to their male comparators. Before the tribunal could consider the “material factor” defence raised by the company, however, a question arose as to who was ultimately liable for the claims in the event that they succeeded. Although liability would usually pass to Graysons, the company argued that because Duchy Catering had become insolvent, the employees could apply to the Secretary of State for payment out of the National Insurance Fund.

Relevant law

Section 182 of the Employment Rights Act 1996 states that where an employer has become insolvent, an employee’s employment has terminated, and the employee was entitled to be paid a debt by the employer at the date of the insolvency, the Secretary of State shall make payment of the debt out of the National Insurance Fund. 

Section 184 states that “debt” includes arrears of pay (limited to a maximum of eight weeks).

Tribunal and EAT decisions

The tribunal held that until an actual award had been made in relation to an equal pay claim, no debt or payment was due, meaning the full potential liability for the claims transferred to Graysons.  If that was wrong, the tribunal held that any liability in excess of the eight-week sum (guaranteed by the statutory scheme) would transfer to Graysons.

Overturning that decision, the EAT held that equal pay arrears can constitute “arrears of pay” for the purposes of section 184, and therefore a “debt” within section 182.  As such, the Secretary of State was potentially liable to pay them up to a maximum of eight weeks and a maximum weekly sum. It also held that remainder of the claims transferred to Graysons.

Although Graysons had settled with the claimants by the time the case came to the Court of Appeal, the Secretary of State’s appeal was heard on the basis that it raised an important point that had not previously been decided.

Decision of Court of Appeal

Upholding the decision of the EAT the Court held that the women’s claim for equal pay could constitute arrears of pay because the mechanism for ensuring equal pay operated through their contracts of employment. Although a claim for equal pay was not identical to that of an ordinary claim for arrears, they were very similar.

As these claims were for arrears of pay, each of them was therefore also a debt to which the 1996 Act applied. Accordingly the Secretary of State was required to pay each claimant the amount to which she was entitled in respect of that debt, subject to the eight-week limit.

Whilst accepting that this outcome might well pose practical difficulties for the Secretary of State, the Court of Appeal held they could not “prevail against the obvious meaning of the statute”.