Case update (3):  An employer is justified in discriminating against an employee if the actions reduce company costs and the employer is suffering an absence of means satisfying the ‘COSTS PLUS’ rule

Summary: Is an employer justified in discriminating against an employee if the actions reduce company costs?

Yes, says the Court of Appeal in Heskett v Secretary of State for Justice available here, if the employer is suffering an ‘absence of means’.

Background:  Where a provision, criterion or practice (“PCP”) planned by an employer impacts on a section made up of employees with the same protected characteristic, such as age, this can amount to indirect discrimination.  This does not necessarily prevent the employer from lawfully carrying through their plan, but the employer would need to show that the PCP they are applying is a proportionate means of achieving a legitimate aim – in other words it was “justified”.

Justification of indirect discrimination requires more than simply a need to save money – case law shows that cost alone cannot amount to a legitimate aim and an attempt to defend a claim on that basis is doomed to fail.  Instead, justification requires something more than cost alone – i.e. what has become known as the “costs plus” rule.

Facts:  The employee, Mr Craig Heskett, was employed as a probation officer in the National Offender Management Service (NOMS), which had its budget set by the Ministry of Justice.

The Ministry of Justice operated a system of increasing pay for each year an employee had been in the job. However, as a result of Government austerity cuts in 2010, these annual increases were much reduced from 2011 onwards. This change in policy disproportionately affected younger employees such as the employee, because a higher proportion of older employees would have reached the top of their pay band or progressed further up it, having moved up at quicker rate.

The practical effect of this was that under the old policy it would take the employee 7 or 8 years to progress to the top of his pay band, but under the new policy it would take 23 years.  Pension contributions would also be affected.  Meanwhile, older employees who were already at or near the top of the pay band would earn significantly more than younger employees at the bottom of the scale.

In 2016, the employee brought proceedings against the employer for indirect age discrimination under s.19 of the Equality Act 2010, on the basis that the rate of pay progression for his job disproportionately disadvantaged younger employees such as himself.

NOMS argued that the change in policy, if discriminatory, was justified as it not only saved costs by cutting pay, but also enabled it to “live within its means“, and that was a legitimate aim. NOMS also said that the change to policy was a temporary measure and it was giving active consideration to amendments to reduce the age-discriminatory effect; the change was therefore proportionate.

Tribunal decision

The Tribunal found the policy was, on the face of it, indirectly discriminatory, but that it was justified.

The Tribunal drew a distinction between cost-cutting on the one hand and an absence of means on the other.   It was the Tribunal’s view that the employer was not relying on cost-cutting to justify its discriminatory conduct, but rather, the absence of means created by the significant downturn in the economic climate which forced the employer to take the actions it did. As a result, this absence of means, and the fact that it was a short term measure, meant this was a proportionate means of achieving its legitimate aim.

The employee appealed.

EAT decision

The EAT upheld the Tribunal’s decision and found that it was entitled to draw a distinction between the absence of means and an employer seeking to solely rely on cost as a justification.

The employee appealed.

Court of Appeal

The Court of Appeal considered previous case law on the use of ‘costs’ as justification for a PCP. The Court confirmed that an employer cannot justify making a lower payment to an employee simply because it would cost more to pay them the same as another employee. If the employer’s aim is solely to save costs, that will not be enough to justify the discrimination. However, the requirement for an organisation to ‘live within its means’ according to budgetary constraints was potentially a legitimate aim. It is for the Tribunal to look at the employer’s overall aim, in order to decide whether that aim is legitimate.

In the current case, the Court agreed that NOMS’s aims could not simply be described as cost cutting. NOMS needed to reduce expenditure in order to balance its books and live within its means and this could constitute a legitimate aim for the purposes of justification.

The Court then went on to consider whether the implementation of the new pay scale was a proportionate means of achieving that aim. It found that it was in circumstances where:

  • the new pay policy was detrimental to all in the sense that all employees were receiving increases in pay that would mean that their real income was falling once inflation is taken into account. The new pay policy was crafted to distribute that pain in as fair and equitable a way as possible given the constraints NOMS was subject to; and
  • NOMS recognised that the level of indirect discrimination requiring justification would inevitably rise the longer the new scheme remained in place, and intended to take steps to address this over time.

Implications:

This decision is a helpful clarification of the “costs plus” principle (meaning that costs alone could not be used as justification for an act of indirect discrimination). It demonstrates what can be a subtle distinction between 1) using cost as justification, and 2) reducing costs in order to achieve the legitimate objective of operating within constrained finances due to an “absence of means”.  If an employer can provide evidence that the latter is the motivation behind a PCP, it will have a greater chance in succeeding in defending a claim for indirect discrimination. Exactly what evidence of a need (rather than a desire) to reduce costs will be sufficient to satisfy a Tribunal remains to be seen.

However, employers should also note that even if an “absence of means” exists to present a legitimate aim, actions taken by the employer must still be proportionate to achieving that legitimate aim.  For example, in this case it was very helpful for the employer that they were able to say that the changes to policy were only temporary. Employers should always carefully consider all the options that are available, to satisfy themselves (and a Tribunal) that there is no less discriminatory way of “balancing the books”.