In a recent case, the Court of Appeal (CA) has revisited the so-called “costs plus” rule and considered the extent to which employers can rely on cost and budget considerations when justifying policies that may disadvantage some protected groups.

The costs plus rule and how it relates to this case

The “costs plus” rule in the justification of indirect discrimination comes from an interpretation of EU law and was last considered by the CA back in 2012. While the CA upheld the rule on that occasion, it has continued to come in for criticism. One of the rule’s judicial critics, who previously described it as involving an artificial game of “find the other factor”, now sits as a judge in the CA. So, the stage was set for this latest case to provide a fresh look at the position.

The issues in the case arose from the government’s austerity measures following the financial crisis in 2008, including the imposition of pay restraints across the public sector. As a result, the rate at which probation officers progressed up their pay scales was slowed down from three pay points each year to just one pay point per year. In the claimant’s case, this meant that it would take 23 years to progress from the bottom to the top of the pay scale, instead of the seven or eight years it would have taken previously. The claimant argued that this was indirect age discrimination.

The Employment Tribunal (ET) agreed that the policy had a disproportionate effect on younger employees, compared to older employees who were more likely to have reached the top of the pay scale already, so it was potentially indirect age discrimination. The key question was whether the policy could be justified as a proportionate means of achieving a legitimate aim.

The claimant argued that this was all about cost and, according to the “costs plus” rule, avoiding costs could never be a legitimate aim justifying indirect discrimination. Costs and budget considerations could only be legitimate aims when combined with other factors. Rejecting the claim, the ET ruled that this was not a just a matter of costs alone and it was legitimate for the employer to seek to live within its means. The Employment Appeal Tribunal upheld the ET’s decision and the claimant appealed to the CA.

Court of Appeal’s decision – costs plus rule still stands, but rarely bites

The CA ruled as follows:

• It is not legitimate to discriminate purely out of a desire to save or avoid costs. For example, an employee who decides to pay part-timers less per hour than full-timers simply because it is cheaper could not justify that.

• The “costs-plus” rule is correct, but the label should be avoided because the principle needs to be understood differently.

• It is important to look at the whole story – how can the employer’s aim fairly be characterised? An “inappropriately mechanistic approach” of trying to look for the additional non-cost factor is to be avoided and the total picture needs to be considered.

• The employer in this case was subject to financial constraints which obliged it to reduce costs. This was different from costs alone. An employer’s need to reduce its expenditure to balance its books can be a legitimate aim. There is no good basis for ignoring the constraints under which an employer is in fact having to operate.

• Whether any specific policy is justified on the facts depends on a proportionality analysis. The ET was right to find that the pay policy was justified in the circumstances of this case.

What this ruling may mean in practice

This case about measures taken in the aftermath of the last recession has taken so long to go through the courts that the CA’s judgment comes just as employers are taking similar cost-cutting measures in the face of new economic turbulence. 

Has the CA made cost-cutting measures less susceptible to legal challenge? To a limited extent, yes. There may be less need for artificial exercises in which employers are advised to reframe the reasons for their actions and identify an additional reason which is not cost. Budgetary considerations may now be more readily recognised as legitimate reasons for adopting policies that have a potentially indirectly discriminatory impact, or for not immediately correcting such policies.

In most cases, however, there will still be arguments to be had over whether indirectly discriminatory policies are justified. The dispute will now move to the question of proportionality.

In this case, the fact that the pay arrangements were intended to be temporary was a factor in the proportionality analysis. The CA said that employers should be allowed to justify measures that may be a proportionate short-term means of responding to the problem in question, even if they could not be justified in the longer term. This is a very helpful clarification.

It’s worth emphasising that the CA’s decision relates only to cases of indirect discrimination. Some policies may be directly discriminatory (for example, if they taper down severance pay once an employee is aged 65 or over). Direct age discrimination can potentially be justified (unlike for other protected characteristics), but the CA pointed out that the tests for justification are not the same. To justify direct age discrimination an employer also needs a “social policy” aim, such as promoting intergenerational fairness. In effect, this means there is a “costs plus plus” rule for direct age discrimination.

Heskett v Secretary of State for Justice – judgment available here