Just in time for International Equal Pay Day 2026, the Employment Appeal Tribunal (‘EAT‘) has provided important guidance on when market forces, recruitment pressures and operational requirements may justify paying one group of employees more than another group performing work of equal value.
The EAT’s recent judgment in Next Retail Ltd and Next Distribution Ltd v Thandi and others [2026] EAT 130 considered the application of the material factor defence in equal pay claims and provides a number of useful takeaways for employers:
- Genuine market forces, recruitment and retention pressures can in some circumstances support a material factor defence
- The correct focus is generally on why the comparator group is paid more, not why the claimant group is paid less
- Tribunals should assess the reason for the difference in pay, rather than asking whether an employer can afford to equalise pay
- Cost considerations do not necessarily invalidate an otherwise legitimate business aim, but relying on cost saving alone will generally be insufficient
- Employers still need evidence connecting each pay difference to the factor relied upon
The decision is helpful for employers operating businesses in which different functions have distinct labour markets. However, it does not make “market rates” an automatic defence to equal pay claims. The EAT upheld findings against Next in relation to some other contractual benefits outside of basic pay where the evidence showed that the difference resulted from a decision to save costs rather than a sufficiently distinct operational or recruitment need.
Background
Under UK equality law, employees are entitled to no less favourable contractual terms (including pay) as those of comparable workers of the opposite sex, if they are employed to carry out equal work. However, employers may be able to defend an equal pay claim if they can demonstrate that there is a “material factor” justifying the treatment which:
- Does not involve less favourable treatment because of the claimant’s sex; and
- Where it places the claimant and others of the same sex doing equal work at a particular disadvantage, is a proportionate means of achieving a legitimate aim
The claims against Next were brought by 3,540 female retail sales consultants working in Next stores. They alleged that they were paid less than predominantly male warehouse operatives despite performing work of equal value, by reference to basic pay and other contractual terms including long-service awards, unsociable hour premiums and paid rest breaks. In an earlier judgment, the Employment Tribunal had determined that the work of three lead claimants was of equal value to that of four warehouse comparators. That finding was binding in the subsequent proceedings.
Next therefore sought to establish a material factor defence and relied on six principal factors to explain and objectively justify the differences in pay:
- Market forces and market price
- The need to recruit and retain sufficient warehouse labour
- The need to maintain round-the-clock warehouse operations
- The need to incentivise warehouse productivity
- The need to incentivise consistent and high warehouse attendance
- The viability, resilience and performance of the Next group
The Tribunal accepted that certain of these factors (in particular, factors 1, 2 and 6) genuinely explained the differences in treatment and did not involve direct sex discrimination. It also concluded, however, that the factors were indirectly discriminatory as they placed the female claimants at a particular disadvantage. This meant that Next needed to establish that reliance on them was a proportionate means of achieving a legitimate aim. The Tribunal at first instance found that this proportionality test was not met and so the material factor defence failed in relation to basic pay and six other terms. Next appealed to the EAT, while the claimants cross-appealed against the Tribunal’s rejection of their direct sex discrimination case.
EAT Decision
Next’s appeal succeeded in part, and the claimants’ cross appeal was dismissed.
The EAT upheld the Tribunal’s conclusion that the claimants had been subject to a particular disadvantage, noting that there was a clear statistical difference between the gender profiles of the two groups (Next’s retail sales consultants were approximately 77.5% female, whereas its warehouse workforce was approximately 52.8% male). It therefore moved to re-consider the Tribunal’s findings regarding (i) whether Next was pursuing a legitimate aim when setting the different rates of pay and, if yes, (ii) whether the difference in pay was a proportionate means of achieving that legitimate aim.
Legitimate Aim
The EAT found that the Tribunal was wrong to find that Next lacked a legitimate aim.
The Tribunal had accepted several factual matters favourable to Next, including that warehouse recruitment was more difficult and expensive than retail recruitment and Next had therefore needed to use recruitment platforms, agency workers and financial incentives to secure sufficient warehouse labour, as well as the fact that warehouse staffing requirements increased significantly over the relevant period as online sales expanded, while retail staffing requirements declined.
Despite those findings, the Tribunal concluded that Next’s decision to set pay rates as it had ultimately relied on cost-cutting alone as a justifying factor, which, without more, could not amount to a legitimate aim. It therefore rejected Next’s material factor defence in relation to basic pay.
The EAT disagreed, finding that this analysis mischaracterised Next’s aim and did not reflect the findings of fact that had been made. The employer’s aim had to be assessed “fairly characterised as a whole”, which included paying a rate to warehouse staff which would enable Next to recruit and retain sufficient workers and thereby maintain efficient warehouse operations. Those recruitment and retention pressures did not apply to retail staff in the same way. Further, the fact that Next might be able to afford to equalise pay did not, by itself, show that the pay difference was unjustified. Affordability may be relevant to proportionality, but it is not the legal test and should not replace analysis of the reason for the comparator’s higher pay.
The Tribunal had therefore focused on the wrong side of the comparison. It asked why Next had not raised the claimants’ pay to the warehouse rate whereas the correct question was instead why Next paid the comparators the higher rate.
Proportionality and the Impact of Market Forces
The EAT found that the Tribunal had also erred in its approach to proportionality and had taken an overly restrictive approach to the potential for reliance on market forces.
The Tribunal had voiced concern that accepting market forces as a “trump card” to justify pay differences might perpetuate structural inequality, in the sense that treating the market rate as conclusive could embed historic discrimination into pay structures (if traditionally male work attracts a higher market rate than traditionally female work).
However, the EAT noted that this was not a case in which Next paid warehouse workers more merely because their work was perceived to be “men’s work” or because warehouse workers tend to be paid more in the market. The Tribunal had already found that Next needed to pay the warehouse rates to respond to actual recruitment and retention difficulties and to avoid jeopardising its warehouse operations. The EAT therefore found that the pay differential was a proportionate means of achieving a legitimate aim – Next paid the rates to warehouse staff which it needed to pay for sound business reasons, which did not apply to the retail staff.
Indeed, the Claimant’s cross-appeal of the Tribunal’s finding that Next’s reliance on market rates to justify pay differences was not directly discriminatory failed on this basis. The EAT reiterated that reliance on market forces as a material factor does not automatically establish direct sex discrimination merely because the employer has not disproved that those forces disadvantage one sex. The relevant question remains whether the employer treated the claimants less favourably because of sex, and the Tribunal had been entitled to find that Next’s decisions were not in fact motivated by sex, but by commercial considerations.
Importantly, the material factor defence did not succeed in relation to all pay differences. The EAT upheld the Tribunal’s conclusions concerning certain differences in benefits where the evidence showed that the underlying decision was principally a cost-saving measure affecting retail staff, including in relation to night and overtime premiums and paid rest breaks. This demonstrates that an employer may not be able to establish a material factor defence at a general workforce level and assume that it applies to every element of remuneration where there are disparities between two groups. Each element of pay where there are differences (for example basic pay, allowances, premiums and benefits) needs to be separately explained and justified.
Practical Significance
The decision is a significant clarification of the material factor defence, particularly for employers with separate and distinct business functions.
The key message is not that market forces permit unequal pay. Rather, evidenced recruitment and retention pressures may amount to a legitimate business reason for paying a particular workforce more, even where the resulting difference disproportionately disadvantages women. However, this will always be a fact sensitive question.
The EAT’s decision is also a useful reminder that cost savings cannot, by themselves, justify indirect pay discrimination. The judgment draws an important distinction between cost only rationales, where the employer’s objective is simply to reduce expenditure or maximise profits and “cost plus”, where financial considerations form part of a wider legitimate operational objective, such as recruiting sufficient labour, maintaining a service or responding to a specific business need.
Employers should also expect each component of the remuneration package to be scrutinised separately. Maintaining clear records of the business reasons for pay differentials, together with evidence of any recruitment and retention challenges, may assist employers in establishing a material factor defence.
