Employee share schemes Frequently discriminate, either directly or indirectly, on the grounds of age. Here we consider the impact of the new age Discrimination legislation on good leaver/bad leaver clauses and alternative approaches employers could adopt.
Share schemes usually incorporate the concept of the ‘good leaver’ and the ‘bad leaver’. Good leavers may be allowed to retain unexercised options and exercise them immediately. The concept also extends to owner/managed companies where the articles of association or shareholders agreement may provide that a good leaver is given a more favourable price for the transfer of shares compared with a bad leaver.
There must be clear definition of the criteria of a good leaver and frequently this will include an employee or director who "retires at or after normal retirement age". The individual who retires before normal retirement age is a bad leaver and treated less favourably. On the face of it, this looks like discrimination on the grounds of age. But does it fall foul of the new legislation? Age discrimination occurs if:
(a) a person treats another person less favourably than he would treat other persons on the grounds of age. For example, only employees aged 40 or more are entitled to share options. This is direct discrimination; or
(b) a person applies a provision, criterion or practice which applies to persons of different ages, but which puts persons of a particular age at a disadvantage. For example, employees must have 10 years’ service in order to qualify for share options. Younger employees are unlikely to have the necessary service to qualify for the share options. This is indirect discrimination.
The legislation protects both employees and directors.
A default normal retirement age of 65 has also been introduced. An earlier normal retirement age can still be used, but only if it can be objectively justified, which will be difficult to do in most cases.
There are two key defences for current purposes:
1. Objective justification
This is where the treatment or provision/criterion/practice is a proportionate means of achieving a legitimate aim. Unlike other forms of discrimination, it is possible objectively to justify both indirect and_direct discrimination.
The burden of proof is on the employer. The ACAS guidance on the regulations states that mere assertion will not be sufficient objectively to justify an otherwise discriminatory practice and that the employer would need to put forward real evidence of both the aim and that it is a proportionate means of achieving that aim. Proportionate in this context means that:
- the treatment or practice must contribute to the aim;
- any discriminatory effect must be outweighed by the importance or benefit of the aim; and
- there is no reasonable alternative to the treatment or practice, i.e. if the aim can be achieved by less discriminatory action, then that action should be taken instead.
2. Service-based benefits
There is a specific exception for benefits based on length of service, which would otherwise be indirectly discriminatory.
Where the length of service is five years or less, the exception is absolute. Where the length of service exceeds five years, the use of length of service as a criterion for the benefit must fulfil a business need, e.g. encouraging loyalty or motivation or rewarding experience. This is an easier test to satisfy than objective justification.
The risk is that a director or employee who ‘retires’ before normal retirement age could claim direct discrimination and, if successful, would have to be treated as a good leaver.
There are three alternative approaches which can be adopted. These carry differing levels of risk and which works best for an employer will depend on what it uses options for and whether it wants to incentivise older workers to stay with the business or not:
1. Remove retirement provisions altogether
This has the advantage of simplicity and removes the obvious age discrimination. It may prove unpopular, especially where favourable treatment on retirement is long-established, as it could lead to an employee retiring at age 65 being treated as a "bad leaver". If the employer’s main purpose in having a share scheme is to use it as a retention tool, and providing deferred remuneration to employees is only a secondary consideration, then the employer may well be comfortable with this approach. An alternative is to replace ‘normal retirement age’ with a ‘length of service’ provision. This is easier to defend legally, but many employers will not want even very long-serving employees to be able to go to a competitor with their option rights intact.
Good leaver/bad leaver clauses frequently contain a discretion for the Board or a committee to decide that an otherwise bad leaver should be treated as good. Care will need to be taken to ensure the exercise of the discretion is not discriminatory (i.e. treating all retirees aged 65 or more as good leavers, but all employees leaving under that age as bad leavers).
2. Define retirement in an age-neutral manner
The reference to "at or after normal retirement age" is removed, which will allow employees/directors who ‘retire’ to be treated as good leavers. What is meant by ‘retire’ will need careful definition to ensure that the retirement - especially that of a younger employee - is genuine. One option is to delay the favourable treatment until the end of any restrictive covenant or vesting period, rather than accelerate it to the point of retirement.
There is also a risk that this approach is still indirectly discriminatory - because older employees are more likely to ‘retire’ (however that term is defined) than younger employees. But if you go through the thought processes, you should be able to justify this approach.
3. Retain normal retirement age on the basis that the practice can be objectively justified
The business aim would be to encourage employees to stay to normal retirement age, but the employer may need to show the significance of that particular age. The fact that early retirement will generally be the employee’s decision, rather than company-initiated, further strengthens this point (many company-initiated departures which are dressed up as "early retirement" are in truth redundancies or termination without cause by the company and would be regarded as such for the purposes of the share scheme).
It might also be possible to justify this approach on the grounds of succession planning, especially in companies with a hierarchical and progressive career structure which could claim that they have a legitimate business objectively in encouraging employees to retire at normal retirement age. However, a potential weakness with this justification is that employers are not required to allow employees to continue in service beyond normal retirement age.
The legislation is not retrospective, but applies to all contractual terms as at 1 October 2006. If the good leaver definition was inserted into share options or articles of association which pre-date 1 October 2006, there is still the risk that an employee who:
- retires on or after 1 October 2006;
- before normal retirement age; and
- is treated as a ‘bad leaver’
could bring a claim for age discrimination. If successful, the employee would have to be treated as a ‘good leaver’ and given the more favourable treatment. It would be possible to treat leavers who could bring a claim as discretionary good leavers. This would avoid the need formally to amend documentation but, as mentioned above, the exercise of the discretion would itself have to be non-discriminatory.
Age discrimination checklist
1. Audit your company’s age profile and consider whether there are anomalies which need to be addressed
2. Ensure recruitment, dismissals, promotions etc. are based on merit
3. Keep a written record of reasons for decisions
4. Remove ageist aspects of policies unless they can be justified
5. Ensure your company’s retirement age is at least 65, unless a lower age can be justified
6. Set up procedures to ensure that employees are notified of their intended date of retirement six to 12 months in advance and of their right to request to stay on
7. Provide age awareness training to all employees
8. Update your company’s equal opportunities polices to cover age discrimination
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
