27 August 2008

Age-related benefits and pay offs get the thumbs up

Christina Morton
Professional support lawyer | UK

Ever since the introduction of age discrimination legislation in 2006, employers have been puzzled about its effect on benefits and exit packages. In the recent case of Swann v GHL Insurance Services Ltd, a tribunal grappled with these issues. Although not binding precedent, this case is a helpful indicator of how the courts might  approach the issue. 

Mrs Swann, a 51-year-old employee, complained that the private medical insurance (PMI) element of a new flexible benefits package directly discriminated against her because the premiums she had to pay were much higher than those of her younger colleagues. The tribunal decided to look at the flexible benefits package as a whole. Using this approach, it concluded there was no difference in treatment between Mrs Swann and any of her colleagues on which she could base a claim. The tribunal also explained how it would have approached the case, if the ‘treatment’ had consisted of the provision of PMI on its own. In such a case, the scheme was plainly discriminatory, but the discriminatory treatment would have been objectively justified for a number of reasons.

  • The company was experiencing high staff turnover and had a legitimate business need to implement effective strategies to attract and retain employees.
  • The company had taken professional advice from a benefits consultant about the design of the flexible benefits package.
  • Staff had been asked before the package was introduced which benefits were most important to them and 65% identified PMI as an element they would have chosen.
  • The premiums charged to employees were based on an actuarial (and therefore objective) assessment of the risk of an employee making a claim under the policy calculated in relation to their age and gender.

This case thus provides some useful pointers for those designing flexible benefits packages.  

Enhanced redundancy schemes, which pay out more to older/longer serving employees, have been another area of concern for employers.   Ms McCulloch was made redundant by ICI in October 2006. At the time, she was 36 years old and had been employed by the company for 7 years. ICI’s redundancy policy based payments on age and length of service and Ms McCulloch’s payment amounted to 55 per cent of her gross annual salary. By contrast, an employee with 10 years’ service who had reached 50 would receive 175 per cent of their gross annual salary. Ms McCulloch claimed that the scheme unlawfully discriminated against her on grounds of her age.   A tribunal agreed that the scheme was both directly and indirectly age discriminatory but decided that the scheme was justified as it was designed to encourage and reward loyalty. It also decided that it was legitimate to try to protect older employees, who are more vulnerable on job loss, by giving them larger payments.

The EAT disagreed with the tribunal’s reasoning on the justification question, particularly in light of the very large difference between the two payments. It has therefore asked the tribunal to reconsider the case. However it did say that encouraging loyalty is a legitimate reason for rewarding length of service and that encouraging turnover and preventing blockages in the career structure may also be legitimate business aims which can be assisted by higher payments to older workers. 

Had there been an enhanced scheme in place that followed the statutory redundancy regime, that scheme would not have constituted age discrimination. So for example it would not be discriminatory to pay all redundant employees 3 weeks’ pay for each complete year of service, increasing payment to 1.5 × 3 weeks’ pay for each complete year of service an employee worked over the age of 41, as this echoes employees’ entitlement to statutory redundancy pay. 

Christina Morton Professional support lawyer | London

Category: Article