It has long been established that an employer cannot justify discriminatory treatment solely because to eliminate such treatment would involve increased costs. Cost-saving alone without regard to other factors or aims does not justify a discriminatory provision, criterion or practice (PCP). However, while cost alone cannot justify a discriminatory act, cost plus some other factor (the so-called 'costs plus' approach) may do so.
Is an 'absence of financial means' capable of being the 'plus' factor justifying indirect age discrimination or is it still just 'cost'? This is the question the Court of Appeal has now considered in Heskett v Secretary of State for Justice. The Court has held that although saving or avoiding cost cannot alone justify indirect discrimination, an employer's need to reduce expenditure, including staff costs, in response to financial constraints can constitute a legitimate aim for the purposes of the justification test.
The Heskett appeal considered changes made to the rate at which certain probation officers progressed up an incremental salary scale, the effect of which was that progression to the top of the scale would take many years longer than previously. The change was made after HM Treasury announced a public sector pay freeze with the aim of limiting pay increases across the public sector to 1% of the overall pay costs. The National Offender Management Service's (the employer) aim in making the change was stated to be a way of dealing with reduced financial means. Cost-cutting was the way to achieve the objective, rather than the objective itself.
The employment tribunal found that the new policy was prima facie age discriminatory, in that it favoured employees aged over 50. But was the introduction of the new policy a proportionate means of achieving a legitimate aim? The Employment Appeal Tribunal (EAT) upheld the tribunal's decision that the employer's aim of seeking to break even year-on-year by making decisions about the allocation of resources was a legitimate aim. A distinction can be drawn between the absence of means and an employer seeking impermissibly to place reliance solely on cost.
Mr Heskett appealed to the Court of Appeal on the ground that the distinction between 'cost' and an 'absence of means' was not a valid distinction.
The great 'costs' vs 'costs' plus debate
Having reviewed the European Union and UK case law, the Court identified the fundamental question as, what is meant by "solely to avoid increased costs"? The Court agreed with the earlier judgment of the Court of Appeal in Woodcock v Cumbria PCT , that an employer "cannot justify the discriminatory payment to A of less than B simply because it would cost more to pay A the same". Accordingly, the saving or avoidance of costs will not, without more, amount to a legitimate aim when an employer is attempting to defend itself against a claim of discrimination, but that principle only bites where the aim is "solely" to avoid costs.
The Court accepted that the 'costs plus' label is not incorrect, but considered that it sometimes acts as too convenient a shorthand. Instead, the total picture needs to be considered. It will only be an illegitimate aim if on fair characterisation of the aim it can it be said to be solely to avoid increased costs. As the Court states, "the distinction involved may sometimes be subtle…but it is real".
Are 'financial constraints' different to costs alone?
Applying the above, can the 'plus' factor consist of the fact that the employer is subject to financial constraints which oblige it to reduce its costs? Can that be said to be that different from 'cost alone'? Is making a distinction between cases where the aim was "cost-cutting" and cases where an "absence of means" forces the employer to cut costs an artificial distinction?
The Court held that an employer's need to reduce its expenditure, and specifically its staff costs, in order to balance its books can constitute a legitimate aim for the purpose of a justification defence. There is no principled basis for ignoring the constraints under which an employer is having to operate. Almost any decision taken by an employer will have regard to costs to a greater or lesser extent. That is particularly so where the action complained of is taken in response to real financial pressures.
In this case, a fair characterisation of the employer's aim was the need to observe the constraints of the Treasury imposed pay freeze. This was a legitimate aim and not solely a cost saving aim – "the subtle but real difference".
When establishing objective justification proportionality remains key
On a separate point in this case, the tribunal noted that the options open to the employer to live within its means were limited to sharing the resources available as fairly as possible. A radical change to the pay system would have been resisted by trade unions and have taken time to implement, and the employer was operating under the assumption that the HM Treasury-imposed pay freeze was temporary. The tribunal therefore found that although the PCP produced inequities that could not be justified in the long term, it was nevertheless a proportionate short-term response to the extreme financial stringency imposed. The employer had indicated in evidence to the tribunal that it would, as soon as possible, implement further changes to remove those inequities.
Turning to the question of whether the tribunal had been entitled to find that the PCP (the policy change) was a proportionate means of achieving the employer's aim, the Court held that there was no reason in principle why the employer could not seek to justify those measures on the basis that they represented a proportionate short-term means of responding to the problem in question. As ever, the key is to consider whether the means adopted constitute a proportionate means of achieving a legitimate aim, taking into account the disparate impact on the relevant group
What does this mean for employers?
Many legal commentators point out that the 'costs plus' rule seems rather artificial, requiring an employer to attempt to find some additional reason for the PCP in addition to cost grounds in order to objectively justify otherwise discriminatory treatment.
The Court of Appeal has taken a pragmatic approach, recognising that almost any decision by an employer will have regard to costs, and stressing the need to look at the employer's aim in a more nuanced way. The Court cautions against an artificial game of "find the other factor". Instead, establishing a legitimate aim requires consideration of how the employer's aim can most fairly be characterised, looking at the total picture. Whilst an aim which is solely to avoid increased costs will not be legitimate, the Court has confirmed that an employer's need, as in this case, to reduce its expenditure or constrain its staffing costs can be. A subtle but very important difference.
The decision will be helpful for employers who are forced to make decisions on cost saving grounds which result in an adverse impact for certain groups of employees who then bring indirect discrimination claims. However, this necessitates much more subtlety than the approach sometimes (wrongly) assumed to be required by a 'costs plus' approach. It could also present its own challenges as an approach, as employers seek to demonstrate their aim is due to an absence of means (which can be legitimate) rather than avoiding increased costs (which is not); in many cases this distinction may be difficult to establish.