The ‘cost plus’ rule | Can employers discriminate to save on cost?

While it’s not possible for employers to justify direct discrimination – such as promoting a man over a more qualified female candidate – indirect discrimination can, in some cases, be justified.


voluntary overtime pay

Indirect discrimination occurs when a company’s policies, procedures or rules which apply to everyone has the effect that people with a certain protected characteristic are put at a disadvantage when compared with those who do not share it. Examples of indirect discrimination include:

  • Refusing an employee’s request to work part-time after maternity leave because you have a company policy of not allowing part-time work;
  • Dismissing an employee for repeat periods of short-term absence due to depression; and
  • Rejecting a 40-year-old candidate with 10 years’ experience for a position as an architect because the role is advertised for people in the first four years of qualifying.

So, what is a legitimate aim?

To prove objective justification, the aim in question must be a real, objective consideration and not in itself discriminatory. For example, ensuring the health and safety of others would be a legitimate aim.

The proportionality stipulation means there must be no alternative action that the employer could have been taken, without too much difficulty, to avoid the discriminatory effect.

It is generally established that cost saving, by itself, cannot be relied on as a legitimate aim and is not capable of justifying indirect discrimination. There needs to be some added reason – this is known as the ‘cost plus’ rule.

Heskett v Secretary of State for Justice

In a recent case, the Employment Appeal Tribunal (EAT) considered whether “absence of financial means” is enough to justify something which would otherwise amount to indirect age discrimination.

The claimant, Mr Heskett, worked as a probation officer. In 2016, he brought a claim after government funding cuts led to changes in the way that certain probation officers progressed up the salary scale. Under the new progression policy, it would take newly-appointed offers 23 years to climb to the top of the salary scale as opposed to seven or eight, meaning his longer-serving (and typically older) colleagues who had reached the top (or close to the top) of the band would earn around £5,000 more per year in salary and pension.

Mr Heskett argued age discrimination, asserting that the pay progression policy indirectly discriminated against younger probation offers like himself. He argued, with reference to previous case law, that cost saving alone could not amount to a legitimate aim and therefore the employer’s actions could not be justified.

While the Tribunal agreed that the policy was, on the face of it, discriminatory, it held that it was objectively justified based on the facts of the case. Crucially, it found that this was not a ‘costs alone’ situation. The EAT upheld this decision, and the case eventually made its way to the Court of Appeal.

The Court of Appeal considered whether the reason for the employer’s action was to reduce costs for its own sake. If so, this would not be a legitimate aim.

It started by reflecting on the Tribunal and EAT’s findings, noting the following:

  • The slowing of the rate of progression had a disproportionate effect on younger employees because a higher proportion of older employees would, in the nature of things, either have reached the top of the pay band or in any event have progressed further up it than younger employees.
  • However, the reason for the Employment Tribunal rejecting the claimant’s submission that the employer’s actions had been based on costs alone wasn’t because this was a ‘costs plus’ case. In other words, the claimant’s argument wasn’t dismissed because the Tribunal believed there was some other factor at play; the reason it had rejected the claimant’s argument was because it had drawn a distinction between cases where the aim was “cost cutting” and cases where an “absence of means” forces the employer to do the act complained of.
  • The employer’s budget for paying its employees had been frozen, so it was required to reduce the rate of pay progression in order to “live within its means”. This, the Judge said, was an important part of the picture, and meant that employer’s aims “cannot simply be described as cost cutting”.

With this in mind, the Court of Appeal held that while the cost plus principle is correct and stands, the real question to answer here was whether “absence of means” can be treated as a distinct factor from “cost”. This, it said, was the real point on which the argument focused.

The 'cost cutting' versus 'absence of means' disctinction

Ultimately, it held that the employer’s justification in this case cannot fairly be characterised as “cost alone”. It wasn’t just that it would have been more expensive for the employer to avoid the discriminatory impact of the measure in question, but that it was positively unaffordable. The claimant’s appeal was therefore dismissed.

For employers, the case confirms that if an employer is subject to financial constraints which oblige it to reduce its costs, then that can be enough to amount to a legitimate aim.

James Tamm

Director of Legal Services

Expert Comment

The court here drew a very subtle but important distinction. The employer in this case was not simply trying to avoid extra expenditure or wishing to save costs – that cannot be a legitimate aim. Instead, we’re talking about an employer genuinely needing to reduce its overall expenditure, and specifically its staff costs, in order to balance the books. That, the court said, was a legitimate aim.

This will be a welcome decision for employers, especially given the financial constraints across many industries due to the coronavirus pandemic. It also appears that the ‘cost plus’ moniker is an oversimplification and can lead to inappropriate outcomes.

A word of warning though to employers: whilst a need to live within one’s means is a legitimate aim, that is only half the battle. The methods to pursue that aim still need to be proportionate. If in doubt, it’s always safest to seek advice from an Employment Law specialist.

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Looking to introduce a policy but worried it might be indirectly discriminatory? Facing an employee grievance about a provision, criterion or practice they feel disproportionately impacts them? Given it now costs employees nothing to bring a claim, get straightforward, jargon-free advice from Employment Law experts. Find out more about our advice line support.

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