Living within means and justifying age discrimination

In terms of discrimination in the workplace, cost saving alone cannot justify discriminatory treatment.

However cost plus ‘some other factor’ may justify age discrimination. And this is known as the ‘cost plus’ rule.

Cost often arises as an issue when considering potential age discrimination: wages are often an employer’s biggest overhead; and salary is often indirectly linked to age.

In the recent case of Heskett v Secretary of State for Justice, the Court of Appeal has upheld the ‘costs plus’ principle in the context of indirect age discrimination by an employer. The Court found that saving or avoiding costs will not, without more, amount to justification of age discrimination.

However, the case highlights the fine distinction between

• cost saving alone (which would not normally justify age discrimination); and
• cost saving as means of short-term ‘financial survival’ (which may justify age discrimination).

Background

Under the Equality Act 2010 (the Employment Equality (Age) Regulations (Northern Ireland) 2006, indirect discrimination occurs when a provision, criterion or practice is applied which

• puts (or would put) people in a protected category, such as age, at a particular disadvantage when compared with others; and
• it does have the effect of putting individuals at that disadvantage; and
• it can’t be justified i.e. a proportionate means of achieving a legitimate aim.

Facts

Since 2006, the Claimant, Mr Heskett, had been employed as a probation officer by the National Offender Management Service, an executive agency of the Ministry of Justice. Mr Heskett contended that a policy, introduced by the Treasury in light of the financial crisis, to limit pay increases, discriminated against younger employees.

Under the new policy, a probation officer could only move up one ‘pay point’ per year, whereas previously it had been three; this meant it would take Mr Heskett 23 years to move into the top pay band, whereas originally it would only have taken him 7-8 years.

Mr Heskett brought a claim in the Employment Tribunal for indirect age discrimination. The Tribunal found that while the policy did put those aged 50 and under at a significant disadvantage, it was justified as a “proportionate means of achieving a legitimate aim” (see Background above).

The ‘legitimate aim’ was to cut costs and the employer had changed its policy to ”live within its means” – while the pay inequalities could not be justified in the long term, the policy was a proportionate short term response.

Mr Heskett appealed the tribunal’s decision, but it was upheld by the Employment Appeal Tribunal. He then appealed to the Court of Appeal, arguing that the justification was just an argument based on costs and the tribunal had been wrong to consider “absence of means” as anything other than reliance on costs.

Decision

The Court of Appeal dismissed the appeal on all grounds.

It was agreed that “the saving or avoidance of costs will not, without more, amount to the achieving of a legitimate aim”, embedding the ‘costs plus’ rule in case law.

However, the Court held that an employer’s need to reduce its expenditure, and specifically its staff costs, to balance its books, could constitute a legitimate aim.

So, an employer is entitled to treat constraints on staffing costs as a legitimate aim, but must also show that the cost cutting measures were a proportionate means of achieving that aim – considering the discriminatory effect on the group in question and whether the aim could be addressed in an alternative way.

The employer’s future intention was also relevant; and the pay constraints in this case were intended to be temporary.

Comment

At a time when many employers are facing severe financial pressures and looking to reduce costs, this decision provides some reassurance.

The ‘costs-plus’ approach to justifying age discrimination has been endorsed, so employers must continue with the, sometimes somewhat artificial, search for the ‘plus’ factor when looking at cost savings which impact on certain age groups.

However, it is now established that an employer’s need to operate within a budget or balance the books may justify any age discriminatory effect of cost saving measures. Even keeping to a self-imposed budget appears to be a legitimate aim.

Note that this case may have been decided differently if there had been

• other measures which the employer could have taken, or
• if the changes to pay grades had been permanent.

So, while the distinction between a ‘simple’ money saving exercise and a ‘costs plus’ budgeting exercise may sometimes be subtle – it’s an important one to draw.

Read the full decision

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions