The future of the retirement exemption has been in doubt ever since the Employment Equality (Age) Regulations 2006 were passed. But recent developments in both the Employment Appeal Tribunal and at the European Court of Justice make it more likely that employers relying on the retirement exemption to retire employees compulsorily will face claims. However, unless the Government moves earlier to resolve the uncertainty, we are unlikely to have clear answers about the legality of the exemption until 2010.

Employers who have retained a compulsory retiring age may need to re-assess their approach in the light of these developments. This note aims to inform this process, although, for reasons which will be explained, there are no easy answers.

The retirement exemption: a quick reminder 

The Age Equality Regulations implement the EU Equal Treatment Framework Directive. As required by the Framework Directive, the Regulations establish a general rule that discrimination on grounds of age is not permitted in the work and vocational training environment. But article 6 of the Directive allows member states some latitude to create exemptions from this general principle where this can be “reasonably and objectively justified by a legitimate aim”.

The Government has used article 6 to create a number of exemptions, of which the one based on the “default” retirement age of 65 is the best known. Under this exemption, employers can make employees retire at aged 65 or over (or at a younger normal retiring age if this can be justified) without facing claims for age discrimination or unfair dismissal. In order to fall within this exemption, certain notice provisions apply, and the employee has a right to make a request to continue to work beyond the retirement age and appeal against any refusal. This exemption was to have been reviewed in 2011, but if the challenge currently being considered by the European Court of Justice succeeds, it may not last that long.

Quite apart from the specific exemptions, it is also possible for employers to justify both direct and indirect age discrimination on a case by case basis.

The Heyday challenge

The legal process

The default retirement age was one of the most controversial features of the Age Equality Regulations for obvious reasons. It was not therefore altogether surprising that Heyday (an organisation linked to Age Concern) issued judicial review proceedings in the high court to challenge its legality. Put simply, its most important argument is that the Government had no power to make regulation 30, because the creation of a “one size fits all” retirement exemption falls outside the scope of article 6. The high court has decided that in order to adjudicate on this challenge it needs to refer a number of questions on the interpretation of the Framework Directive to the ECJ. One of the key questions addresses the scope of article 6. Armed with the answers (which are unlikely to be available until 2009) the high court can then decide whether regulation 30 can stand. Allowing time for the inevitable appeal to the Court of Appeal, this whole process is unlikely to be finished until 2010.

Prospects of success

The ECJ has already been called upon to look at the relationship between the state retirement age and the Framework Directive. In Palacios v Cortefiel Servicios (16 October 2007) it looked at the Spanish equivalent of the Age Equality Regulations. Under Spanish law, rather than having a national provision that applied to all employers, a retirement exemption was created by allowing collective agreements to permit compulsory retirement, provided that employees had reached national retirement age and were eligible for a state pension.

The ECJ decided that although the Framework Directive was engaged by this provision, it fell within the ambit of article 6 and could be justified by the Spanish Government, despite the fact that the legislation did not spell out the policy reasons for introducing such a measure. The Spanish Government was however able to point to a long-term policy of seeking to reduce unemployment by enforcing a national retirement age.

The Palacios case therefore gives both sides of the Heyday litigation grounds for hope. The UK Government can point to the relatively generous approach to objective justification adopted by the ECJ, while Heyday can point to some key differences between the Spanish and UK approach to this issue, which may make the UK position harder to justify.

What will happen if the challenge succeeds?

If the high court finally decides that the regulation 30 retirement exemption can not be justified, it faces a decision. It can either grant a “quashing order” which would mean that regulation 30 would have to be treated as it had never existed, or merely make a declaration that it is incompatible with the Framework Directive, leaving the Government to bring forward legislation to address its deficiencies.

If a quashing order is granted, all employers would be affected. If merely a declaration is granted, then private sector employers would not be affected until new legislation was brought forward. But until such legislation took effect public sector employees would be able rely on the Directive to by-pass the exemption. If the regulation 30 exemption turns out not to be effective, the fact that an employer was relying on it when implementing a compulsory retirement will be no defence. The employer will therefore be called upon to justify the direct age discrimination involved. Given that the test in these circumstances is an objective one, and will probably call for a consideration of the individual employee’s circumstances, most employers will not be able to establish justification retrospectively and will lose these claims.

What happens while we are waiting?

How big is the problem?

It is important to remember that only a small minority of retirements are compulsory. The Age Equality Regulations are only engaged in this context if an employee is made to retire against his or her will. While there are some grey areas, the number of employees likely to be affected by regulation 30 is, at least at present, likely to be relatively small when compared the overall number of retirements.

It is also worth noting that the regulation 30 exemption only applies to employees. So the position of non-employee workers and partners is not affected by this litigation. In those cases it is already a breach of the Age Equality Regulations to enforce a retirement age, unless this can be justified. What is happening to employment tribunal claims?

The strict application of the time limits for bringing employment claims means that legal uncertainly is no excuse for delay. So employees wishing to preserve their position will continue to lodge claims, even in cases where their dismissal clearly fell within the regulation 30 exemption. It was uncertain how individual employment tribunals would deal with these claims one of these claims reached the Employment Appeal Tribunal.

In Johns v Solent SD Ltd 30 October 2007 the EAT reversed the decision of the employment tribunal and ruled that Mrs Johns’ claim should be put on hold pending the decision of the ECJ in the Heyday litigation. This was followed shortly afterwards by a practice direction issued by the Employment Tribunal President for England and Wales, which stated that all present and future claims involving the regulation 30 exemption should be stayed. The reason for this approach was that it is impossible to predict the ECJ decision with certainty, and it was therefore fairer to allow employees to register claims in the meantime, rather than striking them out on the grounds that they had no chance of success in the light of the retirement exemption.

Where does this leave employers?

Employers who have retained a compulsory retirement age will now need to re-assess the risks of continuing to rely on it as grounds for dismissal. Given recent developments it is thought that an employee who is forced to retire against his or her will is more likely to lodge a claim than before, though the prospects of such a claim succeeding in the end have not in our view increased significantly. If the Heyday challenge does succeed, public sector employers are likely carry a greater risk, given that the high court may go down the route of a declaration of incompatibility, which will let private sector employers off the hook until the Regulations are amended.

Based on what we have heard so far, we think that many employers do not think that the risk of successful claims from employees forced to retire is significant enough to warrant upsetting their retirement arrangements. But the risk may drive them to consider one-off requests to continue to work beyond the retiring age more carefully.

In the longer term, even if the Heyday challenge fails, a combination of factors would suggest that the days of the retirement exemption are numbered. These include the experience of other jurisdictions where similar legislation has existed for longer (notably the US), demographic pressures and the Government’s long-standing commitment to review the exemption in 2011. Pressure for reform is also likely to be generated by evidence that we expect to emerge in the next year or so that the procedural underpinning of the retirement exception is difficult to operate and full of traps for the unwary.