The European Court of Justice (ECJ) has decided in the Spanish case of Palacios v Cortefiel Servicios SA that the EC Equal Treatment Directive (2000/78/EC) does not prohibit Member States from having compulsory retirement ages provided they can be objectively justified. The case has significant implications for the ECJ challenge by Heyday (an offshoot of the charity Age Concern) to the UK’s default retirement age of 65, which is expected to be heard by the ECJ in 2009.

Background

Mr Palacios was employed in Spain as a manager. His employment was governed by the terms of a collective agreement which provided for retirement at 65 years of age (unless the employee had not completed the qualifying period to draw his retirement pension). When his employment was terminated at the compulsory retirement age under the collective agreement, he challenged his dismissal in the Spanish Courts arguing that it breached his right not to be discriminated against on the ground of age.

The Spanish Court asked the ECJ to give a ruling on whether the EC Equal Treatment Directive (which outlaws age discrimination) also prohibits Member States from having compulsory retirement ages

In February 2007, the Advocate General, in his opinion to the ECJ, advised the Court that compulsory retirement ages were not prohibited by the Equal Treatment Directive.

First, the Advocate General considered that the Equal Treatment Directive did not preclude a national law providing for compulsory retirement. In addition, he considered that it would be rather far fetched to regard this situation as a dismissal so was not caught by Article 3(1), which provides that the Directive shall apply “in relation to employment and working conditions, including dismissals and pay”.

Alternatively, he said, even if the Court did not agree with this reasoning and the Directive did apply, a compulsory retirement age could be justified under Article 6(1) of the Directive as serving a legitimate public interest aim of promoting inter-generational employment. The Advocate General highlighted that Member States enjoy broad discretion in their choice of measures to achieve their social and employment policy and there was no indication that fixing a retirement age of 65 would go beyond what was appropriate and necessary.

ECJ’s ruling

The ECJ decided that although compulsory retirement ages were potentially age discriminatory and so within the scope of the Equal Treatment Directive, they were, in this particular case, objectively justified and therefore permissible.

As to the Advocate General’s first point, the ECJ disagreed, holding that a compulsory retirement age does fall within the scope of what the Equal Treatment Directive prohibits, and is therefore potentially discriminatory on grounds of age. While the Directive allows Member States to determine retirement age (see recital 14), it is still capable of applying to national measures governing the conditions for termination of employment contracts where the retirement age has been reached. In addition, the ECJ considered that the legislation at issue must be regarded as establishing rules relating to “employment and working conditions, including dismissals and pay” within Article 3(1) of the Directive.

However, agreeing with the Advocate General’s second point, the ECJ said that the compulsory retirement age was justified under Article 6(1) of the Directive, as a proportionate means of achieving the legitimate social aim of promoting employment opportunities and reducing unemployment. It was not necessary for the national legislation expressly to refer to a particular objective for that legislation to be capable of justification. The ECJ reiterated the Advocate General’s view that Member States enjoy broad discretion in their choice, not only to pursue a particular aim in the field of social and employment policy, but also to define measures capable of achieving it. The ECJ also considered that the compulsory retirement age was appropriate and necessary as a means to achieve the aim of promoting full employment by facilitating access to the labour market. In particular, the ECJ took into account the fact that the Spanish law provided for a reasonable retirement pension once the retirement age was reached. Also, Spanish law was flexible in the way it allowed collective agreements to have a default retirement age - meaning that there were possibilities to opt out in the case of specific jobs.

Implications of this ruling for UK employers

The ruling is likely to damage a similar claim challenging UK retirement provisions which is being brought by Heyday. Heyday is arguing that the UK default retirement age of 65 (contained in the Employment Equality (Age) Regulations 2006) does not comply with the Equal Treatment Directive. The case is not expected to be heard before 2009.

It will now be more difficult for Heyday to challenge the UK national default retirement age of 65. Following the reasoning in Palacios, it is likely that the ECJ will find that UK default retirement age does fall within the scope of the Equal Treatment Directive. This will mean that the UK Government will be required to show that such law is objectively justified. To do this, it will have to provide evidence to show that having such a default retirement age pursues a legitimate aim and is an appropriate and necessary means of achieving that aim. For example, in the Heyday case the Government has argued that having a default retirement age helps workforce planning as it provides a target age for retirement; it also reduces the risk of blocking promotion for younger workers and encourages workers to plan for their retirement. In the light of the Palacios case, it would appear that the UK Government has a reasonable chance of success of showing that the UK meets a legitimate aim.

UK law is not quite as flexible as the Spanish law, however, in that under Spanish law, the default retirement age is set by collective agreement thus giving some flexibility in opting out of the retirement age in respect of certain jobs. The state pension for a retired person in Spain is also different from that provided in the UK. On these fronts, there may be scope for Heyday to argue that the way in which the UK law approaches the default retirement age is not appropriate, or goes further than is appropriate and necessary to meet the UK Government’s aims.

If the Government does not succeed, it will have to remove the default retirement age under the Age Regulations. Employers would still be permitted to set their own retirement ages but they would have to be prepared to justify them objectively in the case of each age.

Currently employers in the private sector need not be concerned as individual employees cannot bring claims against their employers for compulsory retirement provided their employers comply with the Age Regulations as they now stand. Employees in the public sector, however, are able to challenge their compulsory retirement at 65 by bringing claims in the Employment Tribunal directly against their employers relying directly on the Equal Treatment Directive. The claims that have already been made have been stayed pending the outcome of the Heyday decision.

Whatever the outcome of the Heyday decision, the Government is set to review the default retirement age in any event in 2011. It is possible that at that point, the default retirement age could be abolished altogether. Finally, it is worth noting that Heyday’s claim is broader than the Palacios case and, therefore, even if Heyday does not proceed on this particular issue, the other questions which were referred to the ECJ will still have to be resolved. These include whether there should be any difference between the general justification tests for direct and indirect discrimination and whether the justification test for direct discrimination under UK law is less strict than that contained in the Equal Treatment Directive.