286: Court of Appeal considers indirect age discrimination and the ‘costs plus’ rule

Indirect age discrimination occurs when a policy or practice puts employees of a certain age at a disadvantage. However, that policy or practice can still be justified if the employer can show that it is a proportionate means of achieving a legitimate aim. Case law has established that employers cannot justify indirect age discrimination solely on the basis of saving costs: there has to be an extra reason. This is known as the ‘costs plus’ rule. In the recent case of Heskett v Secretary of State for Justice, the Court of Appeal has confirmed that the need to balance the books during a public sector pay freeze could be a legitimate aim for the purposes of justifying indirect age discrimination since it amounted to more than just a wish to save costs.

Mr Heskett was a probation officer in the National Offender Management Service (NOMS), an executive agency of the Ministry of Justice. In 2010, due to the public sector pay freeze, NOMS made changes to its pay progression policy. Under the old policy, a probation officer could progress three points up the pay scale each year. Under the new policy, they could only progress one pay point per year. This meant that it would take 23 years to reach the top of the pay scale, rather than about seven, and older employees at or close to the top of the new band would earn more in salary and pension benefits than those lower down the band. Mr Heskett brought a claim for indirect age discrimination, arguing that the pay policy put those under 50 at a significant disadvantage compared to older employees.

The Employment Tribunal agreed that the pay progression policy was indirectly discriminatory but held that it was justified. NOMS had a legitimate aim of setting a pay progression scheme which would enable it to live within its means. This was not the same as relying on saving costs alone, since it had been forced to take action because of its ‘absence of means’. The Tribunal also held that the pay policy was proportionate since it was a short-term response to the extreme financial stringency imposed by the Treasury and NOMS was taking steps to address the discriminatory effect within a short timeframe.

On appeal, the Employment Appeal Tribunal (EAT) upheld the Tribunal’s decision, confirming that it was a legitimate aim for an employer to seek to break even year-on-year. The EAT also noted that NOMS had been forced to cut costs because of government policy and that it had tried to avoid redundancies and consulted with unions.

Mr Heskett appealed to the Court of Appeal, arguing that the Tribunal had been wrong to consider that “absence of means” was anything other than relying on cost. However, the Court of Appeal dismissed his appeal. The fundamental question was whether the employer’s aim was no more than a wish to save costs. If it was, the justification argument would fail. If it was not, a Tribunal had to consider the employer’s aim as a whole and decide whether it was legitimate. In this case, the need to adjust to constraints on staffing costs imposed by the Treasury pay freeze was a legitimate aim and satisfied the “costs plus” requirement. As regards proportionality, the Court of Appeal accepted the employer’s argument that a particular measure can be proportionate as a temporary stopgap, although the longer it remains in place, the harder it might be to justify.

This is a useful decision for employers which illustrates the fine line between wanting to save costs and having to operate within financial constraints. The Court of Appeal has confirmed that the need to work within budgets and to balance the books may be regarded as legitimate aims that amount to a ‘costs plus’ justification. Since financial pressures and budgetary requirements apply to most organisations, this seems to set the bar very low for the defence. However, employers also have to demonstrate that they have acted proportionately by looking at all reasonable alternatives, and that they have tried to limit any discriminatory impact.