The English Court of Appeal recently considered when age discrimination in the context of an incentive plan might be permitted. In Air Products v Cockram, the court upheld an earlier decision of an employment tribunal that the inclusion of a specific retirement age as a ‘good leaver’ ground in a long-term incentive plan (LTIP) could be objectively justified, even though it amounted to direct age discrimination.
Why does retirement constitute age discrimination?
Historically, retirement was a standard ‘good leaver’ reason in share plans, meaning that a person who ‘retired’ would keep outstanding awards, whereas someone who resigned might not. Retirement was usually based on a given age and, as a result, was easily understood, but under age discrimination legislation it is not so easy to define.
What is the problem?
Age discrimination legislation in the UK (and other EU countries) prohibits any form of discrimination based on age, whether old or young. For share plans, this means that including retirement as a good leaver ground may be seen as age discrimination and may give rise to a claim by an aggrieved employee who is below the retirement age.
Is there any exception to this rule?
Under the UK Equality Act 2010, direct age discrimination is permitted only if it can be objectively justified. This can be difficult to establish as the test for ‘objective justification’ is whether the otherwise unlawful discrimination is a ‘proportionate means of achieving a legitimate aim’. A legitimate aim must have social policy objectives.
What happened in Air Products v Cockram?
Under the company’s LTIP rules, a participating employee who left the company would usually lose any unvested awards. The rule was subject to an exception for employees who left on or after the ‘customary retirement age’ of 55. Employees who left the company aged 55 or over were held to be ‘good leavers’ and entitled to retain unvested awards. Mr Cockram resigned from the company when he was 50, consequently forfeiting his unvested awards. He claimed that this amounted to unlawful direct age discrimination.
What did the Court of Appeal say?
The Court reinstated an earlier decision of an employment tribunal which had been overturned by the Employment Appeal Tribunal. The Court found that applying the retirement exception only to employees aged 55 or over “was a proportionate means of achieving a legitimate aim which could be objectively justified”.
What was the legitimate aim?
There were three aims which the court accepted were legitimate:
- Intergenerational fairness and consistency between the generally older members of the company’s defined benefit pension (who could retire at 50) and members of the less generous defined contribution plan (who could not retire until 55). The court accepted that limiting the advantage enjoyed by one age group over another is a legitimate social policy aspect of intergenerational fairness. The choice of 55 as the customary retirement age could be justified because this was set as the minimum pension age in the UK in 2010.
- Rewarding experience and loyalty by striking a balance between encouraging retention up to the age of 55 and then providing some incentive to retire in order to create opportunities for younger employees.
- Ensuring a mix of generations of staff so as to promote the exchange of experience and new ideas.
Interestingly, the court pointed out that even where the aims were in the employer’s best interests, they may nevertheless be directly related to what is regarded as a legitimate social policy.
How was the proportionality test met?
The court upheld the tribunal’s finding that the legitimate aims met a real need and that the discriminatory provision was appropriate to achieving those aims.
It is extremely helpful to have judicial comment on this difficult issue for UK employers. Most UK companies continue to support the idea that retirement should be treated as a good leaver ground but the difficulty is how to include it in an incentive plan without specifying the age when resignation becomes retirement. In the US, by contrast, age discrimination only protects people over the age of 40 and it is lawful to discriminate against younger employees. Most companies which allow for retirement as a good lever reason have removed any reference to a specific age from incentive plans, relying on less precise wording that good leaver includes retirement ‘within the context of the share plan’. An alternative solution is to allow the remuneration committee to decide whether the departing employee is a good leaver. Both of these routes are unsatisfactory and the court’s decision that a retirement age can amount to lawful age discrimination is encouraging, although it does not remove the risk of action by a disgruntled employee. Companies will continue to have to tread carefully to ensure that they are able to justify any retirement age going forward.
For UK tax-advantaged plans (e.g. SIP and SAYE) different rules apply and retirement remains an accepted good leaver ground, although there is no longer a retirement age in the rules, with retirement described more loosely as having its ‘normal meaning’. The Air Products case should provide additional justification for a company referencing an actual retirement age.
The Age Discrimination Directive has been implemented in each EU country differently so, although this is helpful in the UK context, if you are considering having this type of retirement good-leaver clause, do consider the laws in other countries.
If you want to discuss any of the points above, please do contact us.