Three tribunal decisions have confirmed that many, often well-settled, redundancy schemes, even if agreed with unions or employees, are open to challenge under the age discrimination laws.

What is the law?

The statutory redundancy scheme pays out according to well-known bandings based on age and length of service. The older you are, and the more service you have, the greater payment you receive.

Obviously schemes based on age are (on the face of it) directly discriminatory. Older employees get more redundancy pay for the same years of service than a younger employee. As it is easier for an older person to have longer service than a younger one, such a scheme is also potentially indirectly discriminatory.

One way around this is by "mirroring" the statutory redundancy scheme. These mirror schemes have a block exemption from the legislation.

However, many enhanced redundancy schemes which use age or length of service do not fall within the "mirror" scheme exemption. These schemes need to be objectively justified; else they will be discriminatory on grounds of age. To justify the scheme, the employer needs to show:

  • That the schemes were a proportionate means…
  • …of achieving a legitimate aim.

The three cases all fell into this category and needed to be justified.

What were the cases?

MacCulloch v Imperial Chemical Industries (ICI) Plc – Employment Appeal Tribunal (EAT)

Miss MacCulloch was aged 36 and had seven years' service. Under her employer's scheme, this entitled her to a redundancy payment equivalent to just over 55% of her gross annual salary. In contrast however, a colleague aged between 50 and 57 with ten or more years' service, would have qualified for a payment equivalent to 175% of their salary. Unless this could be justified, it would be discriminatory.

ICI identified a number of aims of the scheme:

  • Encourage and reward loyalty
  • Provide a larger payment to older workers as they were more vulnerable in the job market
  • Encourage older workers to leave, creating opportunities for more junior workers

The EAT and tribunal accepted these aims were legitimate.

The tribunal then asserted that the scheme was a proportionate means to achieve those aims and that therefore there was no discrimination. However, as the tribunal had given little indication of why it had come to this conclusion, the EAT sent the matter back to the tribunal to clarify its reasons on this point.

Loxley v BAE Systems Land Systems (Munitions & Ordnance) Ltd - EAT 

BAE's voluntary redundancy scheme excluded employees aged 60 or over. It also reduced the amount of redundancy pay for every month of service for employees aged 57 to 59. Mr Loxley was 61. He claimed the scheme directly discriminated against him on grounds of age. The company accepted that the scheme treated older workers less favourably but argued that the age restrictions were justified.

The employer argued that employees made redundant so close to retirement would have been presented with a windfall as they would shortly come into receipt of a pension in any event. The EAT accepted that preventing a windfall can be a legitimate aim of a redundancy scheme. One of the aims of a redundancy scheme of this type is to cushion employees from the effects of losing their income. The EAT had no doubt that the fact that an employee is entitled to immediate pension benefits will always be a highly relevant factor for an employer determining what redundancy rights, if any, the employee ought to receive.

However, as in MacCulloch, the EAT said that the tribunal had not considered properly whether the discriminatory effect of the scheme was proportionate given the legitimate aim. It said that the tribunal needed to reconsider this point. Interestingly, the EAT warned that the fact that the scheme had been collectively agreed, albeit a factor, did not guarantee that it will be justified.

Galt and others v National Starch and Chemical Ltd - EAT

In this case the question was whether younger redundant employees were unlawfully discriminated against when they lost out to their older colleagues under an enhanced redundancy payment scheme.

The company offered enhanced redundancy terms to the workforce. Under the terms of the scheme for each year's service for those under 40 years of age, employees would receive a payment of three weeks' gross pay. However, those over 40 years of age would receive four weeks gross' pay. Mr Galt and a number of other (younger) colleagues claimed that the enhanced scheme treated them less favourably than older employees.

The tribunal found that the company did have a legitimate aim in coming up with the scheme – the avoidance of potential industrial unrest. However, in a remarkably brief judgment, the tribunal held that the discriminatory effect of the scheme was disproportionate to the legitimate aim.

Given the paucity of reasons given by the tribunal on this point, we suspect this decision is ripe for appeal to the EAT.

All very interesting. Why should I care?

Age discrimination awards are uncapped. In reality, awards could be considerable. For example, for an older employee, a tribunal might well accept that they will not get another job before retirement and expect an employer to make up the difference.

A poor job market makes for litigation. Add to this that in the current climate, a terminated employee who is finding difficulty getting a new job has the motivation to bring a claim. And our experience is that there are a growing band of "no win, no fee" and other advisers waiting to help.

It's sex as well as age. With redundancy schemes in the spotlight, sex discrimination claims are also more likely, on the basis that women in general are likely to have less service than men.

Industrial relations meltdown. Even where a compromise agreement has been reached with the employer, the employee may be able to bring an action against the trade union who agreed the scheme in the first place. Whether as a young employee getting a smaller payment, or an older employee refused redundancy or a victim of a "tapering" as retirement age approaches. Earlier this summer, in Allen and others v GMB, the Court of Appeal confirmed that a trade union had discriminated against its female members by strong-arming them into a collective pay settlement that disadvantaged them to the benefit of predominantly male categories of workers.

You might think this is only relevant to the union. However, it does become the employer's problem. The employers' one-time partner in industrial relations (in good times and in bad) is now not willing to talk. In our experience, the GMB case has meant that unions have been extremely cagey in agreeing collective settlements in litigation, and this could now spread to redundancy payments.

Anything else?

For public sector employers, it is possible that the UK Government's retention of the age-based banding for the statutory redundancy is itself not compliant with the relevant European legislation. We can expect a public sector case in due course challenging the statutory scheme. If successful, this would force the Government to recast the statutory redundancy scheme and remove the exemption for mirror schemes for all employers. 

Action points

  • Employers should wherever possible get closure and value for the money they are paying out as a redundancy payment by requiring employees to sign up to a compromise agreement in return. Otherwise, employers are open to the galling situation that an employee might use the money paid to them under a redundancy scheme to finance a subsequent age discrimination claim.
  • It may be possible (and even desirable) for employers to change their existing scheme to a mirror scheme. It may even make the scheme cheaper. This will have the benefit of removing the problem (for private sector employers at least). However, employers will have to navigate the legal and employee relations pitfalls of changing their schemes.
  • Trade unions may be willing to agree to change to a mirror scheme, given their potential liabilities in agreeing to potentially discriminatory schemes.
  • If keeping their existing non-mirror scheme, employers should urgently revisit their justification for the scheme. The cases have been relatively unhelpful in giving guidance as to what might or might not be sufficient. What is clear is that employers will have to work hard to persuade a tribunal that their scheme is the least discriminatory way of meeting the scheme's purpose.
  • Factor in possible age discrimination claims into your budget for any redundancy programme.