A recent Employment Appeal Tribunal case appears to have made it easier for employers to justify enhanced pay and benefits which, on their face, are discriminatory. When the next recession arrives, this will be an important case for HR professionals to remember (particularly those in the financial services space).
Indirect age discrimination
Indirect age discrimination occurs where an employer's policy or practice creates a disadvantage to employees of a certain age. However, such a practice can be lawful if it is a proportionate means of achieving a legitimate aim.
The Equality and Human Rights Commission Equality Act 2010 Code of Practice provides an example: "A building company has a policy of not employing under-18s on its more hazardous building sites. The aim behind this policy is to protect young people from health and safety risks associated with their lack of experience and less developed physical strength. This aim is supported by accident statistics for younger workers on building sites and is likely to be a legitimate one."
When one must equal two
There's a catch. An employer cannot rely solely on "cost" as its legitimate aim. In other words, an employer cannot justify a discriminatory practice or policy solely because it saves cost for the employer. There has to be some extra reason in addition to cost. This is known as the "cost plus" rule.
A common example is where enhanced redundancy payments are based on age bands which result in older workers receiving higher payments than younger workers who have the same length of service and pay. Unless the employer has a legitimate reason – in addition to lower cost – as to why it pays younger employees less than older workers, the employer is likely to have indirectly discriminated against its younger employees because of their age. The "cost plus" rule has not been without its critics.
In the recent case of Heskett v Secretary of State for Justice, the employer (the Ministry of Justice) demonstrated that it was not relying on cost alone when it introduced a new pay banding system. The new pay banding system was (on its face) indirectly discriminatory to younger probation officers. It would take them 23 years to progress to the highest pay band. Whereas, it had taken only 7 or 8 years under the outgoing system. Existing employees with longer service (generally older employees) enjoyed higher earnings than newer (younger) employees.
The issue on appeal was whether the Ministry of Justice could justify its pay scale due to its "absence of means" to pay higher wages to younger staff. The absence of means was caused by the Government's central pay freeze. The Employment Appeal Tribunal said yes, the Ministry's reason for the pay banding arrangement was not cost, it was an absence of means.
What is the difference between an absence of means (which permits discrimination) and cost (which does not permit discrimination). The answer seems to be that the Ministry was essentially forced to introduce the new pay banding due to the central government pay squeeze. That was deemed to be different from the Ministry having chosen to introduce a new pay system. It's a nuanced point, but the Ministry being "constrained" to introduce the pay policy was key.
Does it add up?
To me, one of the odd points about indirect discrimination claims is that they often concern a benefit that an employee receives which is over and above his or her statutory entitlements. For example, much of the case law has concerned enhanced redundancy pay and increasing pay bands.
The "cost plus" rule also seemed a touch artificial to me. Why was it ok for an employer to rely on cost, as long as there was some extra reason?
This case seems to say that an employer can now rely solely on cost to justify indirect discrimination, as long as the employer is in effect being forced to do so because it is trying to live within its means.
One of the many issues HR teams faced during the last recession was that redundancy policies (which had been gathering dust on a shelf) were suddenly put into use, and new pay arrangements had to be hastily put into place to reduce labour costs quickly. Many of those redundancy policies and pay arrangements were (on their face) indirectly discriminatory towards younger employees. Many of the large banks were particularly affected by this as they had generous contractual redundancy arrangements under which payments were linked to an employee's age.
Provided an employer can demonstrate that its financial means are limited or constrained (or simply that it is trying to balance the books), this case suggests that the employer should be able to justify indirect discrimination. For example: (i) enhanced redundancy payments which differentiate levels of pay based on age; and (ii) new pay bands which increase the time it takes for an employee to reach the top pay band.