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In brief

Employers can justify indirect discrimination if they can show that their actions were a proportionate means of achieving a legitimate aim. Although discrimination cannot be justified where the reason is solely to save costs, the Court of Appeal has held that the need to reduce staff costs in order to balance an employer’s books was such a legitimate aim.


Key takeaways

  • The so-called ‘cost plus’ rule in discrimination cases means that an employer cannot justify discrimination solely to save costs: there must be something else as well, although where there are other factors at play, financial considerations can also be taken into account.
  • In this case, the employer was arguing there was not simply a need to save money, but that its previous pay structure was unaffordable given the limits imposed on its budget by a public sector pay freeze.
  • The Court of Appeal held that the essential question is whether the employer’s aim in acting in the way that gives rise to a discriminatory impact can fairly be described as no more than a wish to save costs (which is not permissible) and, if not, it is necessary to identify a fair characterisation of an employer’s aim taken as a whole. The distinction was said to be subtle, but real. Here, an employee’s need to reduce its expenditure, and specifically staff costs, in order to “live within its means” was not solely about saving costs and was a legitimate aim. Tribunals do not have to ignore the constraints under which the employer has to operate, especially where the action taken was in response to genuine financial pressures.
  • However, an employer with a legitimate aim must still show that the measures taken were a proportionate means of achieving that aim and whether alternative action could have been taken to reduce or eliminate the discriminatory effect.
  • While the ‘cost plus’ principle has been confirmed, it is now established that the need to operate within a fixed budget may be treated as a legitimate aim that is more than just trying to save costs. Employers may find that that couching their aim in these terms will make it easier to justify indirect discrimination, since all organisations are usually required to balance their spending. However, the way in which the money is spent within that budget will be subject to scrutiny to ensure any discriminatory impact is minimised.
  • For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.

In more detail

Facts

Mr Heskett worked as a probation officer for the National Offender Management Service (NOMS), an executive agency of the Ministry of Justice. Under NOMS’ pay progression policy, it would normally take seven or eight years for a probation officer to reach the top of their pay band.

In 2010, the Treasury announced limits on public sector pay increases. In response, NOMS introduced a new pay progression policy, under which it would take Mr Heskett 23 years to reach the top of his pay band. Under the new policy, older employees at or near the top of their pay band would earn significantly more than those lower down.

Mr Heskett brought an employment tribunal claim, arguing that the pay policy indrectly discriminated against those (such as himself) who were 50 or younger. The tribunal held that although the pay policy was potentially discriminatory, it was justified in the circumstances in which NOMS found itself. It was not a breach of the ‘cost plus’ principle, because the new policy was not simply to save costs, but to allow the employer to “live within its means”. While the pay inequality could not be justified in the long term, this was a temporary policy and NOMS was already considering how to change it to reduce its discriminatory effect. The EAT agreed.

Court of Appeal decision

The Court of Appeal dismissed Mr Heskett’s appeal.

Underhill LJ considered previous case law on the ‘cost plus’ principle. Applying the previous Court of Appeal decision in Woodcock v Cumbria Primary Health Care Trust (2012), “the saving or avoidance of costs will not, without more, amount to the achieving of a legitimate aim”. The question was whether the employer’s aim could fairly be described as no more than a wish to save costs. If not, a tribunal should then look at a fair characterisation of the employer’s aim as a whole and decide whether that aim was legitimate.

The Court of Appeal affirmed the decision taken by the EAT in HM Land Registry v Benson (2012) that it is legitimate for an organisation to seek to break even year on year, and to impose a staff costs budget in order to do so. Tribunals should not ignore the constraints under which an employer must operate.

An employer with a legitimate aim must still show that the measures taken were a proportionate means of achieving that aim and whether alternative action could have been taken to reduce or eliminate the discriminatory effect.

There was no reason in principle why an employer might not seek to justify urgent measures which had a discriminatory impact on one group of employees on the basis that they were a proportionate short-term only means of responding to that aim, even if the measures would not be justifiable over a longer period. (Equal pay law, for example, already allows a temporary pay protection scheme to be justified.) However, the employer must be doing something to resolve the situation, not just saying, “I know I am discriminating, but I will do something about it soon.”

Author

James Brown is a Knowledge Lawyer in Baker McKenzie's London office.

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Rachel Farr is a Knowledge Lawyer in Baker McKenzie's London office.

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Mandy Li is a Knowledge Lawyer in Baker McKenzie London office.