Creative accounting arrangements discriminatory

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Peninsula Team, Peninsula Team

(Last updated )

The Employment Tribunal (ET), in the case of Mueller v Utopia Leisure Ltd, found that creative accounting arrangements that permitted a bespoke pay cut arrangement favouring male over female managers can be both discriminatory and contrary to the law on equal pay.

As a result of the significant impact of the restrictions resulting from the Covid pandemic on the hospitality industry in March 2020, the respondent was forced to consider ways to maintain its business, a group of five hotels, and retain its staff. One of the solutions that was decided upon was a pay cut, as opposed to job losses.

The respondent organised its business so that in-house spas were arranged as separate companies, with separate accounts. This was in order to manage the finances of the business in a particular way.

It was decided by the respondent that the pay cut would affect different groups of employees differently. Partly, this was to ensure no employee’s wages fell below minimum wage. Additionally, it was applied to avoid lower paid staff being disproportionately hit in relation to their basic living needs. Larger cuts were therefore reserved for higher paid staff, on the following basis.

  • 20% pay cut for those earning under £30,000.
  • 25% pay cut for those earning £84,999.
  • 33% pay cut for those earning £85,000 and above.

The claimant’s annual salary was £90,000. Two male members of staff also earned around £90,000 each. Before the ET, the respondent explained that the male managers earned more than £85,000 in total, but this was because they both held two roles: general hotel manager and spa manager. The respondent stated that they were paid separately for those roles. The male managers were only issued with one contract of employment by the respondent and there was no organisational documentation that reflected the dual aspect of their roles. Neither was there any documentation that detailed the separate work that was needed to manage the spa and to manage the hotel.

Applying the above percentage cut, the claimant, a woman, had her pay cut by 33%. As the above meant the male managers separate earnings were below £85,000 for each role, the respondent cut their pay by 25% for the general hotel manager role and 20% for the spa manager role. As a result, their pay cuts were less than that of the female manager. The decision to apply the pay cuts in this way was a conscious choice by the respondent, and not a result of an automatic accounting decision made in isolation of the other salary. These cuts were imposed without consultation and no timeline was given for the reinstatement of full pay.

The claimant brought a sex discrimination and an equal pay claim, due to the difference in this pay cut. The ET was tasked with considering whether or not the different pay cuts imposed on the male managers and the female manager were as a result of less favourable treatment by reason of sex.

The ET could not find a reasonable explanation for the difference in pay cut received by the male managers and the claimant. In evidence, the respondent had said the pay cut was based on ensuring those who earned the most had the biggest cut, however, this was at odds with the dual income argument for the lesser cut, as overall all of the managers earned roughly the same.

The ET found that the respondent’s action was an attempt to disguise a bespoke arrangement and they were “unwilling” to provide a reason for this. Both claims, therefore, succeeded.

This case is an example of an employer trying to hide behind complex accounting to justify a pay discrepancy between employees of different sexes. Whether this was due to conscious or subconscious bias, the discriminatory impact was the same. Employers should therefore be reminded of the need to be able to properly justify any differences in pay and pay cuts. Where there is a genuine reason for this, the employer should be able to provide documentary evidence of the differences, which was absent entirely from this case.

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