As the ‘£4bn equal pay’ case at Tesco progresses, RI examines the ‘gender gap’ investment risks

Law firm claims it has been approached by many thousands of employees, but asset managers appear relaxed…

Back in February, the UK press trumpeted a major story saying that Tesco, the UK’s biggest supermarket group, faced what could be the country’s biggest equal pay claim yet. Leigh Day, the Manchester-based law firm that brought the case, claimed the supermarket could face costs of up to £4bn (€4.5bn) over discrepancies between how much it pays female and male staff. Tesco store staff (who are predominantly female) earn around £8 per hour, while their (mostly male) colleagues working in warehouse and distribution are paid in excess of £11 per hour. In an update on the case, Leigh Day told RI that the Advisory, Conciliation and Arbitration Service (Acas) process – which marks the first stage of the employment tribunal process – has been completed for all current claims and that the law firm has had an initial private preliminary hearing to agree the next steps in the Tesco case. It says it has been approached by “many thousands of employees” and is continuing to issue claims on a regular basis. The case is expected to run for several years.
The law firm originally launched the legal action on behalf of around 100 female employees and said up to 200,000 Tesco employees could potentially have been affected by pay shortfalls of up to £20,000 each.
The claim hinges on the UK’s Equal Pay Act, which says that an individual can claim equal pay with a comparator of the opposite sex employed on “equal work in the same employment”. Paula Lee of Leigh Day’s equal pay team said that store staff “contribute at least equal value to the vast profits made by Tesco”. She added: “We believe an inherent bias has allowed store workers to be underpaid for many years.”Tesco has said previously that men on average were paid 14% more than women in the year through to April 2016. The data shows that 62% of Tesco’s lowest earners are women, but only 41% of its highest paid employees are female. A Tesco spokesperson told RI: “We cannot comment on an ongoing legal matter, but we will be defending this claim about equal pay. Tesco has always been a place for people to get on in their career, regardless of their gender, background or education, and we work hard to make sure all our colleagues are paid fairly and equally for the jobs they do.”
It’s a big potential issue, however, with international dimensions. Tesco is only the latest retailer to become embroiled in an equal pay claim. UK supermarkets, Sainsburys and Asda face similar claims. And there is precedent for the case to succeed. Leigh Day told RI: “We are not making novel or unprecedented arguments.”
In 2012, Birmingham City Council had to pay out £1bn after the success of a similar equal pay claim, also brought by Leigh Day, saying mainly female home care workers should be paid the same as road cleaners and refuse collectors, who are mostly male. And in June 2016, in the first step of a claim Leigh Day is currently bringing on behalf of over 15,000 Asda store workers, the Employment Tribunal found that in-store jobs and distribution centre work were comparable.
If Tesco employees are similarly successful, some experts think that it could lead to all major retailers and businesses being hit by a tidal wave of equal pay litigation.
Opponents of the equal pay claim hold that issues of recruitment and market forces – not of gender inequality – are at play. And investment analysts appear
relatively unconcerned. HSBC wrote in a research note that: “If stores and warehouses paid the same rates, we suspect that most workers would opt to work in a store over a warehouse and that if pay rates were the same there could be a shortage of warehouse workers across the industry.” The note concluded: “We suspect […] the £4bn mooted cost will be very wide of the mark.”
Tesco has only recently returned to profitability after a rocky few years. More than £2bn was wiped off its value in 2014 when a profit overstating scandal sent shares sliding. But in April this year, it made a pre-tax profit before exceptional items of £1.64bn in the year to February 24.
Significant consolidation moves in the supermarket sector, including Tesco’s £3.7bn takeover of the Booker Group, have been preoccupying investor minds. Fund managers appear sanguine, distracted…or genuinely concerned about the employee legal claim; it’s hard to tell because they aren’t talking. RI contacted five UK-based asset managers to gauge investor sentiment surrounding the case, none of whom were willing to comment.
Nonetheless, Jackie Daitchman, who leads the Consumer Sector and Canadian Market ESG Research at MSCI, believes a £4bn hit would have a significant effect on Tesco profitability and be challenging to absorb. According to Tesco’s [2017] report, the £4bn represents 2.4 times group operating profit, or according to the previous year’s report about 54% of total employee pay. Daitchman adds that while the share price might not suffer in the short term there are important factors to consider in terms of the long term company valuation and performance. “Unaddressed issues in terms of diversity and management could hold the company back in terms of longer term profitability, earnings per share, return on investment – these are all metrics that, MSCI research has shown, see outperformance when there is support for women in a company’s talent pipeline and more women on boards and in management.”She said the case could have substantial reputational risks. In response to increased pressure, we have seen Tesco closing stores, removing premiums paid for Sunday shifts, and replacing managers with lower paid staff. These cost-cutting measures could potentially cause materially significant brand damage, she adds: “If customers shun the store because they’re unhappy with its practices, that can have a longer term effect on the company’s value and profitability.” As an example, last year, Tesco wanted to reduce the wages of staff in Ireland that had worked with the company before 1996. Despite occupying only a small percentage of the Irish workforce, sales at Irish stores fell by 80% when unionised workers went on strike and picketed shops.
Heather Smith, Lead Sustainability Research Analyst at Impax Asset Management and Vice President, Sustainable Investing at Pax World Funds, says investors should be aiming to determine if companies are taking the appropriate steps to identify and manage risks associated with pay equity.
And there are efforts underway by investors to urge companies to disclose more comprehensive data. The Workforce Disclosure Initiative, which has received the support of over 90 investors around the world with $10trn AUM, specifically asks for the disclosure of the gender pay gap at different levels of management. In the US, the Human Capital Coalition has been pushing for the U.S. Securities and Exchange Commission (SEC) to adopt better disclosure requiring that companies disclose on the gender pay gap and various other gender metrics. Daitchman says: “We’re already seeing a big push for this and I think this is really the direction that the investment world is going to go.” Daitchman says the effect of the Tesco case may be felt in the wider retail sector: “There’s going to be a lot more scrutiny in general, into not just the gender pay gap but also the pay gap at different positions and levels of work.”