Justifying age discrimination on the grounds of cost

Pensions update: Can age discrimination be justified on the grounds of saving pension cost?

In brief

Where an employer directly or indirectly discriminates against an employee on the grounds of age this discrimination will be unlawful unless the employer can objectively justify that discrimination. In a series of recent cases, the courts and employment tribunals have been asked to rule on the extent to which an employer can objectively justify age discrimination on the grounds of cost where the discrimination was in order to avoid triggering the cost of providing expensive redundancy pension benefits.

The ruling in Woodcock v Cumbria Primary Care Trust (the "Trust") confirmed that the saving or avoidance of costs will not, without more, be enough to justify discrimination on the grounds of age (the so called "costs plus" approach).  In that case, the "plus" was the avoidance of a pensions "windfall" to the employee.  The Court did not provide any further guidance on what can constitute a "plus" for this purpose.  The Supreme Court's later decision in Seldon v Clarkson, Wright and Jakes suggests that the "plus" must include an aim of a public interest nature where there is direct discrimination.

This is clearly an evolving area of law where caution is necessary and each case should be considered carefully on its own facts.

In more detail

In Woodcock, the Trust decided, when dismissing Mr Woodcock, to give him his 12 months' contractual notice prior to the start of initiating its formal consultation process. This was to avoid the cost of an enhanced pension which he would have received had his dismissal taken effect after his 50th birthday. Unsurprisingly, an Employment Tribunal found that the employer's actions amounted to direct age discrimination. More controversially, it then went on to make a finding that this decision was lawful on the grounds that the decision was objectively justified. In lending its support to that conclusion, the Court of Appeal agreed that the Trust had a legitimate aim in: (a) making a genuine decision to terminate Mr Woodcock's employment on the grounds of redundancy; and (b) saving taxpayers' money and preventing Mr Woodcock from obtaining a windfall through these enhanced pension benefits. In weighing up the impact of the discriminatory measure against the importance of the Trust's objective, the Court of Appeal noted that the Trust had been generous in delaying the decision to give notice for almost a year when it looked like alternative employment might be found.

Importantly, there was no disputing the fact that Mr Woodcock was redundant and this had been clear long before the formal consultation started.  This contrasts with the earlier and similar case of London Borough of Tower Hamlets v Wooster in which Mr Wooster's redundancy itself was challenged, rather than just the timing of the redundancy. The timing of the redundancy following the end of a period of secondment was, again, calculated to prevent the employee from becoming entitled to an enhanced early retirement benefit. However, in finding against the employer, the EAT noted that Mr Wooster reluctantly accepted a voluntary redundancy package and that no "reasonable" efforts had been made to find Mr Wooster alternative employment. He produced at the Tribunal hearing evidence of 20 alternative roles which he would have been willing to accept.  So an employer cannot dispense with its duty to consider whether there are suitable alternative roles in its rush to implement a redundancy quickly to save on the cost of enhanced early retirement benefits.

If an employer is looking to restructure its wider workforce, it will probably not be able to rely directly on Woodcock either because that is a case of direct age discrimination concerning only one individual. The relevant case would seem to be HM Land Registry v Benson and Others. Here the EAT was required to consider an employer's decision to restructure its workforce to achieve significant cost savings. The voluntary redundancy scheme was heavily oversubscribed and the employer had to choose between a pool of eligible candidates. As a consequence of the generous early retirement benefits in the employer's pension scheme, it was more expensive for the employer to make people in the 50 to 54 age bracket redundant compared with other employees. Employees in this age range were put at a disadvantage because they were less likely to be selected for redundancy. The employer primarily selected employees on the basis of the lowest cost to release them (the "cheapness criterion"). Curiously, the disadvantage here was that the employees retained their employment instead of leaving their employer's service with an attractive compensation package.

The EAT found that the employer had objectively justified the indirect age discrimination which resulted from selecting employees for redundancy on the basis of the "cheapness criterion". However, this ruling, heard prior to the Court of Appeal's ruling in Woodcock, might be doubted because no "plus" for the purposes of a "costs plus" justification was identified. For example, there was no element of "windfall" from a delay in implementing the redundancy, which was a characteristic of the Woodcock decision.  And no other aim, other than cost saving, had been identified.

Finally, the Woodcock decision might also be called into question given that it was heard before the Supreme Court gave judgment in Seldon on cases of direct age discrimination. In Seldon, Baroness Hale ruled that there were a narrower range of legitimate aims justifying direct age discrimination. These legitimate aims needed to have a "public interest nature" even if the employer had not identified such an aim at the time. The two such aims expressly identified by Baroness Hale were intergenerational fairness and allowing people to retire with dignity (rather than being managed out for performance reasons). On the face of it, it is difficult to see how either of these aims was applicable to Woodcock. It may be that there is another legitimate aim of a public interest nature which would apply on the facts of Woodcock although it is worth noting that in Seldon Baroness Hale specifically stated that these aims were not the same as more narrow employer specific reasons such as costs reduction or improving competitiveness.

For further information or tailored advice please contact your usual Fieldfisher adviser or one of our pensions partners, Michael Calvert or David Gallagher.