Discriminatory pay policy justified by need to balance books

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Posted on 03 Dec 2020

An employer can rely on its need to reduce its staff costs to balance its books as a legitimate aim potentially justifying indirect age discrimination. This does not fall foul of the rule that an employer cannot rely on costs alone to justify discriminating on grounds of age. 

Changes made to pay policy

In response to a public sector pay freeze introduced by the Government following the financial crisis, in 2010 the National Probation Service changed its incremental pay scale to address its reduced financial means. The change meant it was only possible to move up the pay scale by one point per year, instead of three. This resulted in it taking much longer than previously for an employee to progress to the top of a pay scale, disproportionately affecting younger employees. It would take Mr Heskett 23 years, instead of seven or eight, to progress from the bottom to the top of his pay scale.  

Following the change in policy, Mr Heskett brought an employment tribunal claim for indirect age discrimination, arguing that the policy indirectly discriminated against the under 50s.  

Tribunal rules pay policy not unlawful

The employment tribunal decided that although the change in policy did indirectly discriminate on grounds of age, the employer had been justified in seeking to break even year-on-year. It was therefore pursuing a legitimate aim. This was not the same as relying on cost alone to justifying age discrimination, which is not allowed. Cost-cutting was the way to achieve the objective, rather than the objective itself. 

The tribunal also considered that the change to the pay policy was a proportionate means of achieving that aim. It was a temporary measure which the employer was actively considering changing to reduce the age-discriminatory effect. While the pay policy could not be justified in the long term, it was a proportionate short-term response to the extreme financial stringency imposed by the Government.

The Employment Appeal Tribunal agreed with the employment tribunal. 

Court of Appeal: Lack of means is not the same thing as a wish to save costs

Mr Heskett appealed to the Court of Appeal, arguing the tribunal was wrong to draw a distinction between lack of means and saving costs when it came to justifying the discriminatory pay policy.

The Court of Appeal reviewed previous case law and confirmed that an employer cannot justify discrimination solely on the ground that avoiding discrimination costs more.  Saving or avoiding costs will not, without more, amount to a legitimate aim. 

The essential question is whether the employer's aim is simply a wish to save costs. If so, the discrimination cannot be justified. But if the employer’s aim is more than simply a wish to save costs, it may amount to a legitimate aim potentially justifying age discrimination. In that case, the tribunal must consider the employers’ aim as a whole and decide if it is legitimate. 

Pay policy was justified

The Court of Appeal went on to rule that an employer's need to reduce its expenditure, and specifically its staff costs, in order to balance its books can constitute a legitimate aim justifying discrimination. A tribunal should not have to ignore the financial constraints an employer is having to operate under, particularly if responding to real financial pressures. The tribunal had therefore been entitled to treat the employer's need to observe the constraints on staffing costs imposed by the Government pay freeze as a legitimate aim. 

The Court of Appeal went on to reject Mr Heskett’s argument that when considering whether the pay policy was proportionate, the tribunal should not have taken account of the fact that his employer was actively considering changing it.  It could see no reason why an employer should not be able to seek to justify measures on the basis that they represent a proportionate short-term means of responding to a problem, even though they could not be justified in the longer term.

What does this mean for employers?

The Court of Appeal took a sensible approach to the ‘cost plus’ rule which says that employers cannot rely on cost alone to justify discrimination, but can take it into account along with other factors. The ‘cost plus’ rule is often viewed as artificial. The Court recognised that any decision made by an employer will have cost considerations and therefore a more nuanced approach should be taken. 

An employer who is forced to make cost saving decisions may be able to establish a legitimate aim if, by looking at the whole picture, the aim can be characterised as more than simply a wish to save costs. 

The Court considered that the need to operate within a budget or balance the books is more than simply a wish to save costs and can therefore justify age discrimination.

Heskett v Secretary of State for Justice

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