Brett

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Indirect Discrimination in Social Security Schemes

Andrew Brett*

* The author wishes to thank Dr Elaine Whiteford and Professor Barry Fitzpatrick for their helpful and constructive comments on earlier drafts of this manuscript. However responsibility for any mistakes remains entirely my own.

Copyright © 1997 Andrew Brett.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary

As the EC possesses a very limited competence in the sphere of social security, it is understandable that the European Court of Justice (hereafter 'the Court') maintains a cautious approach in relation to justifications on objective grounds of social policy, pleaded by Member States, of prima facie indirectly discriminatory rules. However, the Court's pronouncements in two recent cases C-31/93, Nolte v Landesversicherungsantaldt Hannover [1995] ECR I 4625 and C-444/93, Megner and Scheffel v Innungskrankenkasse Vorderpfalz [1995] ECR I 4741, suggest that the Court has become overly respectful towards the claims of Member States, since it has given only the most cursory analysis of whether contested German social security rules comply with Community law.

Background and Introduction

Most social security rules have been traditionally designed on a social demographic structure in which there are one earner families, who are typically headed by a man. Such schemes originally envisaged that women would be dependent upon their spouse, through whom their material needs would be attended. Pressures to adapt this model have grown for a variety of reasons. Firstly, the growth in the number of women who are engaged in paid employment has led to demands for access to equal benefits from the social security system. Secondly, the increasing divorce rate means that it is impossible for women to rely upon the continued financial support of their spouse. Thirdly there has been a growing appreciation of the value of work outside the paid employment market as somehow secondary and calls have been heard for its formal inclusion within the social security systems of Member States (Whiteford 1997, p 361).

EC Directive 79/7

The EC directive on social security arose out of the legislative drive to introduce the principle of equal treatment generally into Community law .The preamble of Directive 79/7 states that its goal is the progressive implementation of the principle of equal treatment for men and women in the field of social security.

Article 4(1) provides that there is to be no discrimination on grounds of sex, either directly or indirectly, by reference in particular to marital or family status. Discrimination is prohibited in relation to the scope of the schemes or conditions of access, obligation to contribute and calculation of benefits. Member States are required to take the necessary measures to ensure any provisions in breach of the equal treatment principle are abolished (Article 5) and that they must provide an adequate remedy for those who consider themselves to have been wronged by the failure to apply the principle of equal treatment (Article 6).

Contributory benefits

Membership of a contributory social security system provides its members with insurance against certain risks which, if they materialise, will deprive them of their income (Paragraph 44 of Nolte).

Contributory benefits are linked to participation in the labour market. Persons whose work patterns are interrupted , who work part time or whose earnings are below an earning threshold (the Lower Earnings Limit in the UK) are either excluded from the scope of contributory schemes or receive reduced benefits from the scheme. The majority of such persons are women whose responsibilities for caring for children, or elderly (sick) parents often in practice restricts their ability to enter into the labour market (Sohrab 1994, p5-6)(Sohrab 1996, chap 1).

Discrimination

A literal reading of EC Directive 79/7 would appear to indicate that the Directive imposes stringent requirements on Member States to eliminate discrimination .In fact, partly as a consequence of the Court's cautious approach, its impact has been less than might have been anticipated.

Direct discrimination concerns rules where discrimination occurs because of a reason based upon sex. Indirect discrimination occurs where the criteria are applied which are not based upon sex but affect a much larger number of women than men, unless it is shown that this is justified by objective factors unrelated to any discrimination on grounds of sex.

The introduction of Directive 79/7 has meant that almost all directly discriminatory rules in Member States' social security systems have been eliminated and replaced by 'neutral rules', which do not differentiate between the sexes. The drawback with 'neutral rules' is that it does not mean that discrimination has been eliminated since they can nevertheless adversely effect women. For example, rules which are designed for 'breadwinners' may favour men in practice, since they are more likely to have dependants than women (this issue was considered in Case 229/91, Commission v Belgium [1991] ECR 2205).

The Court's approach towards whether social security rules indirectly discriminate is increasingly important as the concept of indirect discrimination addresses employment situations where men and women are treated similarly , but have the effect of excluding more women than men. However it possesses a limited ability to bring about equality since indirectly discriminatory practices can be objectively justified by reasons completely unrelated to those based upon sex. Therefore the Directive's capacity to bring about change is governed by the Court's willingness to impose stringent checks on justifications. A lack of scrutiny will allow the continuation of discriminatory practices and consequently will offer little prospect of Member States redrafting their social security schemes so that they are not contaminated by discrimination, since they are safe in the knowledge that the present gender neutral rules will not be struck down.

Facts of Nolte and Megner

German social security law excluded individuals who worked fewer than 15 hours per week and whose income did not exceed one-seventh of the monthly reference wage from the statutory old-age insurance scheme, which also covered invalidity and sickness benefit. This had the consequence that such workers (hereafter referred to as 'minor' workers) were not required to make contributions out of their earnings to the scheme.

Inge Nolte was employed as a part time cleaner for 10 years. Her remuneration remained below the ceiling. In 1988, when she was 58, she became severely ill and ceased working. Her application for an invalidity pension was turned down by the defendants, the Regional Insurance Institution, on grounds that she had failed to make the requisite contributions. She appealed on the grounds that the statutory provisions were contrary to Community law in that they indirectly discriminated against women.

Mrs Megner and Scheffel were cleaners currently employed by G F Hehl & Co, who sought recognition from the Innungskrankenkasse (Sickness Fund for Trade Guilds) that they were subject to compulsory insurance under the statutory sickness and invalidity and old age insurance schemes and that they were under an obligation to pay contributions to the statutory unemployment insurance scheme. The defendant refused to consider that they were engaged in paid employment subject to the statutory unemployment insurance scheme. The plaintiffs brought an action in which they sought a declaration that their employment was subject to compulsory insurance under the schemes in question.

Therefore the Social Court (Sozialgericht) in both these cases sought guidance on the interpretation of the national law in light of the Equal Treatment in Social Security Directive. As considerably more women than men were adversely affected by this legislation, the Court was required to determine whether such measures constituted indirect discrimination and whether the German government could justify its legislation on grounds of social policy.

Judgment

The Court repeated its standard formula for indirect discrimination and for justification on objective grounds of social policy, when it stated (at paragraph 28) that Article 4(1) precluded the application of a national measure which, although formulated in neutral terms worked to the disadvantage of far more women than men, unless that measure was based on objective factors unrelated to any discrimination on sex. That was the case where the measures chosen reflected a legitimate social policy aim of the Member State whose legislation was at issue, were appropriate to achieve that aim and were necessary in order to do so.

The Court accepted two arguments raised by the German government in support of its view that this was indeed a case of a Member State pursuing a legitimate social policy goal.

Firstly, (at paragraphs 29-30 of the judgment) the German government argued that it constituted a structural principle of its social security scheme. The UK and Irish governments submitted in support of that argument that contributory schemes in particular required equivalence to be maintained between the contributions paid by employees and employers and the benefits paid in the event of materialisation of one of the risks covered by the scheme. The structure of the scheme could not be maintained in its present form if the provisions in question had to be abolished. Serious problems would arise as a result and the scheme would no longer be able to function on an exclusively contributory basis.

Secondly (at paragraphs 31-32 of the judgment), Germany argued that there was a social demand for minor employment, and that the only means of doing this within the German social security system was to exclude minor employment from compulsory insurance. Furthermore, the German government explained that jobs lost would not be replaced with full time or part time work subject to compulsory insurance. This would have the effect that there would be a rise in unlawful employment in the black market and an increase in ways to avoid paying benefit contributions.

The Court observed (at paragraph 33 of its judgment) that in the current state of Community law that social policy was a matter for Member States. Consequently, it was for the Member States to choose the measures capable of achieving the aim of their social and employment policy. It further remarked (at paragraphs 34-35 of its judgment) that in exercising that competence, the Member States possessed a broad margin of discretion. Therefore the German legislation passed was necessary in order to achieve its social and employment policy aims and accordingly did not amount to indirect discrimination.

Comment

The focus of this note is to analyse and assess the implications of the Court's approach to 'gender neutral' rules in Member States' social security systems. It will be demonstrated that the Court's lack of an appropriate inquiry means that the perpetuation of discrimination (albeit indirect in its nature) is likely to continue unchecked. In consequence, the potential of Directive 79/7 to bring about change in social security systems of the Member States has been impaired since neutral rules which have been justified on the basis of social policy need not be eliminated even when they have a disparate impact upon one sex.

The Court relied on two reasons as objectively justifying the indirectly discriminatory rule. Firstly, it accepted that the financial equilibrium of the scheme would be hugely upset if it had to incorporate minor workers into its scheme. Secondly, it accepted that various unwelcome social effects would result from the abandonment of this rule.

The Court without apparent criticism accepted that the financial equilibrium of the scheme was dependent upon structural principle of excluding minor workers. It simply listed the German contention that the exclusion of minor workers from compulsory insurance constituted a structural principle of its social security system, and observed the UK and Irish governments' supporting arguments concerning the non viability of contributory schemes if this type of rule had to be abolished.

It is difficult to accept that the whole scheme's viability depended upon this rule given that the rule not only excluded individuals from the obligation to contribute, but also from the right to receive benefits from it. It is disappointing that the Court chose not to provide any real inquiry into the suitability and necessity of this rule and failed to lay down stricter guidance for the assessment of financial viability. It is submitted that there needs to be more evidence than a general assertion that "serious problems" would arise, particularly when it is remembered that Member States were given 6 years to incorporate the equal treatment principle into their social security systems. This lengthy period before the directive came into force was partly designed to give Member States time to absorb the costs (1) and difficulties involved in implementing the equal treatment principle into their social security schemes. Therefore it is regrettable that the Court chose to accept this argument without deeper investigation of Member States' financial claims.

Member States have often sought to justify indirectly discriminatory laws on grounds of cost (2). In Case C-343/92, Roks [1994] ECR I-571, the Court was asked to rule on whether financial implications could by themselves justify an indirectly discriminatory provision. Although the Court warned that budgetary contributions themselves could not justify discrimination against one sex, it accepted that in conjunction with other arguments, it could be relied on by Member States, when taking that aspect into account as part of its social policy decisions. The decision in Nolte and Megner is consistent with the judgment in Roks in this respect, since the Court accepted the financial cost argument in conjunction with other labour market arguments. As Member States are in the best position to assess budgetary considerations, it would have to be a manifestly unsubstantiated assertion on grounds of fiscal difficulties for the Court to interpret on this basis. However, the Court in Roks engaged in more detailed analysis whilst in Nolte, it merely repeated the Member State's arguments (3).

The justification on detrimental social effects of increasing the black market and employment repercussions for minor worker employees was similarly subjected to a very brief analysis. The Court limited itself to repeating the German government's claims as to the unwelcome social affects that would result of out of abandoning the rule and allowing minor workers to become part of the scheme.

Again, it is unfortunate that there is no real inquiry into the validity of these justifications since the Court has accepted the legality of very high thresholds for part time workers which are only one hour below the UK classification of a full time worker. The implications of this ruling are that women who never work full time (because of their family responsibilities) will be permanently deprived of access to contributory benefits in Germany. The effect that this ruling has on part time workers in other Member States will depend on the threshold set by the legislator. This ruling is of particular importance in relation to state pensions which are calculated on a contributory basis, since it will result in many women being completely reliant on their spouses if they are to have an income in their retirement and it has already been demonstrated that this a precarious state of affairs given the high divorce rate.

It is vital for the Court to adopt a critical approach to the justification of prima facie indirect discrimination if women's access to equal treatment in social security is to be achieved. If the Court pays heed to Member States' arguments over women's right to equal treatment, this will have the effect that discrimination against women is perpetuated and consequently the 'status quo', which is currently prejudiced against women, is preserved. The Court has essentially bypassed its duty to inquire into the proportionality of a measure by limiting its focus into whether the Member States arguments are indeed based on social policy. This represents an unwelcome departure from its previous case law (4), where the Court gave a more detailed analysis of proportionality. Whilst it is true that the national court is better placed than the European Court to evaluate issues of proportionality, it is nonetheless disappointing that the Court has undertaken the most rudimentary inquiry into this aspect. In contrast with some of its earlier decisions , it is very short and indicative of its current unwillingness to question the choices of Member States.

The Court's scrutiny appears particularly brief in comparison with the House of Lord's decision in R v Secretary of State for Employment ex parte Equal Opportunities Commission [1994] 2 WLR 409 which concerned legislative provisions that indirectly discriminated against women because they had the effect of making part time workers work for longer periods of time than full time workers before they qualified for unfair dismissal rights. The crux of the case revolved around whether the rule could be justified on objective grounds of social policy. Although the House of Lord's accepted that the aim of the legislation was to reduce the cost to employers of employing part time workers (a 'Nolte' like argument), their Lordships critically evaluated the evidence which had been placed before it (which consisted primarily of a sworn affidavit by a Department of Employment official reflecting the Government's views) and found that the use of threshold provisions "did not contain anything capable of being regarded as factual evidence demonstrating the correctness of these views"(5). The most noteworthy feature of the case was that their Lordships were willing to impose a rigorous check that the aim of social policy was proportionate, which something that the Court in Nolte and Megner refrained from doing.

It is submitted that the implications of Nolte and Megner are that Member States can feel safe in the knowledge that their social security systems are unlikely to have to undergo any readjustments because of this ruling so long as they use 'gender neutral' rules in their schemes. There is no need for Member States to evaluate their schemes in order to determine whether they possess any 'neutrally formulated' rules which have a disparate impact against women. Consequently the Directive's ability to bring about change has been brought into question and, in light of this judgment, it appears to be thwarted by the barrier of objective justification. Furthermore, any future rules which adapt the regime are similarly unlikely to fall victim to an attack by the Court on account of its limited inquiry into justifications based on social policy.

The Court (paragraph 33) emphasised that Member States have a broad margin of discretion in enacting measures of social policy, whereas in its previous case law on indirect discrimination of a social security rule, it had stated that Member States possessed merely a "reasonable margin of discretion" .Therefore Member States will have considerable freedom in enacting their social policies. It is submitted that this is not a radical statement given that Member States have always had more leeway in social policy because of the limited scope for EC action in this area and that the Court's remarks merely reflect the true division of competence in the sphere of social security which favours Member States. It should be remembered that Social Security is the most sensitive aspect of social policy, since a Member State can pass legislation which has multiple aims and purposes and obviously the Court would be playing a dangerous game if it attempted to second guess the real motivation for such enactments. Therefore in practice the Court has always been wary of overruling such schemes, even if they contained elements of discrimination (6), unless there was a complete lack of justification for a Member State's legislation (7). The Directive itself also provides a good explanation for the Court's cautious attitude, since the principle of equal treatment is to be progressively implemented and the presence of derogation clauses highlights the fact that the Directive was never intended to be overly intrusive and represented merely a minimum harmonisation of standards.

It will be interesting to see how the Court rules on the UK law which requires 2 years continuity of employment for the attainment of the right not to be unfairly dismissed, in relation to indirect discrimination against women and objective justification on grounds of social policy.(8) If the Court follows its approach in Nolte and Megner, it is likely to rule that it can be justified on objective grounds of social policy given the limited scrutiny which it applied in that case. It should be noted that the Court has traditionally been more cautious in its rulings concerning equal treatment in social security schemes as opposed to this principle in relation to equal pay.(9) Therefore it possible that the court may apply a more vigorous analysis to this case since it concerns Article 119 rather than Directive 79/7. Evidence that this holds true, can be gathered from its subsequent decisions in Lewark and Freers,(10) ( cases concerning Article 119) where although the court repeated its test in Nolte, it nonetheless suggested that an indirectly discriminatory provision could not be justified on objective grounds of social policy.(11)

Conclusion

The importance of a vigorous approach by the Court towards indirectly discriminatory rules grows as soon as directly discriminatory rules are abolished. Consequently gender neutral rules are more important because, in practice, they often perpetuate the discriminatory regime albeit less obviously, through their disguise of a neutral formulation. Therefore the Court is in a pivotal position to determine the value of the equality principle in practice, since it determines the level of scrutiny which is imposed on the justifications of Member States.

It is submitted that the absence of an appropriate inquiry into the proportionality of a social policy justification, means that "mere generalisations"(12) can now be relied on by Member States to justify that the particular policy was indeed necessary. The Court has signalled its intention to only adopt the most basic scrutiny into the measures. It has declined to probe any further, which is a departure from its previous pronouncements.

At present, it seems extremely unlikely that Member States' social security rules which are couched in gender neutral formats will be struck down by the Court, even where they have indirectly discriminatory effects, because of the huge leeway which the Court has given to justifications based upon reasons relating to social policy . Consequently, the Social Security Directive's ability to assist in the elimination of discrimination has been impaired by the Court's cautious attitude.

It is regrettable that the Court appears to be more interested in paying heed to Member States wishes, rather than women's position in the labour market. Although the Court's conservative approach may well be warranted in the sphere of social security, it is submitted that the pendulum has swung too far in favour of Member States . It is time for the Court to more rigorously assess indirect discrimination provisions, otherwise the Directive's goal of attaining equal treatment in social security scheme will have become entirely defunct.

Bibliography

Banks, K (1991) 'Social security-Objective justification in the context of indirect discrimination' 20 Industrial Law Journal 220.

Docksey, C (1991) 'The principle of equality between women and men as a fundamental right under Community Law'20 Industrial Law Journal 258.

McCrudden, C (1992) 'The cost of removing discrimination from social security schemes' in Hepple, B & Szyszczak, E Discrimination : the limits of the law (London:Mansell) p 195

McCrudden, C and Black, J (1994) 'Achieving Equality between Men and Women in Social Security: Some issues of costs and implementation' in McCrudden C (1994) Equality of Treatment between Men and Women in Social Security (London: Butterworths).

Shaw, J (1997) 'Works Councils in German Enterprises and Article 119 EC' (1997) 22 European Law Review 256.

Sohrab, J (1994) 'Women and Social Security: the limits of EEC Equality law' 16 Journal of Social Welfare and Family Law, 5-17.

Sohrab, J (1996) Sexing the benefit : Women, Social Security and Financial independence in EC sex equality law (Aldershot: Dartmouth).

Whiteford, E (1996) Adapting to Change: Occupational Pension Schemes, Women and Migrant Workers (The Hague: Kluwer Law International).

Whiteford, E (1997) 'Conservatism rises again: Whether women providing full-time nursing care of spouse in their home fell within scope of working population for purposes of Directive 79/7' 19 Journal of Social Welfare and Family Law 361.

1. See Advocate General Vilaça in Case 384/85, Borrie-Clarke v Chief Adjudication Officer [1987] ECR 2865. Back to text.

2. For example Case 229/89, Commission v Belgium [1991] ECR I 2205. In Case 226/91, Molenbroek [1992] ECR I- 5943 the focus was on the contested provision's effect in relation to other aspects of social policy. see McCrudden 1992; McCrudden and Black 1994). Back to text.

4. See especially Case 30/85, Teuling [1987] ECR I -2497, Case 229/89, Commission v Belgium [1991] ECR I 2205, Case 102/88, Ruzius-Wilbrink [1989] ECR I-4311and Case 171/88, Rinner-Kuhn [1989] ECR 2743. Back to text.

6. See Case 229/89, Commission v Belgium, Case 30/85, Teuling. Back to text.

7. See Case 102/88, Ruzius-Wilbrink; See Case 171/88, Rinner-Kuhn. Back to text.

8. The House of Lords in R v Secretary of State for Employment ex parte Seymour-Smith judgment 13th March 1997 has requested a ruling from the ECJ on this point. Back to text.

9. This is often because of economic considerations in social security (Docksey 1991, p 275). Back to text.

10. Case C-457/93, Kuratorium fur Dialyse und Nierentransplantation eV v Lewark [1996] ECR I-243; Case C-278/93, Freers and Speckmann v Deutsche Bundepost [1996] ECR I -1165 which both concerned payment for attendance of training courses for members of staff council committees and the differing treatment afforded to part time and full time workers. Back to text.

11. Lewark paras 36-37; Freers para 28,30. See Shaw (1997 p 256). Back to text.

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