Employers, be careful. Do you treat your retiring employees as good leavers? If so, do you allow them to retain valuable accrued benefits linked to incentive schemes? If your answer is “yes” to both questions, you may be guilty of unlawful age discrimination against younger employees who choose to leave for reasons other than retirement. You might also need to widen your definition of who is a good leaver as a result.
Why is there a problem?
Employers often divide employees into two groups; “good leavers” and “bad leavers”. Employers often treat good leavers more generously than bad leavers, by allowing good leavers to retain the benefit of accrued entitlements under incentive schemes. These entitlements, typically bonus payments or share options. are often valuable to the employee. The employer can then use them as a pressure point in any termination negotiations. Employers also see this as a way of securing employee loyalty, if only by bribery (and with varying degrees of success).
Good leavers are usually employees whose employment ended to the benefit of their employer (for example redundancy) or who would not normally have chosen to leave and whose conduct is not open to criticism (for example genuine cases of ill health). Bad leavers are usually employees who leave to join a competitor, so not to the benefit of the employer, or whose employment is terminated because of misconduct, negligence or poor performance.
Traditionally employees were expected to retire when they reached a given age and so were regarded as employees who may not have chosen to leave, but whose conduct could not be criticised; in other words good leavers. However, since the abolition of the default retirement age in 2011 most employers no longer have a compulsory retirement age. This is because unless they are able to objectively justify having one, they will be guilty of unlawful age discrimination.
To put this in context, it’s helpful to remember how an employer can be found guilty of age discrimination and what they can do to defend themselves.
In summary, employers can only treat employees less favourably because of age (direct age discrimination) or impose a practice, criterion or provision (a “PCP”) which places employees of a certain age or age group at a disadvantage (indirect age discrimination) if they are able to show that their actions and/or the PCP are “a proportionatemeans” of achieving “a legitimate aim“. In other words, the employer must be able to “objectively justify” their conduct or practices.
Retirement clearly affects older employees. As a result most HR professionals are generally alert to the threat of direct age discrimination claims when dealing with retirement. However, it can be easy to overlook the risks associated with retirement-related practices that we are all so familiar with that we do not question them. One of those practices is to allow an employee who chooses to retire to retain valuable benefits they might otherwise have lost out on. This (for laudable reasons) rewards past loyal service, but also financially rewards them for retiring. However offering financial rewards for employees who retire (i.e. older employees) will be indirect discrimination that will need to be objectively justified.
How can an employer explain and justify their actions?
Any employer who answered “yes” to the questions in the opening paragraph of this blog will therefore need to answer a third question: why allow retiring employees to retain valuable benefits, which other (usually younger) leavers may lose out on?
In order to avoid amounting to unlawful age discrimination, the employer’s answer will need to have two parts: first, the reason for retaining benefits must amount to a “legitimate aim“; and secondly, it must be a “proportionate means” of achieving that legitimate aim (i.e. there must be objective justification of the employer’s plans).
Two examples of possible legitimate aims are the wish to encourage loyalty by rewarding employees who choose to end their careers with the employer rather than go and work for a competitor, and the wish to maintainworkforce morale by not having to resort to performance management and capability procedures if older employees choose to retire instead.
But whilst both of these reasons may amount to a legitimate aim, neither would necessarily be a proportionate means of achieving that aim. Consider this analysis instead:
– encouraging loyalty is, ostensibly, a legitimate aim. But there is an obvious flaw in the method. It is not only those employees who leave by reason of retirement who will not be competing with the employer. Allowing retiring employees to access a financial reward that other leaving employees are deprived of, even when those other employees have no intention of competing against their former employer, could well be disproportionate. If loyalty is the legitimate aim relied upon, then employers who want to minimise the risk of age discrimination claims need to consider extending the definition of a good leaver so as to minimise the discriminatory impact on younger employees. Employers should think of allowing those employees, who leave of their own accord but who are not retiring, to also retain the right to access accrued benefits under any incentive schemes, so long as their intended activities pose no competitive threat to the employer.
– performance management and capability procedures will not be seen to be intrinsically incompatible with maintaining workforce morale. The suggestion that older employees are not able to withstand, or need to be excused from the same robust performance criteria that younger employees are subjected to is also (uncomfortably) suggestive of stereotyping.
The point is this: employers will not be able to leap the objective justification hurdle if they can achieve their aim in a non- (or less) discriminatory manner, or if their chosen method does not achieve the stated aim or the discriminatory impact of the method outweighs the benefit.
An Employer’s next steps
So, if you treat retiring employees as good leavers and allow them to access accrued benefits as a result, you will need to begin by asking yourself why you do this and then consider whether that reason would be enough to objectively justify any discrimination.
Remember that whether or not your aims are legitimate and your methods are proportionate will always be looked at on a case by case basis by reference to each particular employer and their business circumstances. It is not practicable therefore to apply hard and fast rules.
As a result of your analysis you may decide to include as a good leaver those employees who choose to leave, but whose subsequent activities will not pose a threat to your organisation. But what happens if, contrary to expectations, an employee goes to work for a competitor, either immediately or after a break? How long must an employee remain out of the market to remain a good leaver? How will you retain the power to re-designate an employee as a bad leaver if this happens? Will you want to claw back (see our earlier blog here) any additional monies paid?
It would therefore be good practice to have a paper trail showing that you have given thought to any potential discrimination, the grounds upon which you think it may be justified and the rationale behind any steps you take to address it. This should also identify your willingness to retain discretion (and exercise it reasonably and consistently) to deal with particular cases.
And the lessons? Standard practices derived from seemingly the best of intentions may in fact get an employer into trouble. The possible cure will also throw up a number of issues in respect of which employers may well be advised to seek advice.