Compelled need to reduce expenditure may justify indirect discrimination on pay

In a claim for indirect discrimination, an employer seeking to show justification (a) may not rely solely on the saving or avoidance of cost as a legitimate aim, but (b) may rely on the need to reduce its expenditure (and specifically its staff costs) in order to balance its books, i.e. where it is compelled to effect such reductions, and (c) the fact that the cost reduction measures are temporary and subject to review, or time-limited, may also go to legitimise the employer’s aim, according to the Court of Appeal.

Heskett v SoS for Justice ([2020] EWCA Civ 1487)

What are the practical implications of this judgment?

In this appeal, the Court of Appeal returns to the vexed question of whether, when determining if a respondent’s indirect discrimination is ‘justified’, i.e. is a ‘proportionate means of achieving a legitimate aim’, the legitimate aim in question may be the saving or avoidance of costs by the employer.

Prior to this appeal, the broad position has been that the answer to that question is that:

• the saving or avoidance of costs by the employer on its own is not a legitimate aim capable of providing the basis of a justification defence, but
• there may be a legitimate aim where the aim described by the employer also involves elements other than cost, i.e. it is permissible that the saving or avoidance of costs forms part of the aim, but there must be something additional to that as well in the overall aim in order for it to be legitimate. This has often been referred to as the ‘cost plus’ rule.

Underhill LJ, in this case, broadly confirms that position. However, in doing so, he:

• conducts an in-depth review of both the EU and domestic case law that is relevant
• looks at some of the subtle questions that arise in the real world when a tribunal is attempting to determine whether an employer’s aim is:
  • just cost-saving (in which case it may not be relied on), or
  • involves something extra, in which case it may be legitimate to rely on it.

The context of the case is that a government department, as employer of the claimant, was asked, as part of the government’s austerity programme, to reduce its expenditure drastically. This led to the imposition of a pay progression system which was markedly less generous, and much slower in progression, than that which had applied before. The claimant argued that this system constituted indirect age discrimination, as older employees were usually further up the pay scale already and hence younger employees, with on average less service, were disproportionately adversely affected in terms of pay progression.

In this context, the Court of Appeal holds that:

• the saving or avoidance of costs will not, without more, amount to the achieving of a legitimate aim; i.e. where the aim is solely to avoid costs, that cannot constitute a legitimate aim
• a tribunal should, where this issue arises, consider how the employer’s aim can most fairly be characterised, looking at the total picture. It is only if the fair characterisation is indeed that the aim was solely to avoid increased costs that it has to be treated as illegitimate
• an employer’s need to reduce its expenditure, and specifically its staff costs, in order to balance its books can constitute a legitimate aim for the purpose of a justification defence
• it may sometimes be difficult for a tribunal to draw the line between:
  • a case where an employer simply wishes to reduce costs (which cannot constitute a legitimate aim) and
  • cases where it is, in effect, compelled to do so (which may constitute a legitimate aim)
• however, that is the distinction that the tribunal must draw
• in the context of this case, the employer was entitled to treat the constraints imposed by the pay freeze as a legitimate aim
• the fact that a system is in the course of change may represent part of the justification for the state of affairs at a particular time (e.g. where, as in this case, the employer regards the current system it is operating as temporary and intends to end or review it over time).

The discussion of the facts in the multiple authorities reviewed in this judgment provide an excellent resource for practitioners who are charged with advising on (the often subtle question of) whether an employer’s aims in implementing a provision, criterion or practice are in fact:

• solely to avoid or save cost, and hence may not constitute a legitimate aim capable of justifying indirect discrimination, or
• properly construed as ‘cost plus’, and hence capable of doing so.

Case details

• Court: Court of Appeal
• Judges: Underhill, McCombe and Macur LJJ
• Judgment handed down 11 November 2020

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