What happened in the case of Graysons?

In 2007, catering assistants raised equal pay claims against Liverpool City Council (the Council). The employees TUPE transferred to Hopkinson Catering and then to Duchy Catering in 2007. The liability for the equal pay claims also transferred to Duchy under TUPE. Duchy went into administration in January 2009 and the administrators completed a sale of its assets to Graysons Restaurants on the same day. This triggered a third TUPE transfer to Graysons. In 2016, the Employment Tribunal held that there had been a breach of equal pay legislation and made an order for compensation. That gave rise to the question of who was responsible for paying the sums due to the employees.

Who pays employee debts in an insolvency situation?

In an insolvency situation, figuring out what debts are owed to employees, how those debts rank, and who is responsible for paying them is complex. The answer will depend on the type of debt and the period it relates to. Some debts are guaranteed by the NIF up to a certain limit, while others fall to be paid by the insolvent company. Where there has been a TUPE transfer following an insolvency, certain debts pass to the new employer, but not all. The extent to which debts transfer is dictated by whether the insolvency proceedings are classed as “terminal” or “non-terminal”. An administration is normally classed as “non-terminal” and this means that most debts transfer to the new employer save for those guaranteed by the Secretary of State.

The key question for the Court of Appeal in Graysons was whether the equal pay claims should be classed as “arrears of pay”. That classification matters because the Secretary of State guarantees payment of “arrears of pay” out of the NIF up to specified limits, and only sums in excess of the cap would transfer to the new employer, Graysons. However, if the sums were classed as damages payments for discrimination (as argued by the Secretary of State), they would not be covered by the NIF at all but would instead transfer to Graysons in full.

The Secretary of State argued that it should not be responsible for the equal pay claims because:

1. the Employment Rights Act 1996 (ERA) definition of “arrears of pay” does not expressly refer to equal pay claims, and an equal pay claim is “conceptually, qualitatively and practically different from pay claims”;
2. even if the claims were arrears of pay, they had not been determined prior to the date of insolvency of the employer and therefore the obligation for the Secretary of State to pay did not arise; and
3. the equal pay claims brought by the employees sought “compensation in respect of a period of back pay” but did not specify whether they were seeking compensation by way of damages or arrears of pay: there was an argument that the claims were being sought as damages thereby excluding them from the sums covered by the NIF.

How does an equal pay claim work?

The Court of Appeal confirmed a principle that is commonly understood in employment law: that equal pay claims are essentially breach of contract claims. Equal pay legislation works by adding an invisible “equality clause” into the employment contract, which in this case created a contractual right to the higher rate of pay, and is treated as always having existed. Any failure to pay in accordance with that (invisible) contractual term is a failure to pay wages due, just as paying someone £8 an hour when their contract included an express hourly rate of £10 would be a breach of contract.

Equal pay claims are also unique in how they interact with TUPE. Employees can raise an equal pay claim years after a TUPE transfer, while still comparing themselves to a person they worked alongside prior to a TUPE transfer. However, if they wish to claim arrears in respect of the pre-TUPE period, the time limit for doing so starts to run from the date of the TUPE transfer. Whether the claim is raised in respect of the pre or post TUPE period, it will be the new employer who is liable (save in respect of sums guaranteed by the Secretary of State).

What did the Court of Appeal say in the case of Graysons?

The Court of Appeal found that equal pay claims were “arrears of pay” under ERA. It did not matter that the equal pay judgment had been reached by the Employment Tribunal years after the insolvency. Accordingly, the Secretary of State was liable to make payment out of the NIF up to the specified limits, with Graysons being liable for any balance due.

It was accepted that this may present practical difficulties for the Secretary of State. It is not uncommon for a decade to pass before equal pay claims are determined so it could be years before the Secretary of State (and the relevant employer) knows that a debt is due. However, the judgment found that the interest of the employees and the purpose of the equal pay legislation had to prevail. The Court rejected the argument that the claims could be seen as a claim for damages not arrears of pay just because the nature of the compensation claim was not specified in the claim.

What are the practical implications of the judgment?

The above case highlights the significance of equal pay claims being treated as a breach of contract claim as opposed to damages, and the impact this can have in an insolvency scenario. The classification of these employee liabilities as “arrears of wages” means that they can fall within the capped sums guaranteed by the NIF.

When assessing the liability for employee debts in an insolvency situation there are a number of variables, and it is not the case that all employee claims would fall to be dealt with in the manner outlined in this case. The financial consequences for the Secretary of State in respect of insolvent employers, where equal pay claims exist, could be significant. The effect of Graysons on insolvency sales will also require consideration as an ability to recover what may be material claims from the NIF may affect the perception of liabilities being assumed and the risk profile on employee claims.

Allana Sweeney is a senior associate and Elouisa Crichton is an associate at Shepherd and Wedderburn