29 July 2010

Compulsory retirement: reversal of fortune for employees and partners?


Emma Sanderson

Consultant | UK

The default retirement age currently prevents employees from claiming unfair dismissal or age discrimination on compulsory retirement (at or above the age of 65) provided a simple process is invoked between 6 and 12 months before the intended retirement date.

The plan to remove the default retirement age is set out in the Government’s consultation document, which is available on the BIS website. The basic proposal is that:

  • from 6 April 2011, employers will be prevented from starting the current retirement process; and
  • even where the process has been started before then, if the intended retirement date falls on or after 1 October 2011 the employee will be protected by the change in the law.
     

The precise extent of the proposed change in the law is not entirely clear from the consultation document. In particular (depending on how the relevant statutory provisions are drafted) it might lead to a disparity in employee protection on retirement under (on the one hand) the unfair dismissal laws and (on the other hand) the age discrimination laws, but it is hoped that this will be avoided.

At the moment there are six potentially fair reasons to dismiss an employee with more than a year’s service, of which the key ones are: retirement; misconduct; poor performance (or other incapability); redundancy; and ‘some other substantial reason’. In each case, to avoid unfair dismissal liability the employer must also follow a fair procedure.

It appears that the Government is proposing to scrap ‘retirement’ (and the associated statutory procedure) as a basis to avoid unfair dismissal liability, so reducing the number of potentially fair reasons to five. If that is the case, employers will be forced to find other (often less graceful) ways of exiting older employees from the business. In particular, employers could be forced to face up to telling underperforming older employees the real reason for their dismissal. This does not appear to have gone unnoticed by the Government, which has said that it wants employers and employees to maintain a dialogue on retirement planning and alternatives to retirement (such as what it calls “part-retirement” and other flexible working options), and it seeks input on what it might do to support this.

The Government has suggested that removing the default retirement age will not only benefit individuals but will remove the administrative burden on employers by abolishing the current retirement procedure. In fact, the likely result of these reforms is that employers will face more age discrimination claims: far more burdensome than the current statutory procedure.

The cost to employers of continuing to employ staff of 65 and over could of course be substantial. Employers will also need to continue to think carefully about their health and safety obligations and how they deal with insurance-backed benefits for older workers (which often spiral in cost and, in the case of PHI, are often linked to retirement age).

One element of the Government’s proposal that is particularly unclear is the extent to which employers will continue to be able to set (and rely upon) their own compulsory retirement ages (instead of using the default retirement age of 65) to avoid both unfair dismissal liability and age discrimination liability.

The consultation document certainly suggests that use of such retirement ages will continue to be possible, but the reality is that few employers to date have relied on them to retire employees because, unlike the default retirement age, they must be objectively justified (the Government calls them ‘EJRAs’ – Employment Justified Retirement Ages). The consultation document cautions that “it is not easy to demonstrate that a retirement age is objectively justified” and most commentators agree with this statement, although with little authority to support this view.

Now, for the first time, and with remarkably coincidental timing, we have one relevant authority. It comes from the partnership arena. Partnerships have frequently relied on their own compulsory retirement ages to retire partners because, unlike employees, the default retirement age has never applied to partners.

The new authority comes from the Court of Appeal in the case of Seldon v Clarkson Wright & Jakes, which concerned a partner who was retired at the partnership’s compulsory retirement age of 65. The Court held that this retirement age was justified on the basis that it is “in the interests of young, would-be employees and/or actual employees that employers or firms should have a retirement age providing a greater likelihood of employment for young persons and reasonable prospects of promotion”. However, employers should not rely on this decision to support the general proposition that all compulsory retirement ages are justified (not least because the judgment relies in part on the fact that the partnership’s retirement age was consistent with the statutory default retirement age)  - each case must be looked at on its own facts and in its own circumstances.

Action points

  1. Start giving thought to your retirement policies and procedures in light of the fact that compulsory retirement ages will have to be justified from next year and (even then) there might be other reasons not to rely on them. Any employer who wishes to retain a compulsory retirement age will need to be able to explain (and ideally produce paperwork showing) the rationale for it. Bear in mind that it may be easier for businesses with clear career paths to justify compulsory retirement ages than other businesses.
  2. Consider whether it is appropriate to initiate the existing statutory retirement procedure before April next year for certain staff at, above or fast approaching retirement age.
  3. Liaise with insurers and other benefit providers about cover for older workers.
  4. Consider the implications of the change in the law on any existing or threatened employment litigation, and increase internal reserves accordingly. Once the default retirement age has gone, employees who are genuinely struggling to find work, and expect to continue to do so past the age of 65, may find it easier to persuade tribunals to compensate them fully for losses beyond that age (on the basis they would have carried on working).
  5. If you wish, respond to the Government consultation by 21 October 2010. Correspondence details are on page 6 of the consultation document.

Emma Sanderson

Consultant | London

Category: Article