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The Costs Plus Rule – what is it and how does it affect employers?

When a rule or requirement (referred to as a “provision, criterion or practice” (PCP) in the Equality Act 2010) is applied across the board by an employer, but places someone at a particular disadvantage due to a protected characteristic, this could give rise to a complaint of indirect discrimination.

If employers find that themselves in a situation where they are vulnerable to a claim for indirect discrimination, there is a potential defence if they can show the PCP qualifies as a ‘proportionate means of achieving a legitimate aim’. What is considered ‘proportionate’ and what is deemed as ‘a legitimate aim’ will depend on the circumstances of each case.

Indirect discrimination cannot be justified where the reason is just to save costs. This is known as the ‘costs plus’ rule, with the ‘plus’ signifying another factor that must be present in order to constitute a justification. However, where there are other factors, financial considerations can also be taken into account.

A case in the Court of Appeal, Heskett v Secretary of State for Justice [2020] EWCA Civ 1487, has shed new light on the costs plus rule, and makes for interesting reading for employers who may be struggling with the ongoing effects of the COVID-19 pandemic.

What happened

In 2010, as part of its austerity package, the government imposed funding cuts across all departments, including the Ministry of Justice (MoJ).

As part of its response to the budget cuts, the MoJ brought in a new pay progression policy that meant that it would take someone 23 years to reach the top of the salary scale, compared with 7 or 8 years under the former policy. The practical effect was that older employees who were nearly at the top of the band would earn more in salary and pension than those lower down the band, by about £5,000 a year. One of the MoJ’s employees, Mr Heskett, who had been disadvantaged by the new policy, argued that it amounted to indirect age discrimination.

A tribunal agreed with Heskett insofar as the policy was indirectly discriminatory but said that the MoJ had advanced a sound justification for it – that it had to “live within its means” and the pay progression scheme was a method for doing so.

Cost on its own was not the justification – it was the absence of means (i.e. an inability to increase pay due to external factors) and financial pressures that had forced it to take the action in question.

On the question of proportionality, the MoJ had acknowledged that the policy would have a discriminatory effect but told the tribunal that it was looking into how to resolve this as soon as possible.

Responding to Heskett’s appeal, the Employment Appeal Tribunal agreed, saying that there was a big difference between the reason of cost alone, and absence of means. By way of example, dismissing people so that a company can increase its profits and pay shareholders more in dividends is quite different from having to make job cuts in the middle of a pandemic when it is all that stands between a company and liquidation.

The EAT was told that the MoJ had to look at all options for cutting costs because of a government policy over which it had no control, and had taken steps to avoid redundancies, consulting with trade unions to facilitate the process. The EAT also noted the MoJ’s point about the short-term nature of the policy that had discriminated against Heskett.

Mr Heskett appealed.

Court of Appeal decision

The appeal was dismissed. The Court of Appeal looked at the relevant case law and said that saving or avoiding costs on its own could not amount to a legitimate aim.

The question that arose was whether “the aim was no more than a desire to cut costs”. If that was the case, then there was no defence of justification. If it was not the case, the employer’s aim needed to be examined at length and only then could a decision be taken on whether it could be classed as legitimate.

The Court did just that in this case and concluded that the MoJ’s need to reduce expenditure in general and staff costs in particular did count as a legitimate aim for the purposes of the justification defence, as the motivation behind it was an external imperative (reduction in budgets across government) and there was no intention for the policy to apply indefinitely. Changes were already being considered in order to reduce the discriminatory effect.

On the duration of a measure or policy, the Court said that if a particular measure is intended to be temporary, it could affect whether it can be classed as proportionate. The longer a measure remains in place, the more difficult it would be to justify if it results in indirect discrimination.

Implications for employers

Employers have had a rough year and for many, the question of costs is hanging over their heads. Making budget savings can mean the difference between liquidation and survival. This judgment will provide much-needed clarity on how to go about achieving those savings without the further worry of an indirect discrimination claim in the employment tribunal.

When considering a justification defence, the key word to remember is ‘proportionate’. As far as the courts are concerned, this means that the employer must be able to show they have considered all reasonable alternatives and there is nothing that can be done to reduce or eliminate the discrimination that the employee is experiencing.

Written by

Shamaila Gul, Solicitor at rradar