Counting the cost – Court of Appeal rules that budget considerations can justify indirect discrimination

Introduction
Costs-plus rule
Facts
Decision – costs-plus rule still stands, but rarely bites
What this ruling may mean in practice

Introduction

In a recent case, the Court of Appeal revisited the so-called 'costs-plus' rule and considered the extent to which employers can rely on cost and budget considerations when justifying policies that may disadvantage some protected groups.(1) If employers have a policy which is indirectly discriminatory and their aim is no more than to save money, the Court of Appeal has ruled that this cannot justify the discrimination. However, needing to balance the books can be a valid justification for indirect discrimination.

Costs-plus rule

The costs-plus rule in the justification of indirect discrimination comes from an interpretation of EU law and was last considered by the Court of Appeal in 2012. While the Court of Appeal upheld the rule on that occasion, it has continued to receive criticism. One of the rule's judicial critics, who previously described it as involving an artificial game of "find the other factor", now sits as a judge in the Court of Appeal. So the stage was set for this latest case to provide a fresh look at the position.

Facts

The issues in the case arose from the government's austerity measures following the 2008 financial crisis, including the imposition of pay restraints across the public sector. As a result, the rate at which probation officers progressed up their pay scales was reduced from three pay points each year to just one pay point per year. In the claimant's case, this meant that it would take 23 years to progress from the bottom to the top of the pay scale, instead of the seven or eight years that it would have taken previously. The claimant argued that this was indirect age discrimination.

The employment tribunal agreed that the policy had a disproportionate effect on younger employees compared with older employees who were more likely to have reached the top of the pay scale already, so it was potentially indirect age discrimination. The key question was whether the policy could be justified as a proportionate means of achieving a legitimate aim.

The claimant argued that this was all about cost and, according to the costs-plus rule, avoiding costs could never be a legitimate aim justifying indirect discrimination. Costs and budget considerations could be legitimate aims only when combined with other factors. Rejecting the claim, the employment tribunal ruled that it was not just a matter of costs alone and that it was legitimate for the employer to seek to live within its means. The Employment Appeal Tribunal upheld the employment tribunal's decision and the claimant appealed to the Court of Appeal.

Decision – costs-plus rule still stands, but rarely bites

The Court of Appeal ruled as follows:

• It is not legitimate to discriminate purely out of a desire to save or avoid costs. For example, employers which decide to pay part-timers less per hour than full-timers simply because it is cheaper cannot justify this.
• The costs-plus rule is correct, but the label should be avoided because the principle must be understood differently.
• It is important to look at the whole story – how can the employer's aim fairly be characterised? An "inappropriately mechanistic approach" of trying to look for the additional non-cost factor should be avoided and the total picture must be considered.
• The employer in this case was subject to financial constraints which obliged it to reduce costs. This was different from costs alone. Employers' needs to reduce their expenditure to balance their books can be a legitimate aim. There is no good basis for ignoring the constraints under which employers are having to operate.
• Whether any specific policy is justified on the facts depends on a proportionality analysis. The employment tribunal was right to find that the pay policy was justified in the circumstances of this case.

What this ruling may mean in practice

This case about measures taken in the aftermath of the last recession has taken so long to go through the courts that the Court of Appeal's judgment comes just as employers are taking similar cost-cutting measures in the face of new economic turbulence.

Has the Court of Appeal made cost-cutting measures less susceptible to legal challenge? To a limited extent, yes. There may be less need for artificial exercises in which employers are advised to reframe the reasons for their actions and identify an additional reason which is not cost. Budgetary considerations may now be more readily recognised as legitimate reasons for adopting policies that have a potentially indirectly discriminatory impact or for not immediately correcting such policies.

However, in most cases, there will still be arguments to be had over whether indirectly discriminatory policies are justified. The dispute will now move to the question of proportionality.

In this case, the fact that the pay arrangements were intended to be temporary was a factor in the proportionality analysis. The Court of Appeal stated that employers should be allowed to justify measures that may be a proportionate short-term means of responding to the problem in question, even if they could not be justified in the longer term. This is a helpful clarification.

The Court of Appeal's decision relates only to cases of indirect discrimination. Some policies may be directly discriminatory (eg, if they taper down severance pay once employees are aged 65 years or over). Direct age discrimination can potentially be justified (unlike for other protected characteristics), but the Court of Appeal highlighted that the tests for justification are not the same. To justify direct age discrimination, employers also need a 'social policy' aim, such as promoting intergenerational fairness. In effect, this means that there is a 'costs-plus-plus' rule for direct age discrimination.

For further information on this topic please contact Carolyn Soakell or Gemma Taylor at Lewis Silkin by telephone (+44 20 7074 8000​) or email (carolyn.soakell@lewissilkin.com or gemma.taylor@lewissilkin.com). The Lewis Silkin website can be accessed at www.lewissilkin.com.

Endnotes

(1) Heskett v Secretary of State for Justice – judgment available here.