UK: Age discrimination: Pay and benefits (practices and policies)

Under the Employment Equality (Age) Regulations 2006, it will be unlawful to discriminate on the basis of age in the way that an employer awards pay and benefits to its employees. So employers must take care to avoid even the appearance of basing decisions on employees’ age, unless such an award can be objectively justified.

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Under the Employment Equality (Age) Regulations 2006, it will be unlawful to discriminate on the basis of age in the way that an employer awards pay and benefits to its employees. So employers must take care to avoid even the appearance of basing decisions on employees’ age, unless such an award can be objectively justified.

Please click here to view a PDF version of our note on objective justification in a new window.

There are a number of exceptions to this general principle:

An employer will not fall foul of the regulations if it provides any pay or benefits in compliance with a statutory authority. A key example of this, which will be covered in more detail in our later article on redundancy, is Statutory Redundancy Pay ("SRP"). In the final regulations, the Government has decided to retain the age criteria in the formula for calculation of SRP. Therefore, as employers must use the statutory formula for payments of SRP to employees, they will not be guilty of unlawful age discrimination.

Another exception, which also has a specific exception all of its own at Regulation 31, is for the national minimum wage. Under this exception, an employer can lawfully distinguish between how much it pays employees according to the age brackets set out in the national minimum wage legislation. For example an employer will continue to be able to pay 18 year old employee A less than 24 year old employee B as long as:

1. the hourly rate for employee A under the national minimum wage legislation is less than that for employee B; and
2. the hourly rate for A is less than the single hourly rate under the adult national minimum wage, which is currently £5.05.

However, employers will not be able to rely on this exception if they do not base their pay structure on the national minimum wage legislation.

One of the key exceptions for employers in relation to pay and benefits is for certain benefits linked to the employee’s length of service. Regulation 32 will allow an employer to treat employees differently for this purpose if that difference is based on the employee’s length of service. The DTI guidance states that the Government’s motivation for incorporating this exception is employment planning i.e. enabling employers to attract, retain and reward experienced staff and the ‘exact formulation of the exempting provisions ensures that the actual award remains proportionate’.

For employees who have less than 5 years service with their employer, there is a general exception. However, where the difference in entitlement to benefits is based on service in excess of 5 years, it must reasonably appear to the employer that the use of length of service as a criterion is intended to fulfil a need of its undertaking, such as encouraging motivation or loyalty, or rewarding the experience of some or all of its workers. This is therefore a subjective test with a relatively low threshold for employers to satisfy.

There are 2 bases for calculating length of service allowed for this exception: - either the time workers have been doing work at or above a particular level (which suggests that pay increments based on seniority within a grade or job will remain lawful) or the length of their entire continuous service.

Notably, there is an exclusion for benefits awarded on termination of employment. It therefore does not apply to redundancy payments, which are dealt with in Regulation 33 and will be the subject of a later Law-Now.

Although a more in-depth consideration of the effect of the new regulations on pensions is outside the scope of this series of articles, the new regulations also make it unlawful for the trustees or managers of a pension scheme to discriminate against members of a scheme on the basis of age in the way in which they carry out their functions.

In particular, it is unlawful for trustees or managers to discriminate in relation to the admission of new members and their treatment of existing members. However, Part 2 of Schedule 2 of the new regulations contains a number of exceptions for rules, practices, criteria and decisions in relation to pension schemes which will not be discriminatory if based upon age criteria. These exceptions are likely to mean that the new regulations have minimal, if no, effect on the majority of pension schemes.

Employers should ensure that they review the criteria used in respect of employment benefits, as well as their employment rules, policies and practices to ensure that they are not discriminatory and make any necessary changes if they are.

Employers should also keep a clear record of the basis on which decisions in relation to pay and benefits are made to ensure that they are able to respond to potential allegations of age discrimination.

For full listings on our age discrimination series, please click here to view in a new window.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 11/04/2006.