03 September 2010

Employment news: Redundancy — employers are entitled to cap payments to prevent windfalls


Meriel Schindler
Partner | UK

In the recent case of Kraft Foods UK Ltd v Hastie, the EAT held that a redundancy payment scheme, which provided that employees should not receive more than the total salary they would have earned had they worked until retirement, was a proportionate means of achieving a legitimate aim and therefore did not amount to unlawful age discrimination.

Mr Hastie applied for voluntary redundancy and Kraft Foods capped the redundancy payment, reducing the amount that he would otherwise have received under the scheme by some £14,000. The employment tribunal held that the cap disproportionately affected those approaching retirement age and was unjustifiable. Accordingly, it constituted unlawful age discrimination.

Kraft appealed to the EAT, which allowed the appeal, deciding that the purpose of redundancy payments was to compensate employees for lost earnings: a form of ‘compulsory purchase price' for current employment. If the aim of the policy was for the employer to pay this price, then capping the payment and preventing the ‘windfall' of an employee recovering more than he could have recovered had he stayed in employment until retirement was proportionately pursuing a legitimate aim. The EAT said that the argument was good whether the sum saved was £1 or £1 million.

The future

Employers with capping mechanisms in their redundancy schemes, and employers looking to introduce them, can rely on this case for the time being. However, they may also need to consider the impact of the Government's proposal to remove the statutory default retirement age on the structuring of redundancy schemes in the future. If the statutory retirement age is removed, the argument that retirement would have happened, and therefore earnings would have ceased, at a particular age will no longer be available as it was to Kraft Foods in this case.

Meriel Schindler Partner | London

Category: Article