The Challenge of Labour Shortages and Pay Rises

Top tips to help you avoid the common pitfalls that come with making pay-rises

Labour shortages and associated pay-rises continue to be a challenge for businesses. This article discusses our top tips for avoiding some employment law issues businesses could find themselves creating inadvertently. Recently Logistics UK reported that one year ago shortages were not being reported by businesses however, 12 months on 13% of businesses were reporting “severe” warehouse staff shortages while almost a quarter were reporting that they were struggling to recruit drivers. Elsewhere, the UK Warehousing Association has recently reported that some warehousing businesses were reporting vacancy rates of over 20%. For 2022, the Association’s members have said the issue of labour shortages was the most important factor for their business with the Association’s CEO, Claire Bottle, saying the warehouse industry is ‘tens of thousands’ short in terms of employees .Commonly, the response of businesses so far to the industry’s labour shortages has been swift, even overnight, pay-rises to retain employees and to offer pay above their standard rates to entice people to join. However, there are issues with those approaches; we highlight what some of the main issues are and what businesses can do to avoid them.

Swift or overnight pay-rises 

We are aware that trade unions are threatening businesses with litigation on behalf of their members who have received overnight pay-rises outside of any collective agreement that the business has with the recognised union, following the Supreme Court’s judgment in late October 2021 in the Kostal v Dunkley case. The judgment in Kostal reinforced the legislative provision that a business which offers any of its employees who are trade union members a pay-rise, without first exhausting any pay negotiation process set out in the collective agreement, is at risk of being found by the Employment Tribunal to have induced those employees to no longer have their pay negotiated by collective agreement through their trade union. If that is found to be the case, each affected employee can claim a mandatory award of compensation from the Tribunal. This award is currently set at £4,341 for each employee. As a result, businesses who are contemplating pay-rises in response to the current situation where there is a relevant collective agreement in place should consider:

• reviewing and amending any collective agreement to ensure it is fit for purpose under the current continuing labour shortage, including a clearly defined process for pay negotiation with a definite end point;
• liaising with the trade union about the pay-rise and how it is to be communicated to the employees;
• ensuring that before any pay-rise is enacted any collectively agreed pay negotiation process is exhausted; and
• as an Employment Tribunal considering any claim must take into account whether the business made the pay-rise with the main purpose of retaining particular employees because of their special value (for example, because they would be very difficult to replace under the current labour shortage), recording at the time the background to the pay-rise and the reasons for it.

Different pay at different sites

Some businesses have been responding to labour shortages on a site-by-site basis and so they have increased pay at one of their sites but have not done so at others. This difference in pay between sites, when it has come to light at the lower-paid sites, has led to an increase in staff dissatisfaction and, in one particular instance as seen in the Autumn of 2021, the threat of strike action by staff in order to bring about pay parity. As a result, before increasing pay at one site but not at others, businesses should consider taking a proactive approach by communicating the news and reasons for the move to its other sites before their employees there learn of it second-hand, draw their own conclusions, and become dissatisfied with the situation. Pay disparity may of course cause dissatisfaction whatever the reasoning and therefore consideration should also be given to how the situation is handled in general as it will be counterproductive to address shortages in one location but potentially cause issues at others.

Above-standard pay for new starters

It is being widely reported that, in light of the labour shortage, some businesses are offering up to 30% above their usual pay rates to try to entice new recruits to join and work alongside longer-serving, now lower-paid colleagues. Whilst in the short-term this is unlikely to provide the basis for a successful equal pay claim from an employee or a group of employees, businesses should be aware that, over time, the risk of an equal pay claim succeeding in those circumstances increases.Equal pay legislation requires equal pay for equal work between genders. This means in simple terms, for example, a female picker in a warehouse is entitled to the same rate of pay as a male picker at the same warehouse (and vice versa). Therefore, if a long-serving female warehouse picker is paid less than a recently recruited male picker, she may succeed with an equal pay claim at the Employment Tribunal and so be awarded back pay making up the difference and her future pay being increased to match that of the male picker. However, the business is likely to successfully defend the claim if there was a good reason for the difference in pay (known as a ‘material factor defence’). Presently, businesses are likely to say that their good reason was that a higher rate of pay was needed to entice the male picker to join due to the labour shortage being suffered in the industry. Businesses should bear in mind that particular good reasons weaken as time goes by, and with them the possible defence of an equal pay claim. This is because the influence of the labour shortages on the male colleague’s rate of pay wanes the longer it was since he was recruited. For example, if the female picker’s pay was still less than the male picker’s pay two years after he was recruited, it is unlikely the business will convince the Employment Tribunal that the labour shortage two years before was still a good reason for his pay to be more than hers two years on. Therefore, her equal pay claim would be more likely to succeed. This means that any business, to reduce the risk of equal pay claims in the future, should regularly review any difference in the pay between colleagues of different genders with a view to eliminating it, and if any disparity is to continue then it should be ensured that there are still good reasons for that ongoing difference.Changing pay and so terms and conditions of employment, trade union relations and negotiations, and equal pay are all complex areas of employment law. We are able to help with those and all other areas of law and recommend you take advice when considering changing the pay rates of your employees.

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Please contact Rena Magdani if you have any questions regarding the topics discussed or would like to know how we can help your business.