Retirement

Background

While the Employment Equality (Age) Regulations 2006 (the “Age Regulations”) made discrimination on grounds of age unlawful unless objectively justifiable, the then Labour government retained one important exception to the rule in the form of a default retirement age of 65 (the “DRA”). If an employee was retired at the DRA, the employer was not obliged objectively to justify the retirement, provided the employer followed the appropriate procedure.

The DRA came under close scrutiny last year in R (on the application of Age UK) v Secretary of State for Business, Innovation and Skills (the “Heyday” case). Age Concern (later Age UK) had challenged the lawfulness of the DRA. The ECJ ruled that the DRA was not necessarily contrary to the Equal Treatment Framework Directive, but that it needed to be objectively justified. The High Court reviewed the DRA, and held that the decision to set the DRA at 65 was justifiable. However, this decision rested in large part on the government’s promise to review the DRA imminently.

Demographic changes and a wider acceptance of the benefits to, and of, older people remaining in the workforce mean the seemingly arbitrary cut off of 65 was looking increasingly incongruous, particularly given the current economic climate. It comes as little surprise therefore that the government has announced that the DRA will be abolished. With it, however, an important tool for employers wanting to actively manage their workforce will be lost.

Abolition of the DRA

The coalition government’s aim is to phase out the DRA and the related statutory retirement procedures as quickly as possible. The proposals bring forward by a year the Labour government’s original promise to review the concept in 2011. This hurried timetable is a response, in part, to the Heyday case; it also, according to the coalition, is due to the country’s changing economic circumstances over the last four years.

The consultation, which was published on 29 July 2010 and closed on 21 October 2010, focused on the impact on employers of the proposed date for abolition of the DRA on 1 October 2011. The government is yet to publish its findings following the consultation. Transitional provisions are due to commence as soon as 6 April 2011, giving HR professionals and in-house legal teams alike very little time to get themselves, and their organisations, up to speed with what will be fundamental changes to the way retirement is approached by UK businesses.

Transitional provisions

Put simply, employers may still retire employees whose 65^th birthday falls on or before 30 September 2011, provided they follow the statutory procedure and give between six and twelve months’ notice. Thereafter, employers will need to objectively justify their retirement age.

The proposals envisage that from 6 April 2011, employers will be prevented from making any new notifications of retirement under the DRA. The provision at paragraph 4 of Schedule 6 of the Age Regulations, which gives employers the option of giving short notice (of two weeks) of retirement will also be abolished from this date.

This means that between 6 April and 1 October 2011, transitional procedures will be in place. For employees given notice of retirement before 6 April 2011 with an intended date of retirement of before 1 October 2011, the retirement procedures should be followed as usual. If so, the DRA will still apply, and (subject to any grants of requests to work beyond the DRA) employees can be lawfully retired at 65 as usual for the potentially fair reason of retirement.

However, employers may not rely on the DRA in circumstances where employees are given notice of retirement under the DRA before 6 April 2011, but the intended date of retirement is after 1 October 2011, or where any notice of retirement is given after 6 April 2011. Employers that want to dismiss in these circumstances will be forced to fall back on objectively justifying a contractual retirement age of 65 under the Age Regulations.

If an employer chooses to retire an employee, but fails objectively to justify its retirement age, the dismissal will be found to be not only unfair, as the employer will not be able to show that it had a fair reason for dismissal, it will also be discriminatory.

If objective justification is likely to be difficult, employers should avoid issuing retirement notifications at all, and will need to rely on one of the other potentially fair reasons for dismissal under section 98 of the Employment Rights Act 1996 (“ERA”) in order to dismiss older workers. An area of the employment cycle that has been kept relatively simple for employers since the introduction of the Age Regulations is therefore about to get significantly more complex.

Contractual retirement ages

While the abolition of the DRA does not rule out blanket retirement ages entirely, dismissing an employee on grounds of age will prima facie be less favourable treatment on grounds of age. Whether it is unlawful age discrimination will hinge on whether employers can establish that a particular retirement age can be justified by reference to specific aims.

It will be helpful for employers to look at the case law that has developed over the last four years on the potentially discriminatory effect of dictating retirement ages. A number of well-publicised cases have tested the legitimacy of not only the DRA, but also of lower retirement ages set by employers in the UK, and elsewhere in Europe. Employers would be well advised to consider these cases before setting a retirement age after April 2011.

The case of Seldon v Clarkson, Wright & Jakes was one step ahead of the game in bringing this precise issue to the courts in the UK. Leslie Seldon, who was a partner in a law firm (as he was not an employee, his law firm could not rely on the DRA), was unsuccessful in arguing recently before the Court of Appeal that the justifications given by his firm were insufficient to objectively justify his forced retirement at age 65. The firm successfully argued that succession planning and allowing for a dignified exit for retiring partners were both legitimate aims.

However, the decision in Seldon may be of limited use to employers who are attempting to navigate through the minefield of establishing a contractual retirement age, particularly when it comes to what age to choose. The Court of Appeal held in coming to its conclusion in Seldon that the age of 65 was a “fair and proportionate cut off point”, but this was largely influenced by the fact that the DRA also stands at 65. In any event, it is difficult to see this argument assisting employers once the DRA has been abolished.

In the case of Martin v Professional Game Match Officials Limited, an employer failed to make out a justification for a retirement age of 48 for football assistant referees. The Employment Tribunal held that such an age was direct age discrimination, and rejected the employer’s submissions that it was a necessary means of creating career progression opportunities. The Tribunal decided that alternative and less discriminatory means of achieving this aim were available to the employer, and crucially, the employer was unable to explain its decision to apply a retirement age of 48 as opposed to any other age.

The government’s view (from recent research undertaken as a prelude to the current consultation) is that performance in most jobs is not affected by the age of the employee until employees reach 70. In the absence of a health and safety-related reason, making the need for an age limit for a particular job crucial in order to avoid any risk of endangering lives, employers may find it difficult to justify why they have chosen any particular fixed retirement age.

Well thought out and detailed evidence relevant to the business in question will have to be collated before employers can have reasonable confidence in their ability to objectively justify their chosen retirement age as a proportionate means of achieving their identified business objectives. However, each employer will be different, and the legal uncertainty that will surround this issue (and which ultimately can only be determined by a Tribunal looking at the facts of the individual case) may be unpalatable for many.

Identifying a contractual retirement age and being able to justify it with legitimate aims to avoid a discrimination claim is only the first hurdle. Employers will then need to look at the fairness of the dismissal. While we await government guidance, it seems likely that considering employees’ requests to work on will be integral to the fairness of the dismissal, so employers should consider putting their own policies in place that, in part at least, mirror the current statutory procedures.

The alternatives

Where employers cannot justify, or choose not to risk relying on, a contractual retirement age, employees will simply be able to continue working until they decide to stop, or until their employer can rely on one of the other fair reasons under section 98 of the ERA. It is as yet unclear whether the ERA will be amended to remove the concept of retirement as being a fair reason for dismissal, but this is certainly a possibility.

Impact on employers

While it will be very difficult to justify the imposition of a one size fits all age on which employees' physical or mental faculties are deemed to have declined to such an extent that they can be retired, there will come a time when employers will have to tackle the unenviable job of 'managing out' particular individuals as it become apparent that they are no longer up to the job. Unfortunately, it is likely that, if employers are unable or unwilling to rely on retirement as a fair reason for dismissing an elderly employee, they are likely instead to rely on capability as grounds for dismissal. Following a capability procedure prior to dismissal in these circumstances is likely to be as excruciating for the employer as it is undignified and upsetting for the employee. Statistically, there is also a greater risk of claims of disability discrimination arising from dismissals such as these.

One of the other difficulties employers will face if the statutory retirement procedures are abolished along with the DRA is the extent to which they will be able to approach discussions on retirement planning with older members of their workforce. While the statutory procedures are cumbersome and often difficult for employers to operate, they at least encourage open and frank dialogue with employees close to retirement about their future in the business. Statistics suggest in many cases these discussions are positive, and many requests to stay on after the DRA are currently granted.

The government has floated the idea of issuing guidance or producing a formal code of practice on retirement discussions and planning, although whether we will see an ACAS guide-style code with some legal clout put in place, and what form this guidance will take, remains to be seen.

The lifting of the DRA is likely to lead to confusion in payroll departments, and will lead to ambiguity as to when pension payments kick in. It will also have an impact on the cost of benefits, as premiums for benefits such as medical and life insurance go up to accommodate an older workforce. It remains to be seen how this will be addressed in the government's plans.

The consultation also asked for respondents’ views on the impact the abolition of the DRA will have on insured benefits and good and bad leaver provisions under employee share schemes.

The government has indicated that its response to the consultation will be published before Christmas, and the draft Regulations and Guidance will be out early in the new year.

Impact on employees

There is no doubt that those most likely to benefit from the abolition of the DRA, at least in the short term, are older employees themselves. One of the main complaints from age campaigners has always been that employees are often not financially ready to retire at 65, particularly given the current pension fund deficit. There are also arguments that forced retirement has a negative impact on the mental, physical and social wellbeing of older members of society. While the proposed changes do not mean that employees must simply work until they drop, it will offer them more choice and the ability to take control of their retirement planning.

From the government’s perspective, employees working longer will reduce the burden on pension funds, increase income tax revenues and reduce welfare payments. Cynics may also suggest that the abolition of the DRA paves the way to raising the pension age. However, it may also have the unintended effect of making it more difficult for young workers to find jobs.

Conclusion

It has long been argued that age is not an appropriate indicator of an employee’s ability to do their job, and many considered the DRA to be a lazy option for employers. The danger for employers once the DRA has gone is that, if they get it wrong, they are likely to see an increase in Tribunal claims under both the ERA and the Age Regulations from disgruntled older employees alleging that their employer is either retiring them by the back door, or retiring them without sufficient justification. However, while employers will no longer be able to fall back on the DRA and the statutory procedures, it will not be impossible to broach retirement discussions with employees. Individuals will simply have to be treated as such, and employers will need to think more about why they wish their older employees to leave. This, after all, has always been one of the key aims of the Age Regulations in any event, and retirement provisions are simply stepping into line.

To protect against possible liability, employers should therefore:

• review contracts and policies for retirement-related provisions;
• review incentive schemes for good/bad leaver provisions. Other documents such as shareholders agreements for example may also need to be revisited of they use the concept of good leaver/bad leaver;
• consider whether the business requires a contractual retirement age. If so, employers should gather as much data, information and reasoning as possible (and consider obtaining a legal opinion) to justify the chosen age;
• if a retirement age is to be maintained, consider how to replace their retirement policy. The policy should mirror, to a large extent, the current statutory retirement procedures; and
• notify employees of the forthcoming changes and amend contractual documents if necessary.

A version of this article was previously published in
The In House Lawyer magazine.