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When selecting employees for redundancy, the criteria used must be as objective as possible to avoid discrimination. That being said, many employers are faced with a situation in which they need to reduce costs and one way to do this is to reduce the workforce. The logical conclusion in many employers’ minds, therefore, is that the best way to achieve this is to make redundant those employees who cost the most. Unfortunately, this can lead to indirect age discrimination, as those on higher wages tend to be older employees who have been in the industry for longer and have more experience, thus enabling them to demand and receive higher salaries.

Under Section 19 of the Equality Act 2010, indirect discrimination may occur if it can be shown that a provision, criterion, or practice (PCP) applied by the employer places an employee at a particular disadvantage compared to others, because of the employee’s protected characteristic.  Age is one of the protected characteristics.

However, the employer may be able to justify using that PCP if it is “a proportionate means of achieving a legitimate aim”.

If an employer decides to apply a practice of selecting for redundancy employees who receive higher wages, it is likely to place older employees at a significant disadvantage when compared to younger ones – thereby constituting indirect discrimination.

The widely accepted formula to use when deciding what constitutes “a proportionate means of achieving a legitimate aim” was laid down in Hampson v Department of Education and Science [1991] as “an objective balance between the discriminatory effect of the condition and the reasonable needs of the party who applies the condition.”

In the recent case of HM Land Registry v Benson & Others [2012] the Employment Appeal Tribunal (EAT) considered a situation in which cost was the deciding criterion for selecting employees for redundancy. Essentially, then, it asked: was saving costs a proportionate means of achieving a legitimate aim?

HM Land Registry had allocated a specific amount of funding to a voluntary redundancy and early retirement scheme, and applied selection criteria to ensure that they did not release too many employees whose entitlements under the scheme would take them over the allocated budget.

The EAT found that applying a criterion which essentially looked for the cheapest employees was proportionate, bearing in mind that it was not the only factor considered but was a practicable one. The only other options were to abandon the scheme entirely or pay an amount much larger than the allocated funds.

The EAT also accepted that it was legitimate for an employer such as HM Land Registry – like any business – to break even on a year-by-year basis and to make redundancies when necessary to enable it to do so. The EAT therefore concluded that it was legitimate to impose a budget on such schemes and that an employer’s decision about how to allocate resources was a legitimate aim. It did not matter that increasing the budget would have reduced the impact of the discrimination: an employer does not need to be facing insolvency for it to be necessary to apply a budget to such matters. It was therefore found that applying the selection criteria of cost was a proportionate means of HM Land Registry achieving their legitimate aim.

However, it is important for employers to note that this case was decided upon very specific facts, and it does not present an open door for employers to automatically use costs as a criterion during redundancy procedures. HM Land Registry did not use cost as the only criterion but it was the only one resulting in a discriminatory effect.

The outcome seems to be that, while cost may be used as a criterion when applying a redundancy procedure, it will not automatically be a proportionate means of achieving a legitimate aim. In fact, it may not be sufficient to defend a claim for discrimination at all.

Therefore, when carrying out redundancy exercises, employers are best to continue using objective criteria, avoiding those that result in discriminatory selection whenever possible.  It may also be worth reviewing which employees have been selected for redundancy, to ensure that they do not share a common protected characteristic. If there is a high percentage of older or female workers, for instance, this could mean that a potentially discriminatory criterion has been applied.  Employers should always ensure that they can justify the use of that criterion before taking action.

Redundancy should always be approached with caution and employers should always seek legal advice from the outset on the procedure they intend to follow.

For more information on this or any other employment issue, please contact our Employment Law team or call us on 0117 904 6000.