Can cost ever be a legitimate aim that justifies indirect discrimination?

Yes – provided it includes ‘something more’ says the Court of Appeal.

Indirect discrimination occurs when a provision, criterion or practice (‘PCP’) places, or would place, individuals with a protected characteristic at a substantial disadvantage. It may be justified if the employer can demonstrate that the PCP was a “proportionate means of achieving a legitimate aim”.

It has long been established that cost alone cannot amount to a legitimate aim, and so employers are not able to rely on cost as a means of justifying indirect discrimination. It may therefore be surprising to learn that, in the recent case of Heskett v SoS for Justice ([2020] EWCA Civ 1487) the Court of Appeal held that the imposition of the Government’s austerity policy was sufficient to justify the implementation of a new, indirectly discriminatory, pay progression scale.

Facts

Prior to the introduction of austerity in 2010, the National Offenders Management Service (‘NOMS’) operated a pay progression system in which particular jobs were placed in a ‘pay band’, which comprised a scale of ‘spinal points’ corresponding to a particular salary figure. An employee would progress up the scale by three spinal points each year until they reached the top. The Claimant was promoted to band 4 in 2008, and started at the bottom of the band. There were 25 spinal points in the band. If the rate of annual progression had remained the same, he could have reached the top in eight or nine years.

In June 2010, in response to the financial crisis, the Coalition Government announced what was described as a ‘pay freeze’ in the public sector under which pay increases would be limited to 1% of overall pay costs.
As a consequence, NOMS introduced an arrangement whereby, among other things, the rate of annual progression in bands 3-6 was reduced from three spinal points to just one. This meant that the Claimant would not be able to reach the top of his band until he had been in it for a further sixteen years (23 in total).

It was common ground between the parties that the slowing of the new rate of progression was a PCP that had a disproportionate effect on younger employees because a higher proportion of older employees would, in the nature of things, either have reached the top of the pay band or in any event have progressed further up it than younger employees.

The question therefore arose as to whether the imposition of the PCP (the slower rate of progression) was justified as being a proportionate means of achieving a legitimate aim?

The Arguments

The Claimant argued that the PCP had been introduced by NOMS with the sole aim of reducing costs, which could not be relied upon as a legitimate aim. However, the Court of Appeal drew a distinction between:-

1. A PCP where the aim is solely the avoidance of increased costs; and
2. An aim which involves something in addition to the avoidance of costs – otherwise known as ‘cost plus’.

In this case, the Court of Appeal considered the difference between ‘costs’ on the one hand and ‘means’ on the other. It acknowledged that the avoidance of costs in and of itself was illegitimate and could not be used to justify discrimination. However, the requirement for an organisation to ‘live within its means’ according to budgetary constraints was potentially a legitimate aim. In simple terms, there was a difference between wishing to reduce costs, and being compelled to do so. 

In the present case it was clear that NOM’S was required to reduce its expenditure as a consequence of the Government’s austerity measures in order to balance its books. NOMS's budget for paying its employees had been frozen, so that it was required to reduce the rate of pay progression in order to ‘live within its means’. This was an important part of the picture, and the Court held that as a result NOMS's aims could not simply be described as cost cutting. Accordingly, its aim was legitimate, and could be relied upon.

Decision

The Court then went on to consider whether the implementation of the new pay scale was a proportionate means of achieving that aim. It found that it was in circumstances where:-

1. The new pay policy was detrimental to all in the sense that all employees were receiving increases in pay that would mean that their real income was falling once inflation is taken into account. The new pay policy was crafted to distribute that pain in as fair and equitable a way as possible given the constraints the respondent was subject to; and
2. NOMS recognised that the level of indirect discrimination requiring justification would inexorably rise the longer the new scheme remained in place. Accordingly, it intended to take steps to reduce the discriminatory effect of the new scheme over time. The fact that NOMS was alive to, and was taking steps to change; a potentially discriminatory PCP was a matter that the Court could properly take into account in assessing justification.

Practice Points

This case demonstrates that, while it may not always be easy to distinguish between a case where an employer wishes to reduce costs and one where it is, in effect, compelled to do so, it is nonetheless a distinction that the tribunal must draw when considering the question of justification. This is helpful to employers, particularly in the current economic climate. This case provides a useful insight into when a ‘costs plus’ justification to indirect discrimination may succeed.

If you have questions about pay, changing terms or pay structures then get in touch via our website or email the team.