Court of Appeal: costs alone are insufficient to justify indirect discrimination

A recent case examines the so-called ‘costs plus’ rule when considering indirect discrimination justification.

A person discriminates against another if they apply a provision, criterion or practice (PCP) which is discriminatory in relation to a relevant protected characteristic the other person has.

In law, a PCP is discriminatory in if it puts someone who has a protected characteristic at a particular disadvantage compared to those without it and the person(s) who applied the PCP cannot show that the treatment is a ‘proportionate means of achieving a legitimate aim’. In brief, this means there must be a good reason for introducing the PCP and the discriminatory effects of the PCP go no further than necessary to achieve it.

A case from the end of 2020 considered whether an employer was able to justify a significant reduction in its pay progression structure after budgetary cuts were applied in 2010.

Case: Heskett v Secretary of State for Justice [2020]

Mr Heskett was employed as a probation officer. As a result of funding cuts, the rate of pay progression for Mr Heskett’s job significantly decreased.

Mr Heskett brought a claim to the Employment Tribunal alleging that he had been subject to indirect age discrimination because the effect of the cuts meant that probation officers under the age of 50 were inherently less likely than officers aged 50 and over to reach the top of the pay scale after the cuts came into force. The result, Mr Heskett explained, was that he had colleagues who did the same job as him who were significantly better paid than he was, that it would take him many more years than it took those colleagues to reach that pay point, and the alleged reason for this was age.

The Secretary of State’s chief defence was that even if Mr Heskett was able to prove he was indirectly discriminated against on the grounds of his age, the reduction in pay was a proportionate means of achieving a legitimate aim; namely the need to balance the ability to continue to award probationary officers with an annual incremental annual pay rise to retain them in employment against the significant reduction in public funds made available to run the service.

The Employment Tribunal and EAT ultimately dismissed Mr Heskett’s claims and the case was appealed to the Court of Appeal.

Court of Appeal’s decision

A key issue for the Court was whether the EAT had correctly concluded that the changes to the pay scale of probation officers were capable of being justifiable as a legitimate aim. This drew on the so-called ‘costs plus’ principle.

Origin and development of the ‘costs plus’ principle

The principle of being able to justify discriminatory PCPs on the grounds of cost originates in EU caselaw, primarily in relation to the disadvantageous treatment of part-time workers. This body of case law established that it was not justifiable to discriminate solely on the ground that avoiding discrimination would involve increased costs.

The first domestic case to consider this case law was the EAT in Cross v British Airways plc [2005] which provided that ‘economic (which includes cost) grounds can properly be a factor justifying indirect discrimination, if combined with other reasons’ but also noted that costs justifications were part of the weighing exercise a tribunal must undertake when determining if the action taken is legitimate and proportionate and that costs justifications were likely to weigh less if the discrimination incurred is ‘substantial, obvious and deliberate’. This case led to the term ‘costs plus’ being applied to the principle, though that phrase was not mentioned in the decisions.

Later consideration by the EAT of this principle, including in Woodcock v Cumbria Primary Care Trust [2012], cast doubt on whether the distinction between ‘cost alone’ and ‘cost plus’ correctly applied the principles established in Cross and that it may be unhelpful to create a rule that cost considerations by themselves could never constitute sufficient justification for causing indirect discrimination.

The Court of Appeal summed up the position from case law in relation to a case of discriminatory pay as ‘an employer cannot justify the discriminatory payment to A of less than B simply because it would cost more to pay A the same’.

Put another way, if an employer’s aim in imposing a discriminatory PCP is no more than a wish to save costs, the employer cannot justify the discrimination. If this is not the case, it is still necessary for a tribunal to consider the employer’s aim in the whole context of the facts and decide whether that aim is legitimate.

Application to Mr Heskett

The Court was clear that a reference to ‘costs’ could be overly-simplistic. In Mr Heskett’s case, the costs of maintaining the more generous pay progression scheme were clearly a factor, but this was set against the backdrop of budget reductions imposed on the employer. In this context, the Court considered that the EAT had been entitled to treat the employer’s need to observe cuts imposed on it as a legitimate aim in itself because the motivation behind the change in pay scheme was not solely about saving costs. For this reason, the EAT was entitled to take wider considerations into account, such as ensuring that the probation service continued to retain officers and that the changes to the pay scheme were not intended to be permanent, when weighing the legitimate aims of the change to the pay scheme.

On this basis, the Court dismissed this aspect of the appeal.

Conclusion

This case is valuable because it sets out a very helpful explanation of the circumstances in which an employer can justify indirect discriminatory action due to financial considerations and draws out useful inferences on what is capable of being justified and then considering if the steps taken are proportionate.

The Court of Appeal’s review of the so-called ‘costs plus’ principle makes clear that employers can justify indirect discrimination for financial reasons provided that those reasons are not the sole aim and the adjacent reasoning is considered legitimate in the full context of the situation it was facing. However, it also gave a useful clarification that an employer can justify an indirectly discriminatory PCP where it results from budget cuts or constraints.

In both scenarios an employer will have to show that the steps taken were proportionate and, in this case, the proportionality was weighed by the employer’s intentions that such amends were not intended to be permanent and that the changes still allowed for pay progression, if at a much reduced rate.

The decision and the guidance provided by the Court may be of use to employers who are considering changes to terms necessitated by a change in financial circumstances and who are concerned that this may result in indirect discrimination claims. This might include changes that subject staff in certain age groups to a greater disadvantage than other age groups or in respect of sex, for example, where changes to part-time or job share working disadvantage women who are still statistically more likely to work under such arrangements.