Look at it this way: EVERY decision to employ or not employ a person involves discrimination. Every single one. The problem is that some forms of discrimination are legal, and some are not.
“Abilty”, “Personality”, “Job History”, “Salary Requirements”, “Qualifications”, “Recommendations” ... these are all “unprotected” areas of discrimination. You’re perfectly free to hire a person (or not) on these bases and say so to the person’s face—and there is no recourse. Even “looks” (believe it or not) can be a basis for an employment decision (but it better not be: “because I like white better than black”, for example).
On the other hand, there are “protected” areas where employers may not legally discriminate (so long as it doesn’t impact the ability to do the job). Among these bases are sex (gender), age, sexual orientation, religion, ethnicity, marital status… and “medical handicap”.
This is where you could conceivably run into a problem. If a smoker makes a claim that he is “addicted” to tobacco (and it’s not a controlled substance, so it’s not like you can fire him for acting illegally), then he may have a defensible claim to “medical handicap” exclusion from otherwise legal discrimination. That is, if he’s smart enough to make that claim and then determined enough to hire an attorney and press a case—it could be difficult to fight, and I’m sure that some attorneys would be happy to take that case pro bono for the publicity if and when they win (because surely one will ‘win’ such a case one day).
If your group insurance has a non-smoking rate that everyone in your group qualifies for and adheres to, then that may be a potential avenue for discrimination based solely on smoking. (Some civil service positions actually have “no smoking” written into the contracts; if employees are found to be smoking they can be terminated for cause.)
Employment law is seldom as clear-cut as it might at times appear to be.
If the employer can make a plausible case for discrimination based on any of the “clear cut” areas, then he’d be better off doing it there.