From 1 October 2006, it will become unlawful to discriminate on the grounds of age. At the same time, there will be fundamental changes to the law on dismissal by reason of retirement. The Employment Equality (Age) Regulations 2006 is the first discrimination legislation which potentially affects not just minority groups but every person at work, throughout their working life. It will apply to all employers, regardless of size, and to all employees, applicants for work, trainees and many other categories of worker.
The Regulations largely follow established discrimination law principles. Four forms of discrimination are prohibited:
- direct discrimination: treating one person less favourably than another
- indirect discrimination: treating all employees the same where some aspect of that treatment affects one group of employees adversely compared to another
- harassment: subjecting someone to unwanted conduct which has the effect of violating their dignity or creating an environment that is intimidating, hostile, degrading, humiliating or offensive to them
- victimisation: treating someone less favourably for asserting their rights under the discrimination legislation
The burden of proof lies on the employer to rebut claims. Where it fails to do so, compensation is potentially unlimited.
There are also some fundamental differences from other discrimination law. There are a number of significant exceptions where the law does not apply in full:
- the recruitment of employees at or near 65 or the normal retirement age
- some benefits based on length of service
- payment of the national minimum wage
- discrimination on the grounds of statute
- enhanced redundancy payments
- life insurance cover
- the retirement of employees over 65
Unlike other discrimination laws, direct age discrimination can be defended on the grounds that it is a proportionate means of achieving a legitimate aim. This is known as objective justification.
Objective justification
Employers will be allowed to continue to operate a discriminatory provision, criterion or practice (PCP) as long as they can show that, in doing so, it is pursuing a legitimate aim and that any discriminatory effect is proportionate to that aim.
For an aim to be legitimate, it must correspond with a real need on the part of the employer. Employers must provide evidence of the legitimate aim and not merely make claims about it. According to guidance published by Advisory, Conciliation and Arbitration Service (ACAS), a legitimate aim might include the health, welfare and safety of the individual (including the protection of young or older people) and the particular training requirements of the job.
Even if the discriminatory PCP pursues a legitimate aim, it still has to be proportionate. In general terms, this means that the method of pursuing the aim must be ‘appropriate and necessary’, but this is not an absolute test. It involves balancing the discriminatory effects of a measure with the importance of the aim pursued. For example, if the stated aim is to encourage loyalty, the employer must be satisfied that using an age-related provision will actually achieve this, and that the same aim cannot be achieved by other, less discriminatory means.
A key question is whether cost can ever objectively justify discriminatory treatment. The ACAS guidance states that economic factors such as business needs and efficiency might be legitimate aims, but it clearly warns that it is not legitimate to discriminate just because it is cheaper than not discriminating. Without case law to resolve this issue, a practical interpretation is that cost may amount to a legitimate aim but the pursuit of other legitimate aims is required before discriminatory treatment would be proportionate.
Benefits
One of the key exceptions for employers is that benefits linked to an employee’s length of service up to five years will continue to be lawful. Guidance from the Department of Trade and Industry indicates that this exception was included to enable employers to retain and reward experienced staff.
There is no blanket exception where the difference in entitlement to benefits is based on service in excess of five years. Instead, there is a relatively low hurdle: employers must show a reasonable belief that using length of service would meet a business requirement of theirs.
Unfair dismissal
The Regulations make specific changes to the law on unfair dismissal. In particular, they remove the upper age limit for bringing a claim. As part of this change, the Regulations remove the tapering of the basic award for claimants over 64 and remove the lower age limit for service which can be included in the calculation of continuous employment.
Retirement
To counteract a flood of new claims, the Regulations also introduce retirement as a new potentially fair reason for dismissal. For employment lawyers, retirement will no longer have its ordinary meaning but will become a legally defined concept. The retirement provisions of the Regulations are likely to have the biggest impact on employers.
At present, employers can force employees to retire at any retirement age specified in their contract. There is no general protection from age discrimination and, as long as the specified age is the ‘normal retirement age’ of the employer, there is no unfair dismissal case to answer. This will change from 1 October. Normal pension ages under occupational pension schemes are not affected.
Under European law, age discrimination can only be permitted if it is objectively and reasonably justified by a legitimate aim. After much consultation, the UK Government decided that a national default retirement age of 65 is justified. It therefore included a specific exception for retirement at or above that age. This means that compulsory retirement of anyone aged 65 or above will be lawful as long as certain conditions are satisfied. Employers wishing to enforce compulsory retirement at a normal retirement lower than 65 can theoretically still do so if it can be objectively justified but this will be very difficult to achieve. If it cannot be objectively justified, the employer cannot argue that retirement was the reason for the dismissal, so the employee is highly likely to have been unfairly dismissed.
Employers are not, however, free of problems just because their normal retirement age is already at or above 65. Retirement will now be classed as another potentially fair reason for dismissal. Employers will not have to prove retirement in the same way as they have to prove other potentially fair reasons, such as redundancy. All they must do is prove that the termination date is the planned retirement date and that they have followed the new notification procedure.
This requires employers to notify employees of their impending retirement and also that they have the right to apply to continue working beyond the retirement age. There is a penalty of up to eight weeks’ capped pay for failure to follow the notification procedure between 12 and six months before the intended retirement date. If employers fail to notify the employees at all, or only do so within two weeks of the date of intended retirement, the eventual ‘retirement’ will constitute an automatic unfair dismissal.
Employees who want to continue working beyond retirement must make their request in writing at least three months (but not more than six months) before the intended retirement date. The process is similar to that for requesting flexible working. The employer must hold a meeting to discuss the request with the employee within a reasonable time and must give the employee notice of its decision as soon as is reasonably practicable after the date of the meeting. There is a right to be accompanied and an employee can appeal the decision.
There are special transitional arrangements for retirements between 1 October 2006 and 31 March 2007.
The big change for employers is that they will now have to manage the retirement process actively and carefully. Forward planning and clear communication will be vital to ensure that retirements do not result in unfair dismissal or age discrimination claims. Employers will now routinely have to inform employees of their rights. Where there is a normal retirement age of 65 or above, employers will not be obliged to justify their decision to hold an employee to retiring at the agreed age.
Redundancy
There is no change to the age-related elements of the formula for calculating statutory redundancy payments. European law allows age discrimination if it is done in compliance with a statutory authority. The Government has also decided that retaining the current formula is objectively justified.
There are some minor changes too. There will no longer be an upper age limit of 65 for those eligible for a statutory redundancy payment, a lower age limit for calculating continuous employment or any tapering of the payment where the redundant employee is between 64 and 65.
It has become reasonably common practice for employers to make larger redundancy than are provided for under the statutory scheme. These have had any number of different forms but, from 1 October 2006, they can only involve specific variations to the statutory formula:
- removing or raising of the cap on weekly pay (currently £290)
- increasing the multiplier for each year of service
- apply a (further) multiplier to the weekly pay times years' service calculation
- choosing to make payments to employees with fewer than 2 years' service
A redundancy enhancement formula not calculated on this basis will need to be objectively justified. Benefits awarded on termination of employment are not included in the exemption for benefits based on length of service, so objective justification would be needed for enhancements such as:
- applying a different multiplier to each of the three statutory age bands
- introducing different age bands
- removing the 20-year cap on the number of years of service that can be taken into account
- giving a lump sum to some age groups and not others
Employee share plans
Many employee share plans have discriminatory features, such as automatically preventing employees who are close to retirement from receiving new awards or favouring retiring employees over other leavers by allowing them to receive the full number of shares under their award. This will normally be discriminatory from 1 October 2006.
Employers should review their plan rules and awards criteria to remove any discriminatory feature or ensure that they can be objectively justified. The summary position for age discrimination in the context of employee share plans is that age discrimination will be unlawful unless:
- the discrimination is required to comply with specific legislation (for example, tax legislation containing express retirement provisions for inclusion in all-employee Sharesave and Share Incentive Plans)
- the discrimination is service-related based on a period of up to five years (such as qualification periods for participating in Sharesave and Share Incentive Plans), or
- the discrimination is objectively justifiable: a proportionate means of achieving a legitimate aim
While recognising loyalty and experience and motivating employees are likely to be legitimate aims, employers have the burden of proof in showing that the discriminatory rules are proportionate means of achieving those aims. Express rules disadvantaging or favouring employees close to expected retirement age are unlikely to be objectively justifiable.
Companies should therefore closely review their plan rules and documentation insofar as it applies to UK participants. Some small changes to executive plan rules will be required before 1 October 2006 to ensure that they are objectively justifiable, although the extent of the change will require careful thought. Changes may also be needed to all-employee plans. Plan rules can usually be amended by board resolution, and neither shareholder nor employee approval will usually be required.
