The UK Government has confirmed that the UK default retirement age (the DRA) of 65 will be abolished from 1 October 2011, and that transitional provisions for phasing it out will apply from 1 April 2011. This means that all employers of employees in the UK will need to consider their approach to dismissing older workers, and examine contractual provisions, handbooks and benefit plans which refer to retirement.

The Current Position

UK employees are protected from discrimination on the ground of age by the UK Equality Act 2010. However, as an exception to this general principle, the Equality Act 2010 currently allows UK employers to set a “company retirement age”, and if this company retirement age is the same as or greater than the DRA (of 65), the “forced” retirement of employees at that age by their employer will not be discriminatory on the ground of age (provided that the retirement procedure stipulated in the Equality Act is followed, which includes a requirement that the employer gives the employee six months’ notice of his retirement). The DRA was itself the subject of a recent judicial challenge as age discriminatory, but the courts found it lawful as a concept because, in summary, its purpose was to protect confidence in the UK labour market — a public policy aim — and not simply to further the interests of private employers.

In addition, “retirement” is currently one of the six potentially “fair reasons” for which an employee can be dismissed in the UK. If UK employees are not dismissed for a fair reason, with a fair procedure having been followed, the employer risks liability for an unfair dismissal claim. If the dismissal is connected to some form of prohibited discrimination (including age discrimination), the cap on compensation for unfair dismissal (currently £68,400) is disapplied and the potential liability is unlimited.

The Effect of the Abolition of the DRA

Employers may still give notice to employees that they are being forcibly retired under the DRA until 31 March 2011, provided that the employees are dismissed before 1 October 2011.

For the period 1 April 2011 to 5 April 2011, employers may still give notice to compulsorily retire employees using the DRA, but the dismissals must take effect before 1 October 2011. This means that the employer will not be able to give the six months’ notice of retirement required by the Equality Act 2010, and so will face a liability of up to eight weeks’ pay in respect of this failure. No further notices using the DRA may be given from 6 April 2011.

From 1 October 2011, employers will no longer be able to rely on the DRA, and retirement will no longer be a potentially fair reason for dismissal. Therefore employers will need to justify any forcible retirement of UK employees or else face potentially costly claims for unfair dismissal and age discrimination.

Justifying forcible retirement

Employers may choose to retain a fixed retirement age after October 2011, or they may choose not to have a company retirement age but instead seek to require individual employees to retire at a particular age. However, either of these routes should be approached with caution. The Equality Act 2010 provides a defence for employers who have committed acts that are, on the face of it, discriminatory on the ground of age. An employer will avoid liability if it is able to show that treating the employee differently on the grounds of his age was a proportionate and necessary means of achieving a legitimate aim, and that there are no less discriminatory means available to the employer of achieving that legitimate aim.

It is likely that, following the abolition of the DRA, principles will emerge from case law as to what, in practice, an employer will need to demonstrate in order to show that compulsory retirement at a given age is justified. Until now, this has only been examined in the context of forced retirement of non-employees, such as partners and office-holders, to whom the DRA exemption has never applied.

These “non-employee” cases suggest that the following, amongst others, may be legitimate aims for compulsorily retiring older employees:

  • Creating opportunities for younger employees, thereby improving recruitment and retention
  • Facilitating workforce planning by ensuring a distribution of employees of varying ages
  • Ensuring an atmosphere of collegiality by providing for older employees to retire at a given age rather than managing them out by alternative means such as poor performance dismissals

Even if an employer is able to point to such a legitimate aim justifying compulsory retirement, it may struggle to show that the legitimate aim is actually achieved by requiring forced retirement at a specific age, i.e. 65 as opposed to 66 or 70, and that it could not achieve its aims by less discriminatory means. This issue arose in the non-employee cases, but these have so far been considered in an environment where the DRA applied to employees, and so although the DRA did not apply to non-employees, the fairness of 65 as an age for compulsory retirement was not overly questioned by the judiciary in these cases. It is therefore expected that the abolition of the DRA will impact not only on decisions to compulsorily retire employees, but also decisions to compulsorily retire partners, office-holders and other non-employees.

The employer will need to point to detailed evidence as to why retirement at the chosen age, rather than any other age, is a proportionate means of achieving an aim as a key element of justifying the retirement age it has applied. For example, if the employer wants to rely on the aim of sparing older workers the embarrassment of a poor performance dismissal, it will need to show that performance does tend to decline after the chosen retirement age. It may therefore be onerous for employers to justify company retirement ages from October 2011, and employers should start considering potential justification arguments now if they want to retain a compulsory retirement age.

Alternative potentially fair reasons for dismissal

Although a retirement dismissal, if the compulsory retirement age selected can be justified as explained above, may still be fair (falling into the “some other substantial reason” category of fair reasons for dismissal), most commentators predict that employers in the UK will need to rely on another of the fair reasons for dismissing older workers. This is because, on the basis of the judicial decisions concerning retirement of non-employees, it may be too difficult to justify forced retirement. In the typical case of an employer wanting to retire an older employee where there is another, younger, employee it would like to take over the role, it is expected that employers may have to take the difficult step of performance-managing older employees in order to try to dismiss them fairly on grounds of performance. This may lead to employee relations issues that could previously have been avoided by allowing an employee whose performance had slipped to “drift” towards retirement.

What Should You do About This?

UK employers should now examine the age profile of their workforce, and if any employees are approaching the age of 65, consider whether the DRA will apply to them or whether the employee has indicated his wish to retire. If the DRA will not apply and the employee has not indicated a wish to retire, the employer should consider what its options are in respect of that employee continuing in employment or leaving employment. In cases where the employer and the employee are not in agreement about the optimum age for the employee to retire, the employer will need to be confident that it can justify its decision to compulsorily retire them (if that is what it decides to do), as explained above. Although existing case law provides some guidance, this is an embryonic area of the law and employers should ideally seek legal advice on this point before making a decision.

The abolition of the DRA is only relevant in the context of employer-imposed retirement — it has no impact on voluntary or agreed retirements. The UK Advisory, Conciliation and Arbitration Service, which sets good practice standards often used by employment tribunals, recommends that, going forward, employers ask all employees, regardless of age, in their appraisals about their short, medium and long-term goals with the aim of allowing an older employee to openly discuss their retirement plans. It is hoped that by inviting the employee to address his long-term plan for retirement, this will avoid employers risking age discrimination claims should they raise the question of an employee’s retirement more directly with them.

All employers of UK employees should, before October 2011:

  • Consider whether they wish to retain (or introduce, if the DRA was not used previously) some form of compulsory retirement age, and if so, how this could be justified
  • Examine the retirement provisions in their contracts of employment, collective agreements, pension plan documentation, employment policies and handbooks, and incentive plans (such as good leaver definitions), and
  • Ensure that they have in place robust performance policies and poor performance procedures (because the need to effect poor performance dismissals may increase from October 2011 if an employer does not maintain a compulsory retirement age)