UK: Age Discrimination And Employee Share Schemes – An Update: February 2007

Last Updated: 22 February 2007
Article by Nicholas Stretch and Sue El Hachmi

Since our Law-Now article last year on age discrimination and employee share schemes, the Revenue have offered their views and a certain amount of market practice has emerged.

To review the Law-Now article from last year, please click Click Here.

For a summary of the current position, and relevant review and action points, please see below:


Full Article

Most companies have needed to review the rules of their employee share schemes so that their retirement provisions comply with the Employment Equality (Age) Regulations 2006 (the "Regulations"), which came into force on 1 October 2006.

The summary position for age discrimination in the context of employee share schemes is that age discrimination after 1 October 2006 is unlawful unless:

  • the discrimination is objectively justifiable;
  • the discrimination is required to comply with specific legislation (in this case, particularly tax legislation for Revenue approved all-employee share schemes).

Originally, it was thought that share scheme awards made before 1 October 2006 would not be affected by the Regulations, but it is now clear that they are caught. Accordingly, companies now need to consider both existing awards as well as new awards.

This update summarises our current understanding of the current position, including the Revenue’s stance for approval schemes. Review and action points are summarised immediately below.

Review and Action Points

  • Companies should review their scheme rules (including those affecting awards already in existence).
  • For all-employee schemes, we believe it is likely that companies should change the scheme retirement age (unless their scheme rules already provide for this) to the lowest possible age permitted by the legislation, both for existing and future awards. This will require prior Revenue approval before any change can take effect.
  • For discretionary schemes, we believe that companies should change their rules (again, unless their scheme rules already provide for this) so as to allow even employees shortly expected to retire to receive awards.
  • Discretionary schemes should either
    • provide for all employees who retire compulsorily or by agreement with the company to receive favourable treatment, or
    • contain no retirement provisions at all, treating retiring employees as covered under the general discretion provision and look at each retirement on a case by case basis
  • both the terms of existing and further awards should be changed as companies feel able. Changes to approved schemes will need prior Revenue approval.
  • In most cases, we believe that these changes can be made by board resolution, without the need for shareholder or participant approval.
  • However, specific analysis of a company's objectives and existing share scheme rules is needed in each case. This is still a developing area.

What is Objective Justification?

Retirement provisions are highly likely to be discriminatory. Objective justification is a defence to claims by employees that they have been discriminated on grounds of age. This term is not defined in the legislation and it is likely to take some time before judicial consideration in an age discrimination context is given.

While recognising loyalty and experience and motivating employees may be objective grounds, there is always uncertainty and employers have the burden of proof in justifying what could be discrimination. Companies will have to balance legal caution with commercial common sense.

All-Employee Approved Schemes

Both the Sharesave (SAYE) scheme and the Share Incentive Plan (SIP) have to comply with tax legislation. Tax legislation requires that they must give employees certain rights on retirement at certain ages (although oddly they are different: for the SAYE scheme this is any age which the company chooses which is between 60 and 75, and for the SIP this can be any age so long as it is not less than 50).

While the Regulations provide that complying with a statutory requirement prevents any claim for age discrimination arising, our view is that where there is a range of ages permitted by the legislation, companies should probably choose the lowest permitted age to avoid a claim.

Where relevant, changes should be made to scheme rules to affect both future and existing awards. Revenue approval is required for any changes to companies' SAYE and SIP schemes. The Revenue has indicated that companies are free to choose any age within the relevant range, and that retrospective changes will be acceptable so long as this improves employees’ position (unless employees have actually agreed changes to their detriment), but reducing the relevant age will normally have this effect anyway.

Discretionary Schemes - General

For both Revenue and non-Revenue approved schemes, the first question is whether a scheme still provides for employees who are approaching retirement not to receive awards. This was an Association of British Insurers' guideline until recently, but has now been dropped and so can and indeed should be removed to comply with the Regulations. While employees should receive awards, any actual receipt of shares depends upon early leaver provisions in the scheme rules. With pro-rating for time served and performance now common for all early leavers, it may be that a retiring employee ultimately receives no shares, but at least he is not deprived of the opportunity to earn them.

The second question is whether the scheme provides for retiring employees to receive beneficial treatment. If that is set by reference to retirement at a specified age, then an employee who retires below that age is likely to be able to complain that he is being discriminated against on grounds of age, and it is difficult to see what "objective justification" defence would be available.

There are a variety of responses possible here, but our view is that companies should at least change their rules going forward so that favourable treatment is extended to all those who retire "compulsorily or by agreement with the Company", or similar wording. This would cover those who retire in accordance with the new statutory provisions for compulsory retirement as well as in other situations with the company's agreement.

Even this is not entirely free from challenge under the Regulations. The better approach may be to leave retirement out altogether as an automatic good leaver reason and deal with these situations under the residual discretion that most schemes give directors. Each case would be looked at on its merits. If someone was leaving with many years’ service or through ill-health, discretion could be exercised on that ground, for example, to reward loyalty etc.

Companies could, in our view, choose either. It mainly depends on how much assurance companies want to give their employees.

Making these changes going forward is relatively easy. However, these approaches may, if made retrospectively, require specific approval by employees who are losing a guaranteed right, and may simply be disproportionate to arrange. Accordingly, even if a company adopts the approach to leave out retirement as an automatic good leaver reason going forward, they may not wish to apply this approach to existing awards, where they may feel that extending retirement provisions (see above) or the simplest approach (just to leave things as they are, and to treat any employees who could complain of adverse discrimination as discretionary good leavers anyway) is best.

Approved Discretionary Schemes

The Revenue approved scheme, which allows up to £30,000 of options to be granted with tax benefits, is commonly known as a Company Share Option Plan (CSOP). This scheme has to comply with fewer and less prescriptive arrangements that the all-employee schemes.

The Revenue have traditionally required these schemes expressly to set out what happens on retirement, but our understanding is that this has changed and that they will now allow companies flexibility to have broad or indeed no express retirement provisions as set out above for discretionary schemes in general. Retirement for tax purposes should be set out in the scheme rules or other relevant document as retirement at age 55 (the minimum age possible under CSOP tax legislation) or above to reduce discrimination. Again, both these changes can be made retrospectively, taking the above considerations into account, but would need to be approved by the Revenue before they can take effect.

Another type of Revenue-approved arrangement is the Enterprise Management Incentive (EMI) option arrangement. The same changes can be made here, but Revenue approval would not be needed.

Consents

Whatever they decide to do, companies will be concerned to check that they have the proper authority to make any changes.

There are three possible sets of consent which may be needed:

  • Revenue approval - this is discussed above but is only relevant for Revenue-approved schemes. Changes for both future and existing awards should now be relatively easily approved, but inconsistent views are coming from particular Inspectors and so the position is still not settled.
  • Shareholder approval - most scheme rules have provisions in them which allow them to be amended to participants' benefit without the need for shareholder approval where legislation requires this change be made. We consider that the age descrimination changes covered in this note should fall within that category.
  • Participant approval - this would only be needed where changes are made to participants' detriment, and this is unlikely to occur or, if it is, changes can often be made where required by changes in law.

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

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 21/02/2007.

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