The Court of Appeal upheld the “cost plus” principle, in the sense that saving or avoidance of costs will not without more amount to a ‘legitimate aim’ in seeking to justify discrimination. However this does not prevent an employer from relying on a legitimate aim of needing to reduce its expenditure, specifically staff costs, in order to balance its books. The employer still has to show that the measures complained of were a proportionate means of achieving the aim.
2020, Court of Appeal. Full decision www.bailii.org/ew/cases/EWCA/Civ/2020/1487.html.
The claimant was a probation officer working for the National Offender Management Service (NOMS). Its budget was set by the Ministry of Justice. It operated a system of increasing pay for each year an employee had been in the job. From 2011, as a result of the Treasury imposing a pay ‘freeze’, the annual increases were much reduced. This disproportionately affected younger employees such as the claimant, because a higher proportion of older employees would have reached the top of their pay band or progressed further up it, having moved up at quicker rate.
NOMS had had to revise its pay scheme because the government decided in 2010, as part of its “austerity” policy, that until further notice the overall cost of public sector pay should not increase beyond 1% per annum. The new pay scheme was the outcome of negotiations between NOMS and the recognised trade union.
The employment tribunal rejected the claim for indirect age discrimination. It held that the reduced rate of pay progression was justified, given that NOMS’s budget for paying its employees had been frozen. The claimant appealed, arguing that cost alone could not be sufficient justification.
Held by the Court of Appeal: The “cost plus” principle does not prevent an employer from relying on a legitimate aim of needing to reduce its expenditure, and specifically staff costs, in order to balance its books, for the purpose of a justification defence.
“Cost plus” principle
The Court of Appeal upheld the “cost plus” principle, but said the label was misleading. Quoting from the Woodcock case, the court explained the principle as follows:
81. …[The principle] “cannot mean more than that the saving or avoidance of costs will not, without more [my emphasis], amount to the achieving of a ‘legitimate aim'”. In other words, to take the paradigm case of discriminatory pay, an employer “cannot justify the discriminatory payment to A of less than B simply because it would cost more to pay A the same.
83. It follows that the essential question is whether the employer’s aim in acting in the way that gives rise to the discriminatory impact can fairly be described as no more than a wish to save costs. If so, the defence of justification cannot succeed. But, if not, it will be necessary to arrive at a fair characterisation of the employer’s aim taken as a whole and decide whether that aim is legitimate…
The court goes on to illustrate this distinction by reference to several cases. It cites some cases where the principle did not apply because cost saving was not the whole story: eg enhanced payments only for predominantly male jobs where this was to provide a temporary cushion for a loss of earnings not suffered by those in other jobs, or higher employment tribunal fees for more complex cases (more likely to be brought by eg women) where this reflected the extra demand of those cases on tribunals’ resources. On the other hand, an example where the principle did apply was O’Brien v Ministry of Justice, 2013: there the Supreme Court held that the government was not justified in denying pensions to recorders and other part-time judges simply because it was expensive to do so.
The Court of Appeal added (at para 89) that the “cost plus” label can mislead parties, and sometimes tribunals, to adopt an inappropriately mechanistic approach. The court said “It is better, in any case where the issue arises, to 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.”
Living within one’s means
In the present case NOMS’s budget for paying its employees had been frozen, so that it was required to reduce the rate of pay progression in order to “live within its means”.
Did the cost plus principle mean that NOMS could not rely solely on this aim? No said the Court of Appeal, it was allowed to rely on that as a legitimate aim. The principle was not intended to catch this kind of case. 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.
This does not mean that such financial constraints will necessarily justify discrimination. Even where the cost plus principle does not apply, so that the employer can rely on a legitimate aim, the employer still has to show that its actions are proportionate:
If it is permissible for an employer to rely, as a legitimate aim, on a real need to reduce or constrain staffing costs, it still has to show that the measures complained of represent a proportionate means of achieving that aim, having regard to their disparate impact on the group in question. It is in my view entirely appropriate that a proportionality exercise of that kind should be the focus of the justification enquiry. Such an exercise will enable the tribunal to examine carefully the nature and extent of the financial pressures on which the employer relies as well as the possibility that they could have been addressed in a way which did not have the discriminatory effect complained of.
The court at paragraph 101 draws a distinction “between a case where an employer simply wishes to reduce costs and cases where it is, in effect, compelled to do so.”
A central element in the employment tribunal’s finding that the reduction in the rate of pay progression was justified was the fact that it had been imposed as a temporary measure, and that active consideration was being given to changing the system so as to reduce the age-discriminatory effect of the scheme as it stood.
The Court of Appeal held that the tribunal was entitled to take into account the fact that NOMS was intending to change the system.
It is worth repearing that even where budgetary issues can be a legitimate aim, this does not mean the justification defence succeeds. The employer etc still needs to show that its action is justified – that is a proportionate means of achieving the legitimate aim.
Also Heskett was a case of indirect age discrimination. I suggest that even the need to meet a budget would not, for example, have justified the Ministry of Justice in cutting pensions for part-time judges but not for full-time ones: cf O’Brien v Ministry of Justice.