Has it become easier for employers to justify indirect age discrimination? Moving away from the ‘costs-plus’ rule

In the recent case of Heskett v Secretary of State for Justice, the Court of Appeal appeared to expand the potential defences to indirect age discrimination claims, under the long established but heavily criticised ‘costs plus’ rule. This typically requires employers to have another legitimate reason, in addition to cost saving, to justify indirectly discriminatory practices. Whilst most employers do not wish to apply any discriminatory practices, during economic downturns many businesses are required to make cost savings and look at the fairest and most efficient ways of doing so. This can often be achieved through redundancy selection processes, exit packages and changing pay scales. The court found in this case that indirect age discrimination against younger workers relating to a new pay scale could be justified by the employer’s absence of financial means, meaning that no unlawful discrimination took place. Has this changed the legal landscape for businesses looking to restructure efficiently and creatively?

Under the Equality Act 2010, indirect discrimination occurs where an employer applies a provision, criterion or practice (PCP) which puts, or would put, the employee and those with the same protected characteristic at a particular disadvantage. However, the employer will have a defence to a claim if it can justify its actions as a proportionate means of achieving a legitimate aim.

Previous case law has confirmed that a desire simply to save or avoid costs could not on its own amount to a ‘legitimate aim’. Instead employers needed another reason, in addition to cost, to justify a PCP (the so-called ‘costs plus’ rule). Although this body of case law has come under some criticism over the years, it has been considered fairly high risk for employers to rely on costs alone where an indirectly discriminatory PCP is being considered by the business.

However, the Heskett case may have paved the way for greater flexibility for employers. The case involved a policy that limited the pay increases within the public sector as result of a wider government pay freeze during “austerity”. This policy had an indirectly discriminatory effect on younger workers as it would take them considerably longer to reach the higher pay scales. The court considered the ‘costs plus’ approach in detail and held that, although the term should be avoided, an employer still could not justify indirect discrimination solely on the basis of cost. Crucially, however, the Court of Appeal found that the policy in this case was justified by drawing the distinction between having “the absence of means” and relying solely on cost. As the employer had been obliged to cut staffing costs in order to balance the books, not solely to avoid or save costs, the policy could be justified due to the absence of means.

This nuanced development will make it easier for employers seeking to implement strategic HR plans that indirectly affect certain groups of staff. Obvious examples include redundancy packages that benefit longer serving staff who may be more expensive to employ, or (as in this case) a pay scale that is weighted towards length of service. Provided that an employer can prove that they are acting in the absence of means by combining their aim to save costs with a need to reduce expenditure, their actions will very likely amount to a legitimate aim. Employers do of course still need to ensure that the PCP is “proportionate”, in other words that the PCP is reasonably necessary and the employer considered whether there were any less discriminatory ways of achieving the same aim. For example, in the Heskett case the court considered it relevant that the pay scale was being implemented on a short-term basis only. However, with some careful planning and preparation, the requirement to ensure proportionality may not be insurmountable.

Article co-authored by Nicole Ellerby.