Summary and implications

In recent months, questions on compulsory retirement, sickness and holiday, and redundancies have been prominent on many employers’ radars. Unsurprisingly, tribunals have grappled with similar issues. In this briefing, we outline:

  • Recent trends on justifying compulsory retirement ages, and the steps you should take in the near future to prepare for statutory changes to the retirement age regime. In a nutshell, whilst employers may find it comparatively easy to establish a legitimate aim for having a compulsory retirement age, the stumbling blocks are likely to be proportionality and supporting evidence;
  • A recent decision on the interrelation between long-term sickness, holiday pay and PHI pay. A pro-employer Employment Tribunal decision goes potentially some way towards helping employers to limit their financial exposure in respect of holiday pay accruals by an employee on long-term sickness leave;
  • An EAT decision on the issue of bumping and a vertical pool of selection for redundancy purposes. This decision serves as a ignant reminder of the importance of identifying the correct pool of selection in redundancy cases. Where the potentially redundant employee is fairly senior, a vertical (downward) expansion may be required.

Compulsory retirement found to be justified on succession planning and service quality grounds – hard evidence is a must

In the last 12-18 months we have seen a string of ECJ, Tribunal and EAT decisions on the question of justifying compulsory retirement of employees. Anyone operating compulsory retirement arrangements needs to understand the emerging trends and take them into consideration when forming or reviewing internal retirement arrangements. These decisions are of particular pertinence bearing in mind the government’s plan to abolish the default retirement age (DRA) from next October.

In brief, case law suggests that:

  1. Quality of professional service and intergenerational fairness could amount to legitimate aims capable of justifying compulsory retirement;
  2. The availability of a pension or another severance payment and the existence of some choice in relation to retirement will go some way towards satisfying the requirement for proportionality; and
  3. The ‘duty to consider’ ought not to be a mere ‘box ticking’ exercise: employers must consider employees’ requests genuinely and in good faith. Failure to do so may lead to an adverse finding of unfair dismissal and / or breach of trust and confidence.

If you operate a company retirement age, we suggest you take the following steps:

  1. Identify, and record, your business priorities in relation to retirement. Do you want / need to retire employees compulsorily? If so, why? Should a single retirement age apply to all employees or should you adopt different ages according to employees’ roles? At what age(s) would you like to retire employees? What are the costs and business implications of failure to retire employees at the organisation’s chosen age?
  2. Identify one or more potentially legitimate aims that support your business policy. If you operate a professional practice, succession planning, supplying a career route and ensuring high quality of service are likely to be relevant in relation to at least some employees. If your employees need to possess a certain level of physical or mental fitness, a health and safety ground may operate in your favour. The rule of thumb is to individualise the decision to your particular organisation.
  3. Collect and record evidence that supports your legitimate aim(s). For example, do junior staff members expect promotion but this can only be achieved if a vacancy arises? Does empirical evidence supports your view that performance / fitness etc diminishes after a certain age?
  4. Assess and establish ‘proportionality’, i.e. whether your legitimate aim(s) can reasonably be achieved using less discriminatory mechanisms? In this context, if you offer employees some choice (e.g. the option of remaining on a fixed contract for a limited period of time), this may go some way towards enhancing your case.
  5. Finally, assess what financial provisions you offer to retired employees and whether they go some way towards ‘sweetening the pill’?

Receipt of PHI benefits may automatically vary contractual and holiday rates of pay

A Scottish employment tribunal has recently held that the rate of a “week’s pay”, used in calculating holiday pay, was equal to the rate of pay of an employee accepted onto a PHI scheme. The employment contract was varied automatically on the employee’s acceptance onto the PHI scheme, to reflect her new (lower) rate of pay. As the employee was paid her PHI rate throughout the year, she suffered no loss in respect of accrued but untaken holiday.

Although this is a first instance, obiter, decision, employers may want to take note of it. If followed by other tribunals and/or upheld by the EAT, the decision opens the door to employers relying on clear contractual drafting to the effect that contractual pay will automatically be adjusted to a certain (lower) level in the event of acceptance onto a PHI or similar scheme. This, in turn, could go some way towards reducing employers’ exposure to payments in respect of accrued holiday during long-term sickness. There are a number of ways of achieving this result, which must be tailored to the specific contracts and benefits employers operate. If you would like to discuss this issue in more details, please speak to your usual Nabarro contact.

Staying with the holiday theme, as the festive season is beckoning, don’t forget that the Working Time Regulations (WTRs) allow you to require employees to take holiday at certain times (you will need to adhere to relevant statutory or contractual procedure). Alternatively, you can object to employees’ request to take holidays at certain times. If you refuse a holiday request, however, you must still allow the employee to take his full statutory leave entitlement within the holiday year. Remember that the WTRs do not allow carry over except in the year of termination. And, at this time of the year in particular, consider carefully the impact of your decision on employees of various faiths.

Where a senior employee is potentially redundant, the pool of selection may have to be expanded vertically, to include more junior employees

A fair redundancy consultation procedure often depends on the establishment of a suitable pool of selection. A recent EAT decision confirms that employers must consider carefully the correct limits of the pool and may have to consult with potentially redundant employees on this point.

The EAT has recently held that the dismissal of an employee for redundancy was unfair because her employer failed to consider and consult with the employee about the possibility of the employee doing a more junior role. Had the employee considered vertical bumping, it would have had to increase the pool to include a more junior colleague of the employee. Had this been done, the employee might not have been chosen for redundancy. The upshot of this decision is that, in cases of potentially redundant senior employees, the employer has to consider, and consult, on the possibility of expanding the pool vertically to include employees in more junior roles. If the potentially redundant employee is willing to undertake a more junior role, on reduced pay, the pool may have to be expanded to reflect the potential bumping scenario.

2011 – Three developments you must not miss

  1. The Agency Workers Regulations 2010 are due to come into force in October 2011. The government has recently confirmed that it would not make any changes to the Labour government’s draft.

Organisations engaging temps need to prepare for the changes ahead (see our earlier briefings on the topic here and here).

  1. The government is considering raising the minimum qualifying period for unfair dismissal from one to two years. In 1999 the qualifying period was reduced from two to one year. The rationale behind the current proposals is the hope to limit the number of tribunal claims. However, many commentators speculate that the change will lead to a rise in unmeritorious discrimination claims.
  1. Costs to justify discriminatory conduct? The President of EAT has recently cast doubt on the notion that ‘costs alone’ can never justify discrimination. Although the comment was tentative, rather than definitive, it is particularly helpful, bearing in mind the increased costs many employers are likely to encounter once the DRA is raised or abolished and they are required to provide older employees with the same insurances as younger members of the workforce. We will monitor closely any developments in this area in 2011 and report any change of direction.